10 Commandments of Inventory Management

Amongst the primary operations of running a supply chain department is inventory management. It is a crucial responsibility that could either break or make a business. Any issues pertaining to inventory can indefinitely cause heavy losses or even business failures.

The aim of a supply chain manager is to strike a proper balance between incoming and outgoing inventory. The timing and cost associated with stocking items can be related to business success and its ability to reach optimal profitability.

According to a recent study by Repricer Express:

• Approximately 43% of retailers believe that inventory management is the biggest challenge they face on a daily basis.
• Moreover, around 43% of small businesses are not focused on managing their inventory at all.
• While the number of warehouses has risen by 6.8% over the last five years.
• 70% of shoppers today are not willing to stick around and would rather go to a competitor if an item was unavailable.

In light of this information, let’s take a quick look at the ten commandments of inventory management.

1.    Combine Multiple Methods

Forecasting and its algorithms can be a tad bit difficult because no singular method can provide you with the ability to make accurate decisions based on only one source of information. This is why it is often critiqued that those responsible for inventory management should utilize multiple sources of forecast data.

This can include your own forecast that heavily resides on historical data combined with forecast adjusted by the sales team as well as the forecast speculated by customers.

With these three sources in hand, you can then calculate the average forecast, which would then lead to a much improved and precise forecasting accuracy.

2.    Go Beyond Unit Cost

Dealing with inventory management eventually lets you face some terrible suppliers and vendors. While buyers always prioritize cheap suppliers, you and other experts in the field already know too well that this means the supplier is going to make delayed deliveries.

This naturally increases your unit cost that can be related through Cost of Quality (COQ), a concept that originated from a Quality Management study. The aim of this is to identify hidden costs that are associated with the manufacturing and delivery of services.

It is comprised of four main elements:

• Prevention Costs that pertains to cost of supplier survey and training
• Appraisal Costs that include costs for product/equipment testing
• Internal Failure Costs that consist of costs related to rework, refurbish, retesting and scrap from defected products by suppliers
• External Failure Costs which is the cost of delayed delivery

To combat suppliers that make delayed deliveries, some inventory managers would keep extra inventory during a delay. However, the best approach is to use COQ to eliminate such suppliers that bring disturbances to the inventory management system.

You can simply jot down and assemble COQ of all suppliers every year and then start to remove suppliers that have the highest COQ from the Approved Vendor List that is if they fail to make or follow a Corrective Action Plan.

3.    Handle Unstable Time Series

Time series analysis is fundamental for adequate inventory management. A time series model is one that allows you to forecast future sales based on a similar time frame, as observed in the past. By simply evaluating sales at the same time last year, you can easily determine which will do well in a particular season.

However, time series are not always stable. In such a case, it is best to reduce the weight of smoothing constant of the most recent period. This will help in reducing errors as data from the most recent period may not be very reliable.

4.    Forecast at the Right Level

When it comes to standard inventory management, traditional approaches suggest that you forecast at the product family level, as the aggregation of items helps to increase the accuracy of the forecast. This is also known as the ‘Law of Larger Numbers’ or Risk Pooling.

However, more modern concepts support the sharing of information and POS data, which have become the gold standard.

Therefore, let’s say your customer doesn’t share demand forecast with you. Your best choice would be to use historical data to make a forecast at SKU level. On the other hand, if you do get POS data from customers, you can use that instead to make a forecast at the SKU or store level.

5.    Measure Forecast Errors Right Away

Sales and Operations Planning is an integrated business management process centered on achieving focus, alignment, and synchronization with all organizational functions.

Those who adopt S&OP believe strongly against the measuring of forecast errors; however, the most appropriate way is to measure the errors of adjusted forecast and not the forecast from the statistical model. This approach will also help you to determine whether S&OP is indeed helping to improve accuracy or not.

6.    Obtain Reasons for Forecast Adjustments

Letting the sales team make adjustments with adequate market information is a bad choice. Instead, you should always ask them to provide reasons for forecast adjustments so that they can be held accountable, and a higher level of accuracy is instilled within the system.

In terms of accuracy, big adjustments are favored over small adjustments, and downward adjustments are favored over upward adjustments. However, if the demand pattern is stable, forecast adjustments by the sales team should be avoided.

7.    Streamline Warehouse Operations

Reducing cycle time inside the warehouse is strategically important. Instead of storing items anywhere, you should consider the approach where each item is stored in a designated place. To further improve upon this, it is better that you keep fast-moving objects upfront for easy access.

By following these recommendations, you would not only improve inventory accuracy but also reduce order picking time.

8.    Choose the right Forecasting Model

Whatever your historic data looks like: there is always one forecasting model that outperforms the others in a particular situation. But there is also not one general-use model that fits for every demand pattern that can occur – be it a trend curve, seasonal demand or just sporadic sales. If you know a lot about forecasting then you may probably be able to pick the right model by yourself. But since this can be very complicated, it is always good to let a software pick the appropriate model with the right parameters automatically.

9.    Use Simple Scheduling Rule

Product scheduling carries prime importance and has a strong impact on the overall service level as well as work-in-process inventory. In real-world scheduling practices, practitioners prefer a rule-based method due to their inability to deal with multiple objectives simultaneously.

However, scientific papers confirm that scheduling jobs with the shortest processing time (SPT) assist in reducing overall lead time.

10.  Utilize Cross-Functional Team

Though I should have mentioned this first, however, this carries the essence of all that we have discussed so far. Utilizing cross-functional teams is essential for inventory management since it is similar to S&OP, which seeks to create synchronicity with all other operations.

It enables you as an inventory planner to incorporate various factors that enhance the efficiency of various classical inventory control theories.

Conclusion

I would like to conclude this post by saying that inventory management works best when it is not restricted to following a particular theory, but instead applied through an interface that combines various practices.

By doing so, you can gain better control over various aspects such as inventory controllers, warehousing, sales, production, and procurement, to name a few. This is what makes inventory management so different, exciting, and unique in the first place.

About the Author

Claudia Jeffrey is presently engaged in fulfilling her duties as a Senior Research Analyst at Crowd Writer. This is where college and university students can acquire assignment writing services from professionals and experts. During her leisure time, she likes to play musical tunes and melodies on a banjo gifted to her by her uncle.