Mal Walker of Logistics Bureau gives a great Video Introduction to Inventory Management.
How Much Inventory Should I Hold?
“One of the principles of supply of goods to a market is that companies hold enough stock to satisfy customer demand, without holding too much.
So intuitively, just the right quantities of stock to satisfy demand will minimize cost. However, when dealing with thousands of SKUs, the art of balancing demand with supply is intricate. It becomes even more complex when multiple storage facilities are used, and customer service times are short or vary according to the critical nature of products.
The best way to understand how much stock you should have is to determine how much it costs you. As a guide, inventory costs vary from 2.4 – 16% of sales revenue.
You might like to check your costs before embarking on a cost reduction exercise. In your endeavor to reduce costs, it’s important to understand what are the typical costs involved. Well here are areas that you should examine:
These are holding costs which include rental, mobile and static equipment, utilities, and compliance costs e.g. dangerous goods or pharmaceutical products.
Cost of labour to manage stock. For example moving it, handling it and counting it.
When capital is invested in inventory, the cost of finance is ‘interest’, or the lost opportunity of vesting capital elsewhere.
These are white collar personnel and IT charges.
These relate to the cost of purchasing, including inbound transport.
As rule of thumb, the faster the stock turns over, the less it will cost you to hold. However, stock turns in some businesses such as spare parts will be very low, say 1-3 times per annum. Whereas stock turns in an FMCG business can be as high as 20 to 30 times per year. Regardless, increasing stock turns for any business to an optimal level is beneficial.
If stock records are wrong, vast amounts of time and expense can be wasted sorting them out. Ideally, stock accuracy should be 98% or better. This means that 98 times out of 100, the stock ‘on system’ actually matches the stock in the storage bin. Lower percentages are always linked to higher operating costs.
Pillage and Ullage
Unfortunately, theft occurs as does unexplained stock losses and damage. The cost of these must be factored in to your analysis.
Too rigid or a single serve level approach can cost dearly. Companies that will offer goods supplied anywhere, anytime in any quantity, at the fastest delivery time possible will have higher levels of stock than those who offer a service level specifically tailored to customer needs.
So in all of these, What is the Solution?
Know thy customer service levels. And note: levels are plural. Smart companies segment their supply to 3 service classes:
Goods that are needed quickly such as medical or emergency products.
Goods that are needed within a reasonable time frame but are not necessarily urgent, such as computers, household white goods, and building materials.
Goods which are built or customized for particular customers and delivered according to agreed delivery times. This applies to products such as computers and furniture for instance.
A further delineation may be made between retail, wholesale or end user customers. In any case, it pays to start with a good understanding of customer needs before advancing to the next stage.
Now that you know the inventory cost drivers, what are some of the strategies that can be used to better manage inventory?
Here are just a couple:
Vendor Managed Inventory
Some companies involved in manufacturing integration or assembly rely on their vendors to manage their own stock until the goods are actually used on the production line. Under this arrangement, the manufacturer doesn’t have to carry any stock and only pays for the stock when used.
This strategy can save the manufacturer money, but can consequently load certain costs upon vendors. This apparent misalignment of costs between manufacturer and the supplier is actually beneficial to end customers as the total cost to supply in fact becomes lower.
This is common to many international manufacturers and is the process of postponing final assembly of goods until demanded in the off shore market where they will be sold.
This enables efficient storage of a smaller range of goods while offering a fast response time to the designated market. It has been used in the fashion industry to good effect, and also in industries such as appliances, computers and gaming. With a large number of companies moving manufacturing off shore to Southeast and Northeast Asia, postponement is becoming more common and feasible for smaller markets such as Australia.
So from what I have covered in this session, you will have discovered that inventory management is a challenging and inexact science which should be approached carefully to ensure full understanding and application of the most appropriate supply chain strategy to manage.
I wish your every success as you scrutinize this important aspect of your business.”
Our eBooks also contain lots of good information on Inventory Management. In particular:
One the fastest ways to reduce end to end Supply Chain costs, is to get your inventory (stock) under better control.
Inventory management is often be one of the back waters of a business, but getting it wrong can wreak havoc very quickly. If your company has some of these inventory control related symptoms, it might be time for an inventory management review:
- Too much working capital invested in inventory.
- Too much slow moving or obsolete inventory.
- Customer service failures and back orders due to lack of the correct inventory.
- Poor on shelf availability.
- Warehouses crammed to the rafters… with the wrong inventory.
- Lots of inter branch / warehouse transfers to get the right inventory in the right place.
If this sounds like your company, the good news is, that inventory control improvements can easily be made without resorting to a large investment in people and inventory management systems.
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