Inventory Management- What is it?
Inventory Management is the part of supply chain management that focuses on the overseeing and controlling of inventory or stock (What is Inventory Management). It is the process that ensures the right inventory mix, at the right quantity, in the right place, and the right time and at the right cost is available to demanding customers (What is Inventory Management).
Why is Inventory Management Important?
An effective inventory management strategy is extremely important for companies, especially companies that sell products in high demand as they deal with high amounts of stock.
Effective Inventory management systems help companies (Campbell):
- Avoid Spoilage of Goods
This is particularly important for industries focusing on perishable goods such as food industries or cosmetics companies. In these industries, if the goods are not sold before their expiration date they become sunk costs. Effective inventory management tactics such as FIFO, can help ensure that all goods are distributed on time.
- Avoid Dead Stock
- Save on Storage Costs
- Increase Potential for Profits
Methods of Improving Inventory Systems According to the Experts:
When asking inventory management experts:
“What’s the single most effective inventory management strategy or technique companies can use to control and reduce inventory costs?” (Pontius)
Experts Revealed their opinions:
Expert Number 1: Garry Patterson:
He states that inventory management is a dynamic process that can lead to a lot of problems with supplies and customer service if not done proactively and continuously. Issues can range from sales spiking unexpectedly causing an oversell in stock, lack of liquidity to pay for storage costs etc. lack of room in the warehouse to store all of the necessary stock, conflicts with suppliers, and a lot more. The inventory strategy needs to think about these possible conflicts and come up with methods to be able to combat them before they are a huge issue (Pontius).
For his version of the most effective and proactive system, he recommends (Pontius):
1. Contingency planning for all possible problems
2. Establish a risk-tolerance framework.
3. Highlight worst-case catastrophic and critical risks (highlight the top 5-10 of these)
4. Develop a coherent action plan that is approved by your executive team.
5. Establish a proactive media policy.
Expert Number 2: Gary C. Smith
Mr. Smith describes how
“Companies often waste time, drain profitability and divert focus away from core business priorities by mismanaging excess inventory. And in my experience, these are some of the common strategies business inventory managers tend to rely on that are sure to put them into a sweaty panic long into the night:
- Make like an ostrich…put your head in the sand!
- Lease additional space.
- Liquidate.
- Continue selling it.
- Send it to a landfill” (Pontius).
However, these are only temporary solutions that can be utilized when mistakes occur. Therefore, he stresses the importance of learning from mistakes and incorporating contingencies. A method of contingency planning that he highlights is regular auditing of goods.
Expert Number 3: Dave Kramer:
He stresses that the number one tool for effective inventory management is: the implementation of the right software tool (Pontius). This tool should be able to automatically track sales on a website and in store, and adjust inventory accordingly.
Expert Number 4: Tom Wheelwright
Mr. Wheelwright stresses that maintaining good systems is the key. He states that there must be good systems in quality control of the goods, i.e. (First in First out systems ensuring that no expired goods are sold) and tracking of inventory. Furthermore, he stresses the need for accurate forecasting systems, as they can help predict demand (Pontius).
Expert Number 5: Bob Hothem
He argues that companies that obtain perpetual inventory spot checking combined with an aggressive obsolescence strategy achieve the best inventory management systems.
He suggests that it is key to divide stock into three categories:
“A - high-value products with a low frequency of sales
B - moderate value products with a moderate frequency of sales
C - low-value products with a high frequency of sales” (Campbell)
By making this list companies can prioritize inventory control systems. Items under category A are the items that require the most attention as their financial impact is significant but sales are unpredictable. Items in category C require less observation because they normally have a constant turnover and have little financial impact (Campbell).
Expert Number 6: Dr. Tim Lynch
Profile: President of a big data analysis company (psychosoftpc) (Pontius).
He claims that effective management of inventory is all about Predicting when you need what and by how much; this is achieved by good data analysis (Pontius). Companies need to look into what people buy, when they buy it and at what quantity. This allows companies to predict demand giving room for accurate inventory adjustments.
Conclusion:
Key Tools to Effective Inventory Management Include:
- FIFO
- Contingency Plans
- Continuous Auditing
- The use of reliable tracking software’s (forecasting methods)
- Maintaining good relationships with suppliers
- Prioritising stock tools
Bibliography:
Campbell, Cassandra. “Warning: You're Losing Money By Not Using These 8 Inventory Management Techniques – Shopify.”Shopify's Ecommerce Blog - Ecommerce News, Online Store Tips & More, www.shopify.com/blog/70603013-warning-youre-losing-money-by-not-using-these-8-inventory-management-techniques.
Pontius, Nicole. “19 Inventory Management Experts Reveal the Single Most Effective Strategy Companies Can Use to Reduce Inventory Costs.” Asset Tag & UID Label Blog, 31 July 2017, www.camcode.com/asset-tags/inventory-management-techniques-to-reduce-inventory-costs/.
“What Is Inventory Management?” What Is Inventory Management? - Know the Basics | TradeGecko, Trade Gecko, www.tradegecko.com/learning-centre/what-is-inventory-management.
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