Inventory Management Challenges 3: Stock Availability
- Common Inventory Management Issues
- Inventory management challenge 3: Ensuring stock availability
- Ensuring stock availability with inventory optimisation
- Service levels
- Replenishment rules
- Getting rid of excess and obsolete stock
Common Inventory Management Issues
The global marketplace is constantly evolving due to political, economic, technological and social factors. As small and medium-sized businesses (SMBs) try to remain competitive, many are coming up against inventory management challenges. In this three-part blog series we’re looking at three of the most common inventory management issues faced by stock holding companies. So far we’ve discussed the following:
In our final post we’re looking at how businesses can ensure stock availability, without investing too much capital into their inventory.
Inventory management challenge 3: Ensuring stock availability
Many businesses fear stockouts – and rightly so. Ten years ago it might have been ok to ask your customer to wait a few weeks until you got their product in stock, but today you’re likely to lose that customer to another supplier if you aren’t able to deliver. After all, your competitor is just a click away.
Faced with the risk of stockouts, a damaged reputation and reduced profits, some businesses will resort to stocking high quantities of every SKU to meet demand. This is a bad idea for three reasons:
1. This will negatively impact your stock turnover rate.
2. It will tie up working capital and increase carrying costs.
3. It will increase the risk of excess and obsolete stock.
Instead you need to find ways to fulfil orders without maxing-out on stock. This is possible when you introduce inventory optimisation methodology to your inventory management practices. Inventory optimisation ensures supply and demand volatility is considered when setting your demand forecasts, stock levels and replenishment parameters.
Ensuring stock availability with inventory optimisation
The first stage of inventory optimisation is to set accurate demand forecasts, so you only carry the products you need to meet demand. Read our blog on demand forecasting or download our eBook for more information.
The next stage is to optimise your stock levels by using an inventory classification model to prioritise the stock you hold in your warehouse. ABC classification is a simple way to do this, where you segment your stock based on its value to the business. The aim is to stock more category ‘A’ products, that sell well and have a good profit margin, versus ‘B’ that are less valuable and finally ‘C’ products, that you may choose not to stock, as they are the least important. Our blog on ABC classification offers more information on this topic, or you can download our whitepaper below.
The next step to ensuring stock availability is to set target service levels. Service levels measure whether an inventory item was in stock when it was requested for delivery, leading to a completely fulfilled order e.g whether demand (or sales orders) could be met from the inventory on-hand.
The target service level you set for each item in your warehouse should be based on its forecasted demand and demand type e.g if you have fast moving products where demand is consistently high, then you might set a high service level of 98% or above. Whereas for slower moving products with intermittent demand you may set lower service levels, such as 90%.
Your service levels are therefore a measure of stock availability.
With your service levels set, you can then agree stocking policies, such as minimum order quantities and safety stock levels, so you lower your inventory but still ensure availability.
Monitoring your service level as an inventory management KPI helps you ensure you can completely fulfil every order and prevent stockouts.
Replenishment is also critical to ensuring stock availability without over-ordering. Determining your order frequencies and order quantities to take account of demand and supply variables means you can reduce stock but still achieve high target service levels.
However, basic replenishment models (often found in spreadsheets or used by ERP systems) are very one-dimensional. Reorder times are based on a fixed order cycle or when stock hits a certain trigger point. Reorder quantities are either the same amount every time or based on filling up to a min/max warehouse capacity.
The Economic Order Quantity methodology is more advanced, taking carrying and ordering costs into account. But none of these methods consider supply and demand variables.
With inventory optimisation software you can go one step further and factor in:
- Demand forecasts – so you’re ordering to the demands of your customers
- Supplier lead times – so you’re taking account of supplier constraints, national holidays etc
- Cost-effective order quantities – so you’re weighing up the cost of carrying and opportunity costs against cheap bulk buys
- Safety stock levels – so you never end up out of stock
Getting rid of excess and obsolete stock
If you’ve previously opted for a policy of maintaining high inventory levels across all SKUs this may have led to a build-up of excess stock. Make sure you act fast before it becomes obsolete!
- If you have multiple warehouses, look at inventory levels across all sites and see if excess items can be moved from a location with low demand to one where the products sell faster.
- Find ways to sell off excess inventory as cost-effectively as possible before you have to write it off as obsolete.
- Get rid of obsolete stock – it’s simply taking up warehouse space, adding to carrying costs and doesn’t have a realisable value.
Many inventory management issues are a result of not accounting for supply and demand volatility.
If you can stock the right goods in the right amounts to meet demand, you’ll maximise your stock turnover rate. As goods move quickly in and out of the warehouse you can keep cash flowing and prevent excess and obsolete stock. At the same time, you’ll have optimised stock levels that are set to ensure high service levels and product availability targets.