4 Strategies for Inventory Control

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Isaac Herman

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4 Strategies for Inventory Control

13/02/2021 Categories: Articles

Reading Time: 10-15 min. TL;DR: Inventory deserves its role as one of the most vital strategic factors for any manufacturing and distribution company's operations due to one simple fact: The number of products you plan to sell will be a substantial investment of company money, and you need to manage that investment closely.  In this blog, we detail 4 effective strategies that you can utilize to manage your inventory in an efficient and profitable way.  1. Get Better Inventory Management Through Better Technology From a purely fiscal standpoint, every business wants to manufacture or order just enough products to satisfy customer demand before replenishment and leave nothing sitting on the shelf. When it's boiled down, inventory tracking is simple – it's keeping track of what's going in, what's going out, and what is leftover. However, more complex and active situations call for inventory management software to accomplish much more than the basics. Your business' need for it could depend on the product; for example, if you're selling perishable goods, inventory management software that records and enforces expiration dates would be ideal. On the manufacturing side, solve quality control issues with inventory software that puts a hold on any products that don't meet the company's predetermined quality metrics.  When you begin looking at inventory management from a customer fulfillment standpoint, different types of issues start to crop up.  The pivotal operational value of inventory is this: it crucially shortens the amount of time needed to fulfill customer demand. Distributors with effective inventory management use warehouses nearest to their customers to deliver goods exceptionally quick. Manufacturers can use finished goods inventory to get items shipped the same day, instead of forcing customers to wait until they are assembled. Having raw materials and parts available in-warehouse allows production to start instantly when a customer requests a make-to-order product.  You can make a considerable difference with inventory management that accurately tracks multiple quantities of items in numerous locations, interprets product usage, and analyzes replenishment. Good inventory management pays off in lower overall inventory costs, higher customer satisfaction, fewer backorders and lost business, and lower expedited delivery costs. Acumatica Distribution Edition contains these features and many more if you're a distributor or manufacturer interested in getting a more robust handle on your product fulfillment and inventory availability.  2. Proactive Planning Creating proactive strategies to "future-proof" your inventory stock can pay off in the long run. Look ahead several seasons, or even years, and plan for anticipated sales or demand.  One of the best ways to proactively take charge of your inventory is through forecasting (using past sales demand data to project future sales demand. Through online inventory tools like Acumatica, companies now have a goldmine of data at their fingertips that can unveil demand patterns that help plan for the next purchasing round of inventory stock. The most effective replenishment plans cause the new supply to arrive just before the previous supply runs out. This inventory management method is called order point, and it's based on assumed usage and typical lead time. However, other approaches may be more effective.  Inventory may be a hefty cost, but shortages or stock-outs can be devastating to a business. Stock-outs damage your business's overall reputation, which is much harder to build back up.   Order point can work, but it may be too simple for your business. Inventory management, planning, and optimization systems let you play with a wide array of tools you can use for proactive inventory management. These tools can effect change in the factory, the warehouse, and throughout the supply chain. No replenishment planning approach is one-size-fits-all because demand varies from day-to-day and week-to-week. Most of these effects on demand are predictable, whether it's a holiday coming up or changing seasons. However, to prepare for unexpected cases, companies will purchase a set amount of extra inventory, called "safety stock." Adding more safety stock reduces the chance

will be a substantial investment of company money, and you need to manage that investment closely.  In this blog, we detail 4 effective strategies that you can utilize to manage your inventory in an efficient and profitable way. 

Warehouse workers

1. Get Better Inventory Management Through Better Technology

From a purely fiscal standpoint, every business wants to manufacture or order just enough products to satisfy customer demand before replenishment and leave nothing sitting on the shelf. When it's boiled down, inventory tracking is simple – it's keeping track of what's going in, what's going out, and what is leftover.

However, more complex and active situations call for inventory management software to accomplish much more than the basics. Your business' need for it could depend on the product; for example, if you're selling perishable goods, inventory management software that records and enforces expiration dates would be ideal. On the manufacturing side, solve quality control issues with inventory software that puts a hold on any products that don't meet the company's predetermined quality metrics. 

When you begin looking at inventory management from a customer fulfillment standpoint, different types of issues start to crop up. 

The pivotal operational value of inventory is this: it crucially shortens the amount of time needed to fulfill customer demand. Distributors with effective inventory management use warehouses nearest to their customers to deliver goods exceptionally quick. Manufacturers can use finished goods inventory to get items shipped the same day, instead of forcing customers to wait until they are assembled. Having raw materials and parts available in-warehouse allows production to start instantly when a customer requests a make-to-order product. 

You can make a considerable difference with inventory management that accurately tracks multiple quantities of items in numerous locations, interprets product usage, and analyzes replenishment. Good inventory management pays off in lower overall inventory costs, higher customer satisfaction, fewer backorders and lost business, and lower expedited delivery costs.

Acumatica Distribution Edition contains these features and many more if you're a distributor or manufacturer interested in getting a more robust handle on your product fulfillment and inventory availability. 

Proactive planning

2. Proactive Planning

Creating proactive strategies to "future-proof" your inventory stock can pay off in the long run. Look ahead several seasons, or even years, and plan for anticipated sales or demand. 

One of the best ways to proactively take charge of your inventory is through forecasting (using past sales demand data to project future sales demand. Through online inventory tools like Acumatica, companies now have a goldmine of data at their fingertips that can unveil demand patterns that help plan for the next purchasing round of inventory stock.

The most effective replenishment plans cause the new supply to arrive just before the previous supply runs out. This inventory management method is called order point, and it's based on assumed usage and typical lead time. However, other approaches may be more effective. 

Inventory may be a hefty cost, but shortages or stock-outs can be devastating to a business. Stock-outs damage your business's overall reputation, which is much harder to build back up.  

Order point can work, but it may be too simple for your business. Inventory management, planning, and optimization systems let you play with a wide array of tools you can use for proactive inventory management. These tools can effect change in the factory, the warehouse, and throughout the supply chain.

No replenishment planning approach is one-size-fits-all because demand varies from day-to-day and week-to-week. Most of these effects on demand are predictable, whether it's a holiday coming up or changing seasons. However, to prepare for unexpected cases, companies will purchase a set amount of extra inventory, called "safety stock." Adding more safety stock reduces the chance of a "stock-out" but will increase your overall inventory costs. Like most things in life, it's about balance. 

Avoiding product shortages

3. Avoid Product Shortages By Reducing Variability

During inventory planning, your top objective is to steer clear of product shortages while simultaneously minimizing the amount of inventory you buy to meet customer demand. The easy way to avoid shortages is by only buying excess, “safety” merchandise. The downside to this is how much money you spend on inventory that doesn't sell out. There is also one more factor: variability. 

Unless you can see the future, it's going to be impossible to cover all possible variations. Businesses are left to cover most expected problems using safety stock and live with a level of availability (fill rate) less than 100%. The more safety stock you purchase, the higher the fill rate will be.

What if you reduce variability? That way, you build up the fill rate without expanding inventory purchases. Variability reduction also lets you reduce safety stock without minimizing the fill rate. 

How can you reduce variability? The most common ways include:

  • Using cycle counting to improve inventory accuracy. 
  • Collaborating with customers and distributors to enhance forecast accuracy.
  • Decreasing lead time (explained in the next section). 
  • Audit distribution procedures and controls and tighten them up where you see fit. 
  • Implementing an integrated system like Acumatica ERP, which can help you manage warehouses and automate data collection.

Reduce lead times and lot sizes

4. Reduce Lead Times and Lot Sizes

If lead time were zero, you wouldn't need inventory. Variability is time-sensitive, so that lead time can come into play in a big way. If your lead time is a week, keep in mind there is a much higher risk of variation than if your lead time was a single day. You can also forecast more accurately in the short term. 

Lowering replenishment order size reduces inventory costs. Replenishment has its price, though, in the form of fixed ordering cost. Fixed ordering cost includes receiving, material handling, inspection, and the purchasing department's operating costs.

Acumatica Distribution Edition provides integrated purchasing applications with supplier portals so that you can compare supplier prices and even negotiate. Automated or semi-automated ordering lowers the purchasing department's operating costs, making it another efficient way to reduce fixed ordering costs. Other features like forecast-based blanket orders and electronic communications throughout each warehouse can also help bring down fixed ordering costs. 

Summary

Since inventory is such a major investment, discovering which inventory levels make the most economic sense for your distribution company can significantly lower operating costs. However, it would be best if you had a solid plan based on data. Lowering inventory without a plan will likely cause shortages and upset customers unlikely to return. 

You can prepare as much as you can by implementing useful software and processes, but your inventory will always be decided to some extent by any variability that occurs. The more variability, the more inventory is required to maintain service levels (fill rate). Because of this, a useful improvement strategy focuses on reducing variability through accurate record- keeping, better forecasting, reducing lead times, and adding procedural discipline.

By understanding the reasons for inventory shortages or overinvestment, then addressing the underlying causes, you can reduce inventory without raising the risk of financial expense – a real win-win for operations managers, the company, and your customers.

Kensium is a certified provider of Acumatica ERP, and we pride ourselves on being experts when it comes to inventory solutions for distribution and manufacturing companies. Contact us today if you're interested in upgrading your inventory management capabilities through Acumatica ERP.

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Reading Time: 10-15 min.

TL;DR: Inventory deserves its role as one of the most vital strategic factors for any manufacturing and distribution company's operations due to one simple fact: The number of products you plan to sell will be a substantial investment of company money, and you need to manage that investment closely.  In this blog, we detail 4 effective strategies that you can utilize to manage your inventory in an efficient and profitable way. 

Warehouse workers

1. Get Better Inventory Management Through Better Technology

From a purely fiscal standpoint, every business wants to manufacture or order just enough products to satisfy customer demand before replenishment and leave nothing sitting on the shelf. When it's boiled down, inventory tracking is simple – it's keeping track of what's going in, what's going out, and what is leftover.

However, more complex and active situations call for inventory management software to accomplish much more than the basics. Your business' need for it could depend on the product; for example, if you're selling perishable goods, inventory management software that records and enforces expiration dates would be ideal. On the manufacturing side, solve quality control issues with inventory software that puts a hold on any products that don't meet the company's predetermined quality metrics. 

When you begin looking at inventory management from a customer fulfillment standpoint, different types of issues start to crop up. 

The pivotal operational value of inventory is this: it crucially shortens the amount of time needed to fulfill customer demand. Distributors with effective inventory management use warehouses nearest to their customers to deliver goods exceptionally quick. Manufacturers can use finished goods inventory to get items shipped the same day, instead of forcing customers to wait until they are assembled. Having raw materials and parts available in-warehouse allows production to start instantly when a customer requests a make-to-order product. 

You can make a considerable difference with inventory management that accurately tracks multiple quantities of items in numerous locations, interprets product usage, and analyzes replenishment. Good inventory management pays off in lower overall inventory costs, higher customer satisfaction, fewer backorders and lost business, and lower expedited delivery costs.

Acumatica Distribution Edition contains these features and many more if you're a distributor or manufacturer interested in getting a more robust handle on your product fulfillment and inventory availability. 

Proactive planning

2. Proactive Planning

Creating proactive strategies to "future-proof" your inventory stock can pay off in the long run. Look ahead several seasons, or even years, and plan for anticipated sales or demand. 

One of the best ways to proactively take charge of your inventory is through forecasting (using past sales demand data to project future sales demand. Through online inventory tools like Acumatica, companies now have a goldmine of data at their fingertips that can unveil demand patterns that help plan for the next purchasing round of inventory stock.

The most effective replenishment plans cause the new supply to arrive just before the previous supply runs out. This inventory management method is called order point, and it's based on assumed usage and typical lead time. However, other approaches may be more effective. 

Inventory may be a hefty cost, but shortages or stock-outs can be devastating to a business. Stock-outs damage your business's overall reputation, which is much harder to build back up.  

Order point can work, but it may be too simple for your business. Inventory management, planning, and optimization systems let you play with a wide array of tools you can use for proactive inventory management. These tools can effect change in the factory, the warehouse, and throughout the supply chain.

No replenishment planning approach is one-size-fits-all because demand varies from day-to-day and week-to-week. Most of these effects on demand are predictable, whether it's a holiday coming up or changing seasons. However, to prepare for unexpected cases, companies will purchase a set amount of extra inventory, called "safety stock." Adding more safety stock reduces the chance of a "stock-out" but will increase your overall inventory costs. Like most things in life, it's about balance. 

Avoiding product shortages

3. Avoid Product Shortages By Reducing Variability

During inventory planning, your top objective is to steer clear of product shortages while simultaneously minimizing the amount of inventory you buy to meet customer demand. The easy way to avoid shortages is by only buying excess, “safety” merchandise. The downside to this is how much money you spend on inventory that doesn't sell out. There is also one more factor: variability. 

Unless you can see the future, it's going to be impossible to cover all possible variations. Businesses are left to cover most expected problems using safety stock and live with a level of availability (fill rate) less than 100%. The more safety stock you purchase, the higher the fill rate will be.

What if you reduce variability? That way, you build up the fill rate without expanding inventory purchases. Variability reduction also lets you reduce safety stock without minimizing the fill rate. 

How can you reduce variability? The most common ways include:

  • Using cycle counting to improve inventory accuracy. 
  • Collaborating with customers and distributors to enhance forecast accuracy.
  • Decreasing lead time (explained in the next section). 
  • Audit distribution procedures and controls and tighten them up where you see fit. 
  • Implementing an integrated system like Acumatica ERP, which can help you manage warehouses and automate data collection.

Reduce lead times and lot sizes

4. Reduce Lead Times and Lot Sizes

If lead time were zero, you wouldn't need inventory. Variability is time-sensitive, so that lead time can come into play in a big way. If your lead time is a week, keep in mind there is a much higher risk of variation than if your lead time was a single day. You can also forecast more accurately in the short term. 

Lowering replenishment order size reduces inventory costs. Replenishment has its price, though, in the form of fixed ordering cost. Fixed ordering cost includes receiving, material handling, inspection, and the purchasing department's operating costs.

Acumatica Distribution Edition provides integrated purchasing applications with supplier portals so that you can compare supplier prices and even negotiate. Automated or semi-automated ordering lowers the purchasing department's operating costs, making it another efficient way to reduce fixed ordering costs. Other features like forecast-based blanket orders and electronic communications throughout each warehouse can also help bring down fixed ordering costs. 

Summary

Since inventory is such a major investment, discovering which inventory levels make the most economic sense for your distribution company can significantly lower operating costs. However, it would be best if you had a solid plan based on data. Lowering inventory without a plan will likely cause shortages and upset customers unlikely to return. 

You can prepare as much as you can by implementing useful software and processes, but your inventory will always be decided to some extent by any variability that occurs. The more variability, the more inventory is required to maintain service levels (fill rate). Because of this, a useful improvement strategy focuses on reducing variability through accurate record- keeping, better forecasting, reducing lead times, and adding procedural discipline.

By understanding the reasons for inventory shortages or overinvestment, then addressing the underlying causes, you can reduce inventory without raising the risk of financial expense – a real win-win for operations managers, the company, and your customers.

Kensium is a certified provider of Acumatica ERP, and we pride ourselves on being experts when it comes to inventory solutions for distribution and manufacturing companies. Contact us today if you're interested in upgrading your inventory management capabilities through Acumatica ERP.