Inventory management and optimisation is once of the most challenging tasks facing supply chain professionals. So what does it take to get it right? Malory Davies asks the questions.
When Tesco released its annual results last month, much was made of the fact that it had managed to stem the decline in like-for-like sales. But, read further and the retailer also revealed that it had made a £400 million improvement in working capital – and that was driven by a £300 million reduction in inventory.
Holding inventory is expensive. It’s not just the capital costs, which can be as high as 15 per cent of value of the inventory. There is also the cost of storage space along with associated services costs. And, many would argue, inventory risk costs also need to be considered.
And, in a multi-channel world, it is all too easy to end up holding too much stock in too many places just to be sure that demand can be satisfied.
Inventory is vital because it sits at the junction of supply and demand. It is very much at the heart of planning, says Martin Woodward, managing director of ToolsGroup, which produces SO99+, the supply chain optimisation software.
For Dawn Howarth of consultants Oliver Wight the starting point has to be an understanding of why the organisation has the inventory it has. She points out that a surprising number of organisations don’t necessarily know why they have the inventory they have got.
“Problems arise if you don’t have an overall picture of the inventory you need to run the business,” she says. “You can’t make predictions, if you don’t have an overall picture.”
For Woodward, a challenge in developing an inventory optimisation strategy is simply establishing ownership. In some organisations there can be an issue over who the inventory belongs to. It might be the commercial department or supply chain – and the ownership is not always transparent. So it is important to declare ownership, says Woodward.
Woodward also points out that supply chains can be “skills constrained”. Organisations don’t necessarily have all the skills they need.
Gavin Clark, commercial director of Synergy Logistics which produces the Snapfulfil warehouse management system, says: “Very often, the key challenge can involve storage and retrieval for specific periods or campaigns. With long lead times for deliveries from suppliers around the world, the biggest challenge can be ensuring the items are processed and ready to fulfil demand at the right time. When the sun comes out, the flip flops need to be ready to pick, not sat in a container awaiting processing.”
Jonathan Bellwood, founder and chief executive of Peoplevox, says: “There are several challenges including gaining real-time visibility of stock levels and sales volume by suppliers which are key to steering you on what to buy. Others include avoiding buyers working off historical sales data, dealing with a wide SKU base where it can be tricky to know the range, and running the risk of buying to stock and then only showing on the website when in stock.”
Fab Brasca, VP, Solution Strategy at JDA, argues that inventory is just one component of the modern global supply chain. “Organisations need to learn how to achieve higher customer service levels with lower resource investment when looking to optimise inventory. Instead of focusing on short-term results, organisations need to adopt more innovative approaches to inventory optimisation to create a long-term, sustainable competitive edge. This would help by aligning day-to-day inventory plans with top-level goals on an ongoing basis – thereby, turning this component into a powerful strategic advantage in a challenging economic climate.”
Sheila Davies, source tagging implementation manager at Checkpoint Systems, argues that the emergence of Click and Collect has increased the need to make delivering very small shipments work for customers and retailers alike. “Businesses need to ensure they are able to distribute the correct level of merchandise to the right locations in a very short period of time, so we’re seeing more companies adopt technologies that help streamline and error-proof these processes, such as RFID.”
And she points out that one of the biggest issues for retailers is that they don’t have enough meaningful data available to enable them to make informed decisions on inventory matters. Inaccurate data is also a problem.
“We see many retailers continuing to carry out manual inventory checks, which by its nature leads to human errors. Taking grocery stores as an example, you then see products remaining on shelves or in the warehouse which have past their sell-by-dates, when they could have been reduced and sold to customers days before.
“Another major issue for retailers is that many are unclear what stock is being held. The latter can lead to problems such as ‘frozen inventory’ where the retailer might think the store is holding the minimum acceptable level of stock for an item, but due to theft, misplacement or poor stock-keeping practices the shelf is actually empty. It can take a long time to spot and fix this kind of anomaly and the out of stock could be fuelling customer negativity over a long period,” says Davies.
Determining the optimum level of inventory for a particular operation must start with business requirement, says Woodward. “You need to decide the level of service you are going to provide.
“100 per cent service is impossible – so it is necessary to decide what is the appropriate level of availability.”
He highlights the pharmaceuticals market where product availability can be a matter of life and death. It’s impossible to guarantee 100 per cent of products will be in stock so it is necessary to have contingency plans to ensure that demand is met. One example would be to have an expedited delivery service to ensure that products could be delivered quickly.
There are clearly calculations to be made on what is the appropriate level of stock to hold and when to rely on the contingency plan.
Clark says: “Accurate reporting of the available space within the warehouse will help to guide buying decisions. An holistic approach to planning, marketing and fulfilling any orders for a given SKU will always need to include a storage element, or over filled warehouses/yards/port and third party overflows will rapidly eat into productivity and profitability.”
And, says Brasca: “In terms of ensuring the optimum level of inventory for any given operation, businesses seeing varying or static levels of demand could turn to profitable order promising as a solution. This would enable businesses to create an optimal view of inventory and the network, so that decision makers at the top can better understand the reality of implementing their plans at each level of execution. As a result, businesses can close the gap between what they plan to do what they actually do, meeting their customer demand with ever greater efficiency and profitability.”
Davies highlights the importance of information sharing between manufacturers and retailers, particularly when retailers don’t own the supply channel. “This is a result, in part, of accelerated product launches, broader and sometimes customised product lines and more frequent shipments, particularly with fast fashion. Data sharing on trends such as “what’s hot” and “what’s not” enable both parties to work together more efficiently and improve inventory management.
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