An understanding of the inventory and the role it plays in supply chain management, its cost implications, and ways and means to optimize it are all essential issues in determining your business’s profitability. In this article, to increase your practical knowledge that would go towards making your business gains a competitive advantage, we would elaborate with seven ways to optimize your inventory levels.
- Inventory Accuracy
Inventory accuracy is a fundamental requirement for realizing optimum inventory management. It is so because knowing with certainty, the available quantities and locations of the items are mandatory. Not only for the efficient functioning of your warehouse(s) but also the overall efficiency of your business performance. Some may argue it is an unrealistic goal to aim for 100% inventory accuracy because whatever software your business uses, yet the human interface cannot be eliminated. While this may be true, yet the importance of getting nearer to 100% accuracy cannot be undermined for a reason inventory accuracy forms the basis for order fulfillment, without meeting the expectations of the customers. It would harm the business, not just vague financial terms but also in a non-tangible way by damaging the harmonious relationship you have with the customers who form the backbone of any business.
- Know the Total Landed Costs (TLC)
It is associated with inventory management in a scenario where almost all the businesses outsource their parts, components, or even the entire product (some may be highly imported intensive, while others may be less). It is necessary to calculate the TLC and optimize the inventory. TLC includes:
- The cost of the product + the insurance+ the freight (CIF)
- The Import duties, the port and warehouse (Container Freight Stations) charges
- The payment for the transaction costs for the clearance of your goods
- The transportation for the products to reach your warehouse
- The invisible price could add up due to uncertainties in the reaching of the cargo. Or the payment for the interpretational problems on the correct rate of duties.
When these costs did not work out diligently, this results in your losing the competitiveness for the product, and the savings, which you had initially thought, may vanish. In some cases, it may result in the closure of businesses. A case in example is the winding up of Foxconn Technology production in India, which was set up to manufacture of iPhones.
- Decentralize Supply Risk Management
It is needed to consider minimizing the overall supply risks because of supply chain management as similar to financial management. Your business would have to view the risks associated with inventory in the same way financial institutions evaluate investment risks. The three supply risks that need to manage for the optimum list are:
- shortage of critical parts
- loss of finished goods due to the use of defective parts
- Inflated costs of supply (for example, arising out of a miscalculated TLC mentioned earlier). One way to realize the goal is to divide the suppliers into ‘clusters.’ That would provide the twin advantages of competition between them and diversification. It would offer to confer an ultimate benefit to your business by providing the opportunity to realign the resources vis-a-vis your competitors.
- Ensuring Supply Continuity
Disruptions in supplies is a potential risk, which experts’ label as ‘process and control risks’ can derail efficient inventory management. It is caused so because of it due to inconsistent. Or inappropriate strategies that can lead to structural problems in business. It can manifest in the forms of lack of visibility, unnecessary dependencies, and mistrust.
The supply chain continuity could be made possible by taking four measures, which are:
- Creation of awareness of the systems,
- Gaining visibility
- Managing knowledge in a better manner,
- Taking remedial measures that would prevent supply interruptions
- These would go towards inventory optimization that would lead to a reduction in costs.
- Use Kanban
Kanban is all about avoiding wastes that have versatile applications in supply chain management. In the context of inventory optimization, it has utility as it increases the frequency of product replenishment intervals. What this means to the inventory optimization is that you would be ordering lesser inventory per order. But would do more often in response to the actual purchases of the customers in real-time.
- Establish a hierarchy for the inventory movement
To inject the efficiency of operations, you need to establish a hierarchical system in your management. Which should follow the principle of the fastest moving products being located closes to the shipping, staging in the warehouse. When the demand for each of the products decreases, it should shift to the back end of the warehouse. As the time spent looking for the products gets reduced, you would achieve inventory optimization.
- Make investments in Inventory Optimizing technology
It is possible for your existing technology platforms; for instance, ERP might have outlived its utility or have become outdated. Therefore, as a result, it may become necessary for you to evaluate add on systems, which could support lean operations. One size may not fit all. Hence you need to choose that one that fits your business the best.
The key take away of this article from a practical angle is:
- Businesses have to plan their inventory management with greater accuracy
- They need to optimize by putting in place safeguards to reduce wastes, eliminate redundancies, etc
- The company will benefit in terms of organizational effectiveness, efficiency when leaner and agile supply chain principles are applied. Which would go towards achieving the objectives you have set for your business.
Keywords: BUSINESS, MANAGEMENT, COST, PRODUCT, OPTIMIZE, RISK, WAREHOUSE, inventory management, Inventory Accuracy, Supply Risk