INVENTORY MANAGEMEMENT SYSTEM
Inventory is defined as stock of a material, item or resource. Inventory management system is the system which is established to guide and define inventory policy and control and manage overall inventory
An effective inventory management system is essential for the organization to ensure product availability for sales, raw and packing material to run production and semi finished goods to convert into the finished product.
Different types of product inventory in supply chain are :
1. Finished Goods: FG inventory is the final finished product. It is available in factories, distribution centres, distributors and retailers. FG Inventory strategy defines customers to be serviced at what level.
2. Raw Materials: Raw Materials are purchased from the suppliers to use in the final finished product.
3. Packaging Material : Materials used to pack the product like carton box, shipper, laminate etc
4. Semi finished goods: Semi converted goods stored for conversion into final finished product. It is also called intermediate goods
Inventory management system and policy is defined at SKU level basis various factors which are explained as below:
1. Cycle Stock: Cycle stock is the stock stored to cover the next cycle of stock arrival. It is determined by frequency of replenishment and economic order quantity
2. Safety Stock: Safety stock depends upon demand variation measured by Mean Absolute percentage error and supply variation measured by lead time, quantity and quality deviations against the standard service levels
3. Seasonal stock: Seasonal commodities are stored in bulk during the peak season to cover shortages during the lean season.
Inventory reduction is more of an intent than a method. Practical and Effective Tips to reduce inventory will help in sharing the right approach to optimize the material stock and inventory levels.
Key question to answer is that is inventory management system and strategy is derived by fear of product stockout or additional cost of excess inventory. Right answer to this question is to understand business strategy and basis business requirement derive the inventory management system and strategy.
A pharmaceutical company may choose to stock high product covers as medicine stock out will risk patient lives whereas food company may go for low stock cover to deliver fresh product.
A simple and highly effective review mechanism to implement robust inventory management system in an organization consists of Inventory tracker. Periodicity of the tracker can be month, week or day level basis the nature of materials and required granularity of inventory control and can be used for materials and Finished Goods.
11 Simple, effective and practical tips to reduce inventory are as follows:
1. Focus on A Class items:
Most effective and too easy to miss. Sort materials in descending order by value. Pick the top 10 items and track and monitor them daily.
When number of SKUs are very large in number and it is not clear from where to start, it brings focus to understand the inventory and factors impacting it for top items. It is similar to application of Pareto principle where 20% of actions contribute towards 80% of results. Inventory needs to be studied daily for top materials to understand the underlying causals and take corrective actions.
This tip is very simple but highly effective.
2. Review, Review and Review :
Review is the key. More you review the inventory more insights one will get on how is it behaving. Is it more or less? Is this much really required. Key point to watch out for is that after some time reviews tend to lose the rigour.
It needs to be maintained by keeping it on top of agenda and priority list. Sometimes planners also tend to lose focus due to daily urgent operational issues which needs to be addressed immediately. Scheduling time in advance at weekly frequency will be the best approach.
Keep regular focus on reviewing and improving forecast accuracy as it plays an important role to reduce inventory
Review is an important element of effective inventory management system
3. The Human Element :
It is the most overlooked element. Organizations use advanced tools and processes to optimize inventory but forget the human element. People use advance tools to further add buffers in inventory due to low confidence and organization will be surprised that inventory has increased post implementation of new tools.
Providing a secure environment to planners and having a strong risk mitigation plan for stock outs will work wonders and provide courage and safety net to people to reduce inventory.
4. Inventory norms:
Accurate inventory norms will decide the inventory level. Cycle stock is determined by frequency of replenishment. Safety stock is determined by demand and supply variation. Seasonality is determined by finished goods and commodity behaviours during peak and lean season.
In an effective inventory management system, setting norms is not a one-time job. So, don’t forget to review and correct them on quarterly basis to reflect current reality
I had the opportunity to improve product availability from 60% to 95% in an organization within 4 months by simply setting the right inventory norms which avoided stock outs and eliminate excess stocks in the pipeline. It enabled business to meet its objectives of incremental sales and achieve yearly targets
5. Improve Reliability :
Reliable supply chains don’t need extra safety stocks which further reduce inventory storage kept for uncertainty in demand and supply. Reliability can be achieved by standardizing robust process for consistency in delivery performance.
Suppliers performance needs to be reviewed regularly and corrective actions to be taken for repeat failures. Alternate vendors to be developed wherever there are repeat issues with single vendor. Improving reliability is a continuous and ongoing process and working collaboratively with vendors will help to eliminate most of the issues and build robust inventory management system.
Reliability to be developed in entire value chain in supplier deliveries, transit lead times, Good receipt and end delivery
6. Reduce MOQ and order quantities:
Take up with your suppliers to reduce Minimum Order Quantities. It is better to taker lower quantity with marginally high cost then to take entire material which cannot be consumed. Ordering more frequently than ordering in bulk can also reduce the inventory. Lower the lot size, lower will be the inventory.
7. Reduce Obsolescence cost :
Inventory obsolescence can be big cost and loss for the organization directly hitting the profitability. Adding risk materials timely in provisions list allow to take immediate actions. Blocked stocks should be not kept long in the system and actions should be taken for return to vendor, re sale or write off or scrap sale and destruction.
Materials which are used in New Products , exclusive for few products, products with irregular demand, frequent artwork and packaging changes and short shelf life are generally on high risk of expiry. Managing non moving items and activating consumption is an essential element of inventory management system
8. Right Inventory Policy for robust Inventory Management system :
Inventory policy FIFO, FEFO, LIFO should cover any material related risk.
I was working in an organization which was following First in first out inventory policy. I observed that one of the materials which has gone for rewinding at the vendor end expired in warehouse due to FIFO policy.
I raised the matter with senior management and got changed the inventory policy for all the factories, warehouses and distribution centres from FIFO to FEFO to cover any material related risk. This simple initiative saved millions of dollars for the organization. Identifying SKUs between Make to stocks and make to order can also help to reduce the inventory by deciding the stock strategy depending upon fast runners or slow moving SKUs
9. DEMAND AND SUPPLY ALIGNMENT
Most of Excess inventories happen due mismatch in demand and supply alignment. Forecast accuracy should be improved to bring Demand forecast and actual sales closer. Flexibility to be build on supply side to make responsive changes due to drop in demand
10. IMPROVE ACCURACY IN NPI FORECASTS
Since demand is not certain in New product launches, they often lead to excess inventories. Reducing the targeted inventory stock at the time of launch can help to avoid excess inventory. Make NPI forecast accurate buy using bottom up model with clear drivers with direct correlation to demand changes
11. REDUCE ORDERING AND DISPATCH ERRORS
Avoid Ordering errors which can lead to excess stock. Avoid dispatch errors leading to extra inventory at receiving location. Don’t cancel customer orders for which POs cannot be cancelled to suppliers
Today many organization don’t even have basics of inventory management system in place and they struggle a lot to ensure timely availability of material.
Inventory management system and strategy is key component of Business strategy and needs to be flexible considering the business requirement and external environment. For example, during Covid-19, organizations have started to build up material inventories as they don’t want to lose on production due to non availability of materials.
Inventory Management system is one of the key component to drive overall supply chain and distribution performance. If not managed well can lead to severe disruptions and revenue loss for the organization.