6 Inventory Control Techniques for Stock Optimization
According to the Merriam-Webster dictionary, inventory control can be defined as the “coordination and supervision of the supply, storage, distribution, and recording of materials to maintain quantities adequate for current customer needs without excessive supply or loss.”
When it comes to wholesalers and distributors of durable goods, inventory control can be further defined as the process employed to maximize a company’s use of inventory. The goal of inventory control is to generate the maximum profit from the least amount of inventory investment without hindering customer satisfaction levels or order fill rates.
Techniques of Inventory Control
There are a number of different techniques employed by wholesale distributors to ensure their inventory control is maximizing efficiency and profitability. Below are six key techniques of inventory control for wholesalers and distributors of durable goods:
1) Establishing Annual Stocking Policies
Management must decide the maximum and minimum level of stocks and supplies that need to be kept in the warehouse or across the network of warehouse locations. Management must also set optimized re-order levels, safety stock levels (below which supply must not be allowed to fall) and an average inventory level to ensure costs are contained.
2) Preparation of Inventory Budgets
Many organizations have an annual inventory budget and they are usually prepared well in advance before inventory is procured. Budgets should include the total cost of ownership to keep inventory on hand during that year’s account period. This includes materials cost, fixed operational costs, carrying costs, logistics costs, redistribution costs and additional miscellaneous costs that contribute to the total costs of ownership.
3) Maintaining A Perpetual Inventory System
Also known as “the automatic inventory system”, this method is designed to keep a constant track of the quantity and value of each stocked item. Many wholesale distributors leverage a combination of an Enterprise Resource Planning (ERP) or Warehouse Management System (WMS) in conjunction with an Inventory Optimization solution, such as EazyStock, to optimize inventory balances. Most ERP and WMS technologies struggle to keep costs low and service rates high, which is why optimization software can be so valuable to operations processes.
4) Inventory Turnover Ratio
This is a calculation used to determine how quickly inventory is used up or “turned over” in a given time period. The higher the ratio the shorter the shelf life of the inventory and typically leads to higher sales volume and profitability for companies with lower profit margins. Inventory turnover should be closely watched for every item in the warehouse. Over the course of the product’s life cycle, demand will fluctuate and cause variability in the supply chain. Tracking demand patterns are one way to ensure product replenishment calculations are accurate and optimized.
5) Establishment of Optimized Purchasing Procedures
In order to ensure that inventory is under adequate control, management must adopt purchasing procedures that align with actual sales history and demand pattern data. All inventory items that have not had an inventory turnover or have not been sold within an accounting period, typically 12 months, should be classified as obsolete stock and should be liquidated from inventory to eliminate unnecessary carrying costs. Any item with a declining customer demand should be flagged in the system and its safety stock level thresholds and re-order point counts should be downwardly adjusted to mitigate risk of obsolescence and cost.
6) ABC Analysis and ABC Classification
The fastest moving products in your inventory should be located closest to the shipping, staging, and receiving area in the lower-right of the diagram below. As the demand for each product decreases over time, products should be migrated backwards to free up space for items with higher inventory turnover or for new product introductions that have high demand. Since the majority of your picking activity is performed in a rather small area, your warehouse layout should be optimized to reduce time spent looking for product in the back of the warehouse.
Challenges of Wholesale Distributors of Durable Goods:
Most of our distributor customers report having the same issues when it comes to inventory control:
- They experience stockouts of other products, resulting in backorders, lost sales, and dissatisfied customers.
- They have too much of some products which leads to excess inventory which ties up working capital and profitability.
- They have lost track of what is actually in inventory because their legacy applications cannot effectively keep up with growing demand and the speed of business.
- They can’t find material in their warehouse, but they know the material is in the warehouse but warehouse management systems says they have product on hand.
With these common challenges come a few industry best practices that can eliminate, or at the very least, reduce the recurrence of these issues. Distributors that have committed to putting into place some of the following best practices on average report 30% reduction in costs associated with managing inventory.
How Can Optimization Be Achieved?
Here are 5 inventory optimization best practices to consider that will lead to a more optimized supply chain:
1) Categorize Your Inventory
This is similar to the ABC analysis practice where management categorizes its inventory according to its value and speed of turnover. Sales numbers and profitability margins are some of the ways stocks are valued. Inventory optimization software, such as EazyStock, can help inventory managers track an item’s demand and lifecycle across 9 different demand patterns, from new to growing to decline, to ensure replenishment practices and customer demand are never out of step with each other.
2) Automate Demand Forecasting
The company’s performance is often dependent on external conditions such as seasonal demand, market trends, economic conditions and other business trends that can cause unpredictable demand variability. Automated demand forecasting can be used to take the guesswork out of how much inventory should be carried for a given period. Automation dynamically calculates an inventory item’s based demand according to historical sales data to ensure minimum and maximum order quantities are optimal.
3) Replenishment Automation
A centralized inventory management system coupled with inventory optimization software will enable a company to better track inventory levels and prepare for unexpected events. They can also avoid over stocking and under stocking situations as demand patterns can automatically override the replenishment parameters based on predetermined stocking policies and service level targets.
4) Continuous Process Improvement
Unless companies continuously monitor and analyze operational challenges, they may keep getting the same results, which include high operational costs, poor customer service levels and inefficient operations.
5) Invest into Inventory Optimization Technology
Most wholesalers and distributors rely on antiquated technology platforms such as ERP and WMS to drive their planning, forecasting and replenishment processes. Unfortunately, these types of systems were not designed to optimize inventory levels. Companies looking to gain a step on the competition need to evaluate add-on systems that can support more lean operations and more efficient operations to save costs and increase service levels.