Inventory Management Challenges 2: Growing Product Portfolios
- Common Problems in Inventory Management - Managing Growing Product Portfolios
- Inventory management problem 2: Expanding product portfolios
- Identifying demand types
- Accurate demand forecasts
- Optimising inventory levels
- Automation efficiency
Common Problems in Inventory Management – Managing Growing Product Portfolios
At EazyStock we talk to a lot of small and medium-sized businesses (SMBs) who are struggling to manage their inventory effectively. This is mainly due to an increasingly challenging marketplace which is causing three common inventory management problems:
- Complex supply chains as businesses rely on a vast network of manufacturers, distributors and retailers
- Expanding product portfolios as customers demand more choice
- Increased stock levels to ensure stock availability
In this three-part blog series we’re looking at each inventory management problem in turn. In this post we’re looking at how to manage inventory effectively when you’re faced with a growing product portfolio.
Inventory management problem 2: Expanding product portfolios
As customers demand more variety, businesses are diversifying and expanding their product portfolios to survive. Whilst this may satisfy customers, operationally, this can lead to a wealth of internal inventory management problems:
- Difficulties managing a breadth of SKUs efficiently – spreadsheets won’t cut it!
- Reducing stock levels to carry more lines (without accurate forecasting and inventory optimisation tools) can lead to stockouts and expensive backorders or rush orders from suppliers.
- A build-up of excess inventory and obsolete stock as social trends and technologies quickly change and forecasting models fail to keep up.
- Increased operational costs and a lack of warehouse space.
Businesses need to adapt their inventory management processes to manage stock effectively. Many are turning to inventory optimisation practices to balance their stock levels.
Inventory optimisation is critical to businesses that carry a wide breadth of stock. It starts with identifying the demand patterns of your products. You can then accurately forecast demand, and finally optimise your stock.
Let’s look at each in more detail:
Identifying demand types
All products in your warehouse are in their own product lifecycle. For example, some will be at the growth stage with either positive demand or ‘fast’ demand e.g selling a steady volume. As an item moves to maturity it’s demand may become ‘erratic’ e.g have more unpredictable, fluctuating demand, or see a negative demand pattern emerge.
Identifying and tracking demand types will help you accurately forecast future orders and prioritise which products to stock.
Accurate demand forecasts
Accurate demand forecasting helps you achieve the right levels of inventory to fulfil orders whilst preventing the risk of excess or obsolete stock. Ensure you consider demand variables, such as seasonality, trends and qualitative information sources to make forecasts as accurate as possible.
In addition, adjust your forecasting formula to consider the demand types above. Each demand type has a different deviation from its mean and therefore responds better to some forecasting algorithms than others. Read this eBook for more guidance on accurate demand forecasting.
Optimising inventory levels
When carrying lots of SKUs, you may be tempted (or even forced due to lack of space) to reduce the quantities of each line. Whilst this helps free-up space and capital, unless supplier lead times are short or you have dropshipping arrangements, you run the risk of stockouts that can affect customer satisfaction.
Effective inventory management requires you to prioritise the stock you carry based on its value to the business. ABC analysis is a simple way to categorise inventory, so you can stock more category ‘A’ items that sell well and have a good profit margin, versus ‘C’ items that have a low sales rate and bring less value to the business.
With inventory optimisation software, stock classification can be much more advanced. For example, EazyStock will base stocking policies on several key criteria:
- The demand volatility of each SKU – EazyStock automatically segments items based on their demand volatility behaviour and, therefore, how easy their demand is to forecast.
- The value an annual usage of each SKU – this accounts for sales volume as well as the unit cost of the product.
- How often each SKU gets picked – this distinguishes high volume products with many requests (1000 requests for 1 unit) from high volume products with low requests (2 requests for 500 units).
For example, if you wanted to focus on products with a high value of annual usage, you could prioritise those that have predictable demand patterns and high pick frequencies (as the risk of excess stock is low and you need to ensure you can cover demand), over those with volatile demand and low pick frequencies (as these are expensive to stock and demand is not consistent).
The objective when setting stocking policies is to prioritise products that are forecasted to sell well in the future and make you the most money. You can then reduce the stock levels of other SKUs, preventing the likelihood of building up excess stock levels which can turn obsolete.
Cloud-based inventory optimisation software, such as EazyStock, can be very advantageous when you have a large product portfolio to manage. EazyStock is designed to automate demand forecasting, stocking policies and replenishment tasks, helping you manage your stock more effectively.
It factors in supply and demand variables and dynamically adjusts inventory levels to ensure stock availability whilst optimising turnover. Without a reliance on spreadsheets, there will be less risk of human error and complex calculations will be speeded up.
Effective stock management is critical if your product lines are constantly growing. Many small businesses have already invested in inventory management software, such as enterprise resource planning (ERP) or warehouse management systems (WMS). And whilst these may be effective at inventory control processes, such as tracking and counting items in your warehouse, many lack the functionality to specifically optimise your inventory levels.
Inventory optimisation software can help overcome a wealth of problems faced by inventory management. It’s ability to carry out accurate forecasting, set cost-effective stock levels and automate reordering delivers a fast ROI for many businesses.
If you have inventory management problems that you’d like to discuss with our team, or you’d like a demo of EazyStock software, please get in touch.