Inventory & Warehouse Management
Inventory is significant part of your business. It represents a large investment of company cash; that is why inventory is the often the focus of cost-cutting efforts. However, inventory also has a critical role in fulfilling customer demand. Having too few of some items could frustrate important customers. This balance between low investment and high availability cannot be over analyzed. Yet it is often “analyzed” by walking around and/or with back of the envelope methods.
Here are 4 Strategies for Smarter Inventory Control:
Strategy #1: Maintain accurate inventory records. While this seems like a simple requirement, it often isn’t easy. The human part of any inventory system is fraught with error, delays, lost transactions, bad math, and misidentification. Improvements in the human element can be made with better motivation and better management. Some data collection can be automated, with barcoded scanners, which can improve speed and reduce data entry errors. Periodic cycle counting helps to improve the counts of important items, and forensic procedures can help you to identify how errors occur and allow you to take preventative measures to improve accuracy.
Strategy #2: Proactive Planning. Determine an appropriate replenishment process for each inventory segment and automate it (where applicable). The most efficient replenishment plan is to plan for the new supply to arrive just before the current supply runs out (just in time). Many use Reorder Point which uses an average (or assumed) usage and typical lead time, but there are other options. Distributors are starting to use a method borrowed from Manufacturers (MRP), called Distribution Requirement Planning (DRP). This technique is based on a sales forecast, which then works backward in time through the distribution network to prepare replenishment orders to minimize inventory, while minimizing shortages.
Strategy #3: Focus on Improvement. The objective of Inventory Control is to avoid shortages while minimizing the amount of inventory. The easiest way to reduce or avoid shortages is to have more inventory – safety stock. This safety stock helps to compensate for forecast errors, changing lead times or inventory accuracy errors, otherwise known as Variability. If you can reduce variability you can reduce the amount of safety stock that is required to avoid excessive shortages. Some ways to reduce variation are:
Improve inventory accuracy (use cycle counting)
Improve forecast accuracy (collaborate with customers and distributors)
Reduce lead time (improve vendor shipping acknowledgement tracking)
Become more reliable (tighten up procedures and controls)
Implement integrated warehouse management systems like barcode scanners
Consider Inventory Optimization services such as NetStock or EazyStock.
Strategy #4: Reduce Lead Times and Lot Sizes. If lead time was zero, you wouldn’t need inventory. The longer the lead time, the more inventory you’ll need, along with more safety stock to buffer the time-sensitive variability. Forecasts tend to be more accurate over the short term than further out, so variability is smaller with shorter lead times. With less variability (need for safety stock) and shorter lead times, replenishment quantities can be smaller, so overall inventory levels are reduced.
Replenishment lot size is generally determined through a concept of economic order quantity (EOQ). Even if your company isn’t using an EOQ model, you’re probably following the concept. EOQ seeks to minimize the total holding costs and ordering costs by finding a balance between the holding cost over time against the cost of incremental orders. There isn’t much that systems can do to reduce holding costs, but if you are able to reduce the cost of placing an order, you would be more likely to place orders more often and in smaller lot sizes. This would reduce inventory. You can reduce ordering costs by:
Improving technology and processes for receiving and inspecting
Automating material handling (put away)
Implement collaborative systems with vendors (purchasing portals, EDI)
Improve replenishment reporting for purchasing