The 3 must-haves for successful inventory management

One man’s hobby is another man’s job…

Earlier this year, Nik Wallenda successfully walked along a 2-inch-wide tightrope across the Grand Canyon, 1,500 feet above the ground amidst swirling 30 mph winds with no harness. This balancing act can go down as one of the greatest, most death-defying tightrope stunts in history.

Much like Nik Wallenda’s daredevil hobby, the reality of inventory management can also prove to be a challenging high-wire act.

Effective inventory management is faced with the challenge of harmonizing opposing requirements. While the production team strives for efficient equipment utilization, the sales department makes short-term delivery commitments, which can result in the rescheduling of the production plan on a regular basis. Warehouse managers want to ensure high availability of items, so they may over-order and build up a large supply of cost-intensive safety stock. All this is happening while the top managers aim to cut costs and increase liquidity.

Regardless of what industry a business operates in, the subject of inventory management is relevant. Every business is faced with the challenge of providing the right supply to meet the market demand. This is no easy task. Before I delve into the 3 must-haves for successful inventory management, it is important to note that this is an “including, but not limited to” situation. Topics such as gut-feeling, personnel planning, warehouse location and the like, are all relevant to successfully managing inventory. The following three aspects serve as a basis to effective and successful inventory management.

Must have #1: Forecast analytics for optimal demand planning:

Let’s face it, there is no crystal ball nor are there any stars in the sky that can tell you what your customers will order tomorrow. With your ERP system flooding you with data, it can be hard at times to find the right elements that lead to an accurate and all-inclusive demand plan. This, all too often, leaves inventory managers with the difficult task of relying on their gut feelings, which tend to become less reliable as the number of items in a warehouse continue to expand. To make things more difficult, sometimes input from other departments (marketing, production etc.) never make it into the final plans.

This is where forecast analytics come into play. Through using intelligent forecasting tools, inventory managers are able to create an efficient demand planning process and achieve optimal planning accuracy. The individual plans from the various department managers including top executives, sales, marketing, purchasing managers and so on, can be integrated into one valid plan. Forecast analytics tools provide decision makers with historical data and enable the visualization of market trends which in turn allow for the adjustment of demand plans in real-time. Cutting edge mathematical and statistical procedures bring about a faster and more accurate response to real-life demands.

Must have #2: Optimized Procurement:

The role of procurement within an organization is growing and will continue to grow in importance. Successful procurement is no easy task as we discussed in our procurement pitfalls blog entry earlier this year. Globalization has led to increased complexity along the supply chain and unforeseen events make it difficult to ensure that warehouses are sufficiently stocked to meet the demands of production and distribution. The most common response to uncertainty is the expansion of safety stocks, which takes us back to the tight-rope stunt as high safety stock levels lead to tied capital in a time when top managers are trying to cut costs and increase liquidity. This is the ultimate balancing act that procurement managers are faced with every day: availability vs. cost management.

Intelligent procurement tools which serve as a platform for data integration can provide procurement managers with the best solution to this balancing act. Optimized safety stock levels for each individual item in a warehouse as well as demand forecasts (mentioned above), order recommendations, and optimized logistical decisions can all be generated based on historical data analysis using advanced mathematical procedures. This emphasizes the importance of proper data management as this is vital to improving the procurement process. Optimized procurement processes can leave warehouses with reduced inventory levels and higher product availability.

Must have #3: Inventory controlling:

Inventory controlling serves as a vital link between inventory and financial management which makes controlling one of the most important factors to successful inventory management. Proper inventory controlling creates transparency amidst complex inventory interactions. Inventory controlling can provide decision makers with a detailed overview of the inventory situation in a given warehouse. Some essential aspects of inventory controlling which help lead to transparent warehouses include ABC and XYZ analyses as well as KPI monitoring and portfolio management. The accuracy of the results of the various aforementioned analyses depends heavily, once again, on the integrity of the data being analyzed. For this reason, it is important that appropriate data integration and management is ensured.

An additional aspect of inventory controlling is the ability for decision makers to simulate various scenarios.  Data simulation gives procurement managers the opportunity to catch problems before they happen.

Closing word

With these three must-haves, inventory management can be just as successful as Nik Wallenda’s tight-rope stunt across the Grand Canyon. It is however clear that the three topics mentioned in this article require more than an Excel spreadsheet. Data-based decision support systems, for example, help stock managers find the balance between low stocks, high availability and optimized cost-efficiency. As mentioned above, there are several other factors that lead to successful inventory management, but these three must-haves certainly serve as a great starting point for discussion.

In your opinion, what are some other crucial factors that lead to successful inventory management?