Two Expensive Inventory Issues: Which Do You Fix First?

Do you know the root causes of the four common inventory issues: out of stock, overstock, bumpy cash flow, and lost sales? Your goal is to have the right products in the right quantity at the right locations just in time to sell with terms from your supplier that allow you to use your money again before you pay the supplier. No one would argue the success of this strategy, so where is all the grief? In truth, there are four root causes of the most common inventory issues. Unfortunately, many companies fail to identify and act on these root causes, resulting in lost profits in the form of lost sales and higher operating costs.

Out of Stocks – Supply Chain Issues
Overstocks – Operation Problems
Bumpy Cash Flow – Planning & Finance
Lost Sales – Customer Service Issues

This blog is an abstract from: “Four Familiar Inventory Troubles – Which Do You Want to Overcome?”* in the September 2013 edition of Retail Value Chain Federation’s monthly newsletter. CLICK HERE to see the complete article. This is part 4 of a 5 part series in RVCF-Link on Demand Forecasting and Inventory Replenishment. This blog is part 2 and the conclusion of the series we started on

What Your Inventory Operation Isn’t Telling You

Our blog: Four Common Inventory Issues – Which Do You Want To Fix? addresses two of the four most common root causes to inventory issues, demand forecasting, and lead time forecasting. The article also outlines how different inventory optimization actions can improve inventory performance. “Inventory optimization has been made to sound like the ’end all’ answer to these four profitability issues. Is it a state of nirvana for retailers that, if reached, magically removes all inventory issues? What is inventory optimization and is it truly the “final answer” to your inventory planning and operation execution issues?”*

There are four steps you need to take in reviewing your inventory operations. In the previous blog in the series, we discussed steps 1 and 2 and outlined some methods for you to use to measure your opportunity. In this blog, we cover the remaining two steps for you to review. These final two create more issues than the first two because you can have a perfect demand forecast and lead time – but if these two steps are not addressed the cost to profits will be substantial.

Order Cycle and Optimization

Step 3: Inventory Order Cycle Optimization is needed to determine the most efficient quantities of product to buy. Real inventory optimization determines the optimum order cycle based on pull methodology, from the bottom, based on individual product/location service goals. This is the best way for your business to be customer-centric as it lowers your inventory costs and raises your sales and service level attained. The pain of reordering based on service is that it follows the market and not a plan or open to buy. While a system that calculates the reorder cycle based on service levels is very responsive to the customer and results in less inventory, the danger for some is that replenishment seems a higher priority than plan.
Order cycle optimization decisions are best made when future needs, the demand forecast, and your company’s cost structure, product acquisition and carrying costs, are integrated into the equation. The resulting optimum economic buy quantities provide the best possible cash flow and increase customer sales.
Many companies and many legacy software applications are based on a plan. Often, companies set their reorder cycle (supplier order schedule) using a weekly or monthly schedule. This practice is not responsive in today’s marketplace and often results in overstocks, out of stocks, and cash flows that are weighted heavily in the first week of any month. These multiple inventory expenses are caused just from how you schedule orders!

Visible Supply Chains Then and Now

Step 4: Inventory optimization needs supply chain visibility tools that can monitor demand and supply, while providing configuration by individual users and management. Monitoring requires effective exception management that is, again, configurable by users based on product/ location hierarchies and multiple management levels. The uniqueness of your internal and external business workflow activities and goals should be defined in your configurable exception management tools and process which dynamically change by recognizing market changes over time. A flexible tool allows you to create new reports and screens that support resolving new exceptions, providing the best possible results.

Real Supply Chain Visibility tools should allow you to share one view of the truth to any user group: corporate, warehouse, logistics, stores, 3rd parties, and suppliers. The shared screens should be able to update dynamically without human intervention, not waiting on the end of day batch processes. In other words, this week’s promotion items should show on every buyer’s desk without anyone touching a program or report. The inventory issues based on your real-time business rules should be already highlighted and people that need to take corrective action are aware of the issue and steps to resolve.

Benefits of Supply Chain Visibility

One Source of the Truth – Ask two departments for a sales report – note the differences?
Supply Chain Visibility needs one source of the truth to Deliver Consistency in Response by removing disparity of departments, systems, operations, and suppliers.

Results include:

Real Time Response – Improve Supplier Communication – Reduce Duplicate Efforts – Lower Operating Cost – Improve Growing Global Supply Chain – Improve Accuracy – A Real Use for that Vendor Portal all are talking about today.

Supply Chain Visibility provides a methodology to remove many issues in your supply chain. The reality is many solutions today fail to address the root goal of visibility – one source of the truth that is delivered and updated dynamically to all interested parties, and easily configured and updated by the business group. There are a few solutions like iKIS that deliver it out of the box, contact us.

Top Ideas for Common Inventory Issues

The four biggest pains of inventory are overstocks, out of stocks, bumpy cash flow, and lost sales. The root cause of these issues are caused by ineffective management in four key areas: Demand Forecasting, Lead Time Forecasting, Order Cycle Optimization, and Supply Chain Visibility. Review your current processes to managing these four steps using the ideas we provided in this and our last blog.

If you need help getting started contact Data Profits for a free consultation. You can also request a demo and see how things can start to improve in your supply chain with our 30 day install. ‘Are you ready to tighten the Links in Your Chain? ™’

About
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Stuart D

Stuart Dunkin is a strategic visionary who leads by calling on his broad range of experience as a former retail executive as well as a consultant for top retailers and for the E3/JDA software company. He founded Data Profits to solve a real-world problem plaguing retailers today – the disjointed relationship between supply chain data, people and business goals. He has experienced first-hand the challenges and frustrations that occur when decisions are made based on wrong data, which often leads to the wrong actions being taken with crippling results like overstock, out-of-stock, and increased working capital.
Stuart graduated from Auburn University, with bachelor of science in business administration.