6 areas of erosion and opportunity in inventory management

Stephen F. Wiley
6 areas of erosion and opportunity in inventory management

Inventory management can be complicated and complex – but focusing on the underlying drivers of the process can help a business maximize performance.

Inventory management isn’t just about managing the multiple parts or pieces well – it’s about managing them all well, all at the same time. If you don't perform just one of the categories well, it can lead to poor inventory turns, obsolescence, excessive days of supply, suboptimal customer fulfillment, and deteriorating profits. Some of the traditional sources of inventory erosion were exacerbated as a result of the pandemic – however, opportunity is there if you know where to look. Learn about six areas of potential erosion in inventory management and how to turn those areas into potential opportunities for your business.

  1. Behavior
  2. Throughout the pandemic, companies primarily were focused on acquiring sufficient materials, and considerably less scrutiny was placed around optimizing working capital and inventory levels. Now that the market seemingly is correcting, it’s time to right those behavioral shifts, including a lack of discipline in following the normal cadence of the system. Premature or excessive ordering no longer is a strategy for success. Now is the time to take a step back, evaluate buying behaviors over the past two years, and properly forecast how to move forward.

  3. Supplier performance
  4. During the pandemic, organizations that developed and maintained a robust contingency supply base performed better, especially as primary suppliers struggled with on-time delivery. And while that struggle is not what it was even a year ago, issues still exist throughout the supply chain in many industries. Organizations that learned the importance of building this contingency into their supply base continue to invest both time and money into better supply chain resiliency – and if you haven’t been making similar investments in your organization, now is a great time to start. It’s easy to look at each individual item or category and argue that you might give up a unit cost savings by expanding your supplier base. But it’s vital to look at building a contingency from a total cost of ownership perspective. When considering the impact of premium freight and customer penalties, the additional costs of funneling 10% of your goods to a contingency supply base to develop those relationships is worth the upside flexibility of a second (or third) supplier.

  5. Forecasting
  6. Demand was through the roof during the pandemic, and that made forecasting a major challenge for sales – a challenge that still exists. In many organizations, a strong inclination to overforecast what will sell persists. It’s important to incentivize your sales department to provide accurate information, as organizations that implement this level of accountability have a better chance of success. Organizations that associate a portion of their sales teams’ variable-based compensation (perhaps 10%-15%) with specific inventory management metrics or accurate forecasting information have had good results. While forecasting might not be the main focus of their responsibilities, making sure they're providing good inputs to the supply chain is one major way to help combat this inventory challenge in the future.

  7. System parameters
  8. During the pandemic, many organizations did not use their defined system parameters to drive the inventory replenishment process, usually because those parameters were not trusted, updated, or maintained. That said, without good inputs in the enterprise resource planning system, it's challenging to make good decisions in terms of how to plan and bring in material. For example, some organizations do a solid job of using the safety stock parameter in the system, but don’t optimize the calculations or factor in volatility in the supply base. Other organizations treat all their products the same way – but having a more segmented approach in terms of how to go to market and manage products can be a more optimal way to set about your organization’s portfolio. It’s also worth taking a closer look at your reorder points, lead times, and minimum order quantities to see where you can maximize efficiency and timing.

  9. Product life cycle management
  10. When you hear “product life cycle management,” you might think about SKU rationalization – but that’s not the only way to help manage portfolios and maximize profitability. Having a robust, iterative product life cycle management process is key to managing inventory and overall profitability. Reducing costs, maximizing product opportunities, and analyzing customer strategy and pricing all are levers to think about as you consider product life cycle management.

  11. Inventory accuracy
  12. How are you accounting for the movement of your inventory from raw material to finished goods? How do you handle substitutions or scrap? Are you understating or overstating the requirements necessary for your finished product? How does any seasonality in your business affect your inventory? It’s vital to not let things slide, even if that’s how you’ve been operating up until this point. Making sure you have the processes and people in place to manage inventory accuracy is a great way to help shore up your margins and protect your bottom line.

During the pandemic, every organization did what it could to stay afloat – and much of that resulted in acquiring excess inventory. Now, a perfect storm of increasing interest rates and slowing demand could put your organization in the precarious position of paying more to hold onto inventory that you might not need – which means now is the perfect time to evaluate and improve your inventory management processes.

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Stephen F. Wiley
Principal, Manufacturing Advisory Leader