Effective inventory management, the ultimate cost minimisation strategy? by Anna Garcia and Rebecca Holmes
Effective inventory management, the ultimate cost minimisation strategy?
Lately, one of the main responsibilities of managers is to order and organise inventory. To do that, a proper understanding of supply and demand can mean the difference between a high profitability or missed revenue.
Inventory is a current asset on your company’s balance sheet and more importantly, it is a major part of your ongoing business operations. Inventory includes raw materials used to make and assemble products, to the products you acquire to resell to customers, depending on the type of company. In either case, you need inventory to earn revenue.
However, the cost of inventory does not only include the price you pay to acquire the good, taking into account storage expenses, insurances, turnover etc when making purchasing decisions can significantly reduce your costs. But, what is the optimal amount of inventory that should be purchased? It depends on the type of company and the market that we are working in. Now we will analyse the importance and what to take into account when organising inventory in highly demanded markets, paying special attention to McDonalds in the fast food market.
Why is organising inventory important?
- Avoids dead stock (losses).
- Avoids high storage costs.
Problems that can occur if inventory isn’t organised efficiently:
- Increasing labour costs due to a forced increase in production to keep up with demand.
- Stock outs and lost sales due to a company not being able to cope with the surge in demand.
Generic ways of organising inventory:
- Looking at inventory in a warehouse by sales volume, and then segmenting this warehouse organising it based on frequency and volume. Then, keeping the most demanded products closest to the delivery area means that overall, there will be a faster delivery time.
- Creating designated receiving areas so that its easier for new inventory to be separated and stored faster, and therefore delivered faster.
- Using an inventory management system.
The case of McDonalds.
McDonalds is one of the largest fast food restaurant chains in the world, with more than 30,000 restaurants in around 119 countries. Therefore, efficient inventory management is essential in order for the company to meet customer demand and to protect their market share. These are some of the steps taken by the company in order to organise their inventory well:
- Constant communication between the central restaurant supply planning manager and the individual restaurants,
- Each regional planner works with 100 restaurants and communicates with them everyday.
- Regional planner also works with ICT stock control system; Manugisitcs, to ensure there are sufficient raw materials.
- Stock charts are used to show the balance of orders of new inventory against sales.
In the warehouse, a Manhattan warehouse management system is used to allocate stock into areas. Also, when picking orders, the pickers use a voice activated system to tell the employee which items and quantity to pick and where from.
In conclusion, the points made above show why organising or managing inventory is so important for a successful supply chain. There are many links in the supply chain to inventory management such as demand planning, which many companies use to determine inventory levels.
References
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