Page 19 - Logistics News June 2016

inventory management
The bottom line is that
inventory is expensive and it
typically comprises 40% to
50% of a manufacturing or
distribution organisation’s
capital investment. The cost is
a combination of the value of
the product and the storage
costs associated with holding
the inventory. It is usually a
big number that the executive
management team and
shareholders see, and they
don’t like it.
Inventory ABC classification
When it comes to classifying
inventory it is usually safe to
follow the Pareto Principle,
also known as the 80/20 rule.
The Pareto Principle is the
theory that most businesses
see 80% of their sales
come from roughly 20% of
customers. ABC Classification
for inventory management
is a very similar approach.
Classifying inventory items
into A, B, C and D (80%,
15%, 5%, 0%) based on sales
volume is an industry best
practice when managing
inventory.
The most common metric
to use is Annual Sales
Volume when doing ABC
Classification to calculate
inventory for each group.
Special consideration needs
to be taken for new and
critical items in the inventory. true customer order
Revised purchase order
cycles and quantities
Another effective strategy for
better managing inventory
turnover is to purchase
smaller and more frequent
order quantities to reduce the
overall inventory carried.
Determining order
frequencies is one of the
key variables of a supply
chain. One way can be to
stay at the same number of
annual orders but reallocated
June 2016 | Logistics News
between the A, B and C and
at the same time evaluate the
demand frequency to more
intelligently manage order
cycles and order quantities.
This strategy gives inventory
managers more flexibility to
align purchasing patterns with
actual customer demand.
Improved inventory
forecasting
Forecasting is not always
the most popular subject
to inventory planners and
managers, but there is no
escaping the conversation
as forecasting is done by
every make-to-stock or
purchase-to-stock company.
It is possible to improve
forecasting but inventory
forecasting best practices
should begin with ensuring
data accuracy first. For
example, sales and marketing
may have been influencing
demand through pricing and
promotion activity. First, you
must understand and collect
the inputs that drive the core
of the demand. Separate out
seasonality and trends.
Use the demand that is
as close to real customer
demand as possible,
preferably point of sales
data. If you forecast off
consignments, and the
consignments don’t reflect
quantity and dates (based
on unavailability and back
orders), the data is tainted
and will skew forecasting.
When the right inputs are
available and the data is
clean, then it’s time to review
the forecasting methods.
Eliminate excess and
obsolete stock levels
Once inventory reaches the
obsolete stage of its life-
cycle, it’s typically too late to chain and the walls between
take actions that will result
in a profitable return on
that investment. With good
inventory policies in place,
a better understanding of
real customer demand and
product lifecycle trends,
companies can avoid this type
of situation.
But be warned that if you
don’t address obsolete stock
today, it will just continue to
grow. Don’t let accounting
drive poor operating rules.
Get obsolete inventory off
the books, and utilise that
open warehouse space for
productive and profitable
inventory turns.
Understand customers’
service level needs
What kind of service, in terms
of lead time and availability,
do customers require? It is
no use to provide a higher
service than required as it
costs the company money.
Understand how customers
are using products and what
they expect in availability and
delivery time. If a seven-day
lead time is good enough
for the customer, you might
be able to lower inventory
levels and rely more on
smaller expedited orders to
save on inventory storage
costs. However, in today’s
competitive environment, if
you fail to deliver sales orders
in a timely manner, customers
will not hesitate to jump to
one of the competitors.
In conclusion, inventory
is the measuring stick of the
entire supply chain. It reflects
the agility and profitability
of the supply chain. The only
sustainable way to reduce
inventory is to improve supply
chain processes. To do this,
the organisation needs an
end-to-end view of the entire
departments need to be torn
down. •
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