This blog post is brought to you by Unleashed, makers of powerful inventory management software.
Looking to get to grips with inventory for your business? Read on!
A good indicator of a company’s fiscal well-being is its inventory health. An unbalanced inventory can lead to over or under-stocking, and create financial problems for a business through loss of revenue. A pre-emptive approach is to use inventory management software to identify and monitor any areas that need improvement.
At this stage it is prudent to ask, “What is a healthy inventory?” And although the answer depends on what type of business you are in, there are a number of aspects that lead to healthy inventory management, including constant analysis of industry trends, and inventory turnover. In order to determine the health of your inventory, it is necessary to first establish an optimal inventory model with which you can compare your current stock levels.
What’s an “inventory model” you may ask?
An inventory model is really just an ideal stock level for every product at each stockholding location. Such a model is based on a range of factors like your range of products, forecast accuracy, your desired stock availability, the reliability of your supplier and any supply constraints. On their own, these can be difficult to determine, which is where the use of dedicated inventory management software can prove beneficial.
Once you have established your ideal inventory quantities, here are three key inventory management practices to ensure your inventory is functioning at a healthy level:
It is important to have a clearly defined product range that you understand thoroughly. You can typically break the product range of a business into three distinct categories; obsolete products, stocked products and non-stocked products. Obsolete products are often dated or out of production, and will not be restocked in the future. Non-stocked products are those that you supply without keeping on hand – you will purchase these once an actual order has been placed. Stocked products are of course those that you plan to hold and supply customers with directly. The aim is to minimise the quantities of obsolete and non-stocked products, while retaining an optimum level of stocked products so you can maintain your ideal supply targets.
So far so good!
The second step is to consider what your market offer is. Your business may wish to have 99% availability of all stocked products, or maybe you only require maximum availability on those products where you are attempting to gain market share. Perhaps you only require 90% availability for those products where you are the market leader. From a sales and marketing perspective the service level should be as high as possible, however, there are financial constraints and strategies that often limit inventory investment. They key is to find a balance between the two that works for your business.
The third step to maintaining a healthy inventory is to understand both the internal and external constraints faced by your business. The level of inventory you hold will differ depending on how much and how often you order from your suppliers. Sometimes suppliers will impose minimum order quantities, which means you may be required to hold more stock. It is also important that you are aware of your supplier lead times, and their ability to consistently deliver within that time. You will also need to be conscious of your ability to accurately forecast supply and demand sales trends to minimise the over or under-purchasing of stock.
Once you have defined your product range and decided your approach to market, your optimal inventory model factoring in your constraints and supplier behaviour will be ready for evaluation.
You are now in a position to assess your service level and establish where improvements in inventory levels can be made. You may be able to find ways in which you can reduce the value of your inventory while simultaneously improving your service levels and overall productivity.
Image courtesy of Stuart Miles at FreeDigitalPhotos.net