Manufacturers and distributors continue to face significant challenges with inventory management — the process of assessing, storing, and fulfilling inventory requirements as inventory moves through the supply chain. Many organizations find themselves burdened with excess stock of items they don’t need, needlessly tying up capital. At the same time, they experience backorders on high-demand products, risking customer dissatisfaction and potential revenue loss. Challenges with forecasting and demand variability, navigating supplier relations (domestically and internationally), adhering to manufacturing regulatory requirements, ensuring inventory accuracy, and more, all impact a company’s ability to effectively manage its stock.
Whether operating as a small manufacturer, a midsized distributor, or a large multinational organization, companies are increasingly confronted with the complexities of balancing inventory levels. But the right inventory management approach can help you overcome these obstacles, optimize costs, and position yourself for growth.
The importance of inventory optimization
Inventory management is an ongoing process that helps companies manage their stock along the supply chain; however, inventory optimization goes beyond balancing inventory levels, allowing competitive businesses to optimize their inventory to protect revenue and support scaling efforts.
There are many ways that manufacturers can optimize their inventory for cost reduction and growth. But it’s imperative to adopt a comprehensive approach that safeguards the integrity of the entire supply chain. An effective inventory optimization strategy must account for the needs of all internal and external stakeholders involved in the product life cycle, from suppliers to end customers.
Assessing your current position
The first step in developing an effective strategy should be identifying whether you’re maintaining the right inventory levels across raw materials, components, and finished products. Defining the right minimum inventory levels to fulfill customer demand while trying to minimize carrying cost and avoiding tying up capital is tricky. Too little inventory, and you’ll run into production delays and won’t be able to meet customer demands on time; too much and you’ll face elevated costs and impaired cash flow.
Analyze data in your system to assess your inventory levels and determine if the right quantities are being held. Many supply chain management tools can provide real-time insight on inventory levels, automate the ordering and tracking of stock, and provide predictive analytics on demand forecasting to ensure your stock is aligned with customer needs. This is why it’s critical that your current system is aligned with the scale of your business. Once you’ve calculated the optimal stock quantities, develop an action plan to reduce unneeded stock and increase where levels may be too low.
Next, gain a thorough understanding of your current inventory position from a physical standpoint. It’s crucial that your systematic inventory aligns with actual physical counts. A cycle counting program allows you to identify inventory levels by comparing a smaller portion of your inventory to system records, rather than stalling operations with a full inventory count. Implementing a cycle counting program can help you maintain more accurate inventory levels, quickly detect discrepancies, and immediately implement process fixes.
Inventory planning with demand forecasting
Once you’ve defined your inventory position, you’ll want to evaluate your inventory planning approach. Consider if your current inventory planning process is tailored to your business. Your inventory planning approach should be adaptive and based on a host of factors, including your growth goals, market trends in your industry, and seasonality fluctuations.
Determine whether to base your planning on historical sales data with an added growth factor, or if a detailed forecast exists to inform your strategy. Regardless of your chosen strategy, a robust forecasting process should be in place to guide your decisions.
Once you have a clear picture of your current inventory position and planning methods, assess how these align with your forecasted needs. Applying an enhanced sales and operations planning process that brings together a cross-functional team of your director-level staff across marketing, sales, purchasing, and logistics can help you align your inventory with projected sales. It can also help you address the challenge of changing and unpredictable consumer demand. Regular assessment of your chosen inventory planning methodology will also help you keep track of whether your minimum inventory levels are appropriately set.
The path forward
Identifying the root causes of your inventory challenges and developing tailored solutions can lead to significant improvements in cash flow, enhanced customer satisfaction, and increased operational efficiency. It’s important to recognize that there’s no one-size-fits-all solution; finding the right approach that fits the unique circumstances of your organization is crucial. By taking a deliberate and holistic view of inventory management, you can successfully overcome complexities and implement effective strategies that support growth, raise your competitive edge, enhance customer satisfaction, and ultimately, drive long-term success.
