How to Optimize your Inventory

Managing inventory in the supply chain is critical to ensure high customer service levels. However, it is also a very costly asset to maintain. Having the right amount of inventory to meet customer requirements is critical. Find out what inventory best practices reduce inventory costs across the supply chain.

Here are 4 solutions to help keep you on top of your inventory.

• Eliminate Dead Stock

  Smart retailers like The Gap and H&M have a markdown policy that clears merchandise in the store – no need to transport it and inventory it for many years. Make sure that you have a pro-active policy that clears dead stock.

• Perform an ABC Analysis of your Inventory

  Pareto’s Law, otherwise known as the 80/20 rule applies to Inventory Management. For example, 80% of your sales are represented by 20% of your items. Let’s look at a hypothetical situation for a full-service food warehouse with 40,000 SKUs. Please refer to the the "ABC Analysis" table below.

  Only 5,000 items represent 75.7% of the annual sales volume. These SKUs are classified as ‘A’ items. They may include items such as milk, produce, bread and snack foods. To ensure a high level of customer service, it is imperative that these items have a high in-stock level. From a management perspective, it’s sensible to keep low inventory of ‘A’ items and arrange for frequent replenishments, reducing capital requirements. Conversely, the strategy best suited for ‘C’ items is to holding inventories and looking at other alternatives such as stockless buying (discussed next). As ‘B’ items fall in between, they should be reviewed less often than ‘A’ items, however if they are ‘key’ items that consumers want, must be treated like ‘A’ items. For example, a young mother will want to purchase diapers for her new-born along with milk & bread, but if diapers are a ‘B’ item it must be treated as an ‘A’ item to ensure high customer satisfaction.

• Arrange Stockless Buying / Systems Contracting

  A good way to understand how this arrangement works is with an example. A small boat manufacturer requires fasteners & rivets to make boats. These are small-dollar value (i.e. ‘C’ class) items, however having the right sizes and quantities in inventory is essential to keeping on track to the monthly production schedule. Rather than buying large quantities of these items (and risk obsolescence with future design changes) the boat manufacturer arranged a stockless buying arrangement with the fastener supplier. This is how it works: The boat manufacturer would share its monthly production schedule with the supplier. The supplier is then responsible for ensuring that an adequate supply of materials is available at the manufacturer’s facility. There is a special secured area in which the supplier keeps the inventory. When a requisition request is generated in the manufacturer’s system, it allocates inventory to production. At this point an invoice is generated and the manufacturer pays for the materials it used. This introduces beneficial process efficiencies into the management of purchasing and inventory functions for both the manufacturer and the supplier.

• Vendor Managed Inventory Systems

  Vendor managed inventory (VMI) systems have placed the responsibility for the replenishment function to the vendors. For example, Heinz, a manufacturer of ketchup, will arrange to have its products available to its customers (grocery retailers, mass merchants, etc.). They will monitor sales and send the right quantities at the right time to ensure consumers will find Heinz ketchup on store shelves. The purchasing/order processing functions are more streamlined, allowing the management team of Heinz’s customers to focus their efforts on other areas. VMI has evolved to Collaborative Planning, Forecasting and Replenishment, which included additional partners in the supply chain. Wal-Mart, a world leader in CPFR, has its own proprietary system called Retail Link, which gives all of its suppliers information on product sales history, inventories, in-stock percent, etc. across all of its retail locations over the last two years. Suppliers are responsible to maintain an in-stock level of 98.5%. The relationship works both ways. Wal-Mart provides this information for free to help its suppliers; however their suppliers must meet the 98.5% in-stock level if they would like to remain a Wal-Mart supplier.

Use the above four solutions to reduce inventory costs in your supply chain. One of the few remaining ways to drive down inventory costs are a result of organizations becoming more collaborative and sharing their data across the supply chain.