It is important for a company to set up the right Inventory Management practices as one of the strategic tools for driving profitability. Best practice companies add value and gain an edge of competitiveness by having control over and maintaining lean inventory. Inventory should not be too much or too less. Both situations are risky to the growth potential of any company.
However often we see that inventory is not focused upon by the management and hence a lot of inefficiencies build up over a period of time without the knowledge of the management. It is only when we embark on cost reduction that the loop holes in the management of inventory and hidden skeletons in the closet come out of the cupboard, often resulting in a call to revamp the entire business operations.
However those companies, which have always focused on implementing the right inventory management practices as a principle function and recognized the effect of inventory on sales, as well as the books of accounts and profits, have managed to introduce necessary processes to improve the management of their inventory. Inventory management to a large extent is dependant upon the supply chain efficiency as well as operations.
It is to a large extent a management cum operations function, which on the one hand requires operational processes to be followed and maintained on the floor while on the other hand requiring management to conduct continuous studies, conduct effective analysis to facilitate effective decision making that would enable mechanisms to control and adequately manage inventory levels.
Review and periodically revise stocking patterns and norms
Inventory management practices to keep your inventory lean and clean.
Inventory stocking is dependant upon the demand as well as the supply chain delivery time. Often companies follow one common stocking policy for all items. For example, companies A, B & C may be stocking inventory of 30 days, which may not be the right thing required for all. While some stock items may have a longer lead-time thus affecting the inventory holding, the demand pattern and the hit frequency in terms of past data may show up differently for each of the inventory items. Therefore, a tendency towards an all fitting standard which does not suit all may lead to over stocking of inventory as well as in efficiencies arising from poor inventory management practices.Plan for your inventory requirements in detail - One size does not fit all
Understand the inventory types and the specific characteristics of the items you are carrying. Then build the inventory stocking parameters taking into account the unique characteristics of the particular inventory you need.
From amongst your inventory list, you will find that all types of materials are not of the same value. Some might be very expensive and need to be carried in stock for a longer period, while another item might have a shorter lead-time and may be fast moving.
Getting into the detailed understanding will help you identify the inventory management norm required to manage these characteristics to ensure optimum efficiency. The solution quite often may not be to carry stocks, rather it may involve setting up the customer service standard for such items and specifying a delivery time depending upon the frequency of demand. Quite a few items often have varying shelf lives, and hence may require separate norms and focus to manage.Study demand pattern, movement patterns and cycles to build suitable inventory norms for different categories of inventory
Companies which are into the business of retailing and dealing with huge inventories in terms of number of parts as well as value will necessarily need to ensure they practice review of inventory lists and clean up operations on an ongoing basis.
Popularly known as catalogue management, norms for reviewing inventory management practices should be put in place based on detailed study of the sales data, demand pattern, sales cycles etc. Understanding of the business and sales cycles specific to the product category helps one manage inventories better. For example, in case of retail garments, some of which become redundant no matter how their demand was in the previous months. This helps identify those stocks which are required to be managed at a micro level and identify the high value and fast moving items that need to be always on the radar to avoid stock outs.
It does not help for example to carry standard stocks of all items including low value items as well as high value items. If the low value items are locally available and the lead-time is less, one can cut down on the inventory and change the buying pattern. Similarly high value items too can be managed by cutting down the delivery lead times and in turn reducing inventory.
It helps to periodically study the past data and extrapolate the same to identify slow moving and obsolete items. The dead stocks should be flushed out and active catalogue items should be made available.Improving Inventory Management Practices Through ERP?s
ERP applications bring about transparency and visibility in the operations of a company. Companies having operations or branches across multiple locations can be able to manage their inventory, track dispatches, plan purchases, and monitor their financials over an ERP platform. Standardization of all processes across the organization can be achieved and data accuracy is also enhanced. This leads to tangible business benefits and directly improves the bottom line. ERP?s are especially important because they bring about efficiency in inventory management.
Having a visibility of inventory is necessary whether it?s in the factory, ware house, or depot. ERP systems can effectively track the movement of raw material, packaging material, consumables, manufacturing and sales or finished goods at all stages of procurement. Analysis of slow moving, perishable, unused inventory can help managers decide to come upon on a suitable decision. This reduction of inventory by a few percentage points can release cash to the business. It can also lead to a reduction in working capital requirements. Inventory management practices through ERP systems can help reduces plant shutdowns due to shortage of required material. The system adequately facilitates procurement planning which is dependent upon accurate information about inventory at each location in addition to Finished goods inventory management which is important for servicing customer requirements.