For many companies, keeping the right levels of inventory has become increasingly difficult. As supply chains increasingly involve many different suppliers and thousands of items, the necessity to measure supplier delivery performance by item becomes critical. The last two years have highlighted the vulnerabilities in the supply chain, including wildly unpredictable lead times and supplier performance, that can leave you with either too little or too much of the goods your customers want.
It's not just about making better forecasts. Truly competitive companies think about how to make the most impact by placing orders, not just for perfect amounts, but at the perfect time, too. They do this because they have measured and managed inventory and forecasting levels with exquisite detail and care and have set realistic goals that can be tweaked as needed on a daily basis if necessary.
But the trouble is most supply chain managers simply don’t have this approach or the tools to facilitate it. Everything you do should have best practices built in so you can be the most effective in your job and create a department that’s a profit-booster, not just a cost center.
In order to better manage inventory levels, it’s critical to dig into the likely lead times and availability of items on an individualized basis in order to orchestrate products in the most efficient ways. Here’s how.
Consider supplier risk. Supply risk is a two-pronged problem. A supplier might promise to deliver by a certain time, but they’re a week late. Or they might deliver on time but only fulfill part of the order. Both can leave you high and dry. In order to mitigate these risks, you need to keep safety stock, so you minimize the risk of running out. The trick is to measure that risk in each case, for each supplier and each product, so that you can set an appropriate safety stock level without tying up capital needlessly. This will be different for different suppliers, and different stock items themselves will likely have a different risk profile than others. For example, you might be able to get one product from a vendor who is local, but another might be coming from weeks or even months away. It’s important to identify exactly what the replenishment profile is, and to build safety stocks accordingly.
Assess forecasting risk. Sometimes, you think you’ll sell 100 units of an item next month, but you only sell 50, or you sell 110, and you run out. Forecasting will always be the bane of supply chain management, but it’s gotten trickier as supply lines become less certain. Again, the devil is in the details. You need to measure sales against forecasting constantly, always tweaking actual against projected for each individual product item, and continually assessing the risk involved, as above. It might be relatively easy to arrive at accurate forecasts for a fast-moving consumer item, for example, but the forecast risk will be higher for a spare part, where demand is less predictable.
Measure capital for safety stock. An unsophisticated approach to inventory management might be to simply keep 60 days of safety stock across the board. But you need to ask: Does that make sense for all items? Some items might be inexpensive or not bulky enough to take up significant storage space, so it might be prudent to keep 60 days’ worth to hand or more. But, in the case of a very expensive item, you’ll need to carefully review whether it makes sense to keep the same levels of safety stock. Keep an eye on when you’re investing in inventory that you don’t necessarily need immediately available. Running out of some items might lose you a customer; in other cases, it will be okay to delay delivery. It’s important to remember that inventory is money tied up that could otherwise be invested in the company — a case of inventory vs. growth. Make sure you’ve got the balance right.
Anticipate stockouts. One day, it might seem you have enough inventory in stock, but then market conditions change, and suddenly that order due to come in 45 days from now is going to be too late. If you anticipate these problems in time, you can take action, such as expediting an order from a supplier, or switching from ocean or truck to air, because the higher cost is offset by not losing sales. Don’t forget: When you lose a sale, you might lose a basket of sales; or even the customer. So, it’s important to check that you’re in a strong position to serve your customers, even when you have safety stock. You might have a new customer, or a global event could hit, such as COVID-19, and everyone is hoarding toilet paper or ordering more garden furniture than usual. It’s critical to anticipate these changes in the market as much as possible.
Be willing to cancel an order. It’s not just stockouts that result from fluctuating demand. Sometimes, it’s the opposite, and you have over-ordered. We’ve seen many examples of customers who were confident they were going to sell a predictable amount of an item, but then demand goes out the window, and there are outstanding orders that exceed coming demand. Maybe a customer went out of business, or a change in consumer habits affects demand. If you can understand that problem early enough, you can do something about it. This might include canceling or delaying an order or delivering it to a different warehouse or fulfillment center. It’s important to constantly assess whether the orders you have placed are still correct. Don’t be afraid to cancel an order. Sometimes, it’s better to pay the price of cancellation than pay for having dead inventory in the warehouse.
How Netstock Helps With Inventory and Supplier Management
Netstock was born out of the needs of small and medium-sized businesses, which have the same problems as bigger ones. Although Fortune 500 competitors have sophisticated inventory and supplier management tools, along with access to the best of the best to help mitigate risks, smaller companies make do with Excel spreadsheets or an ERP system that doesn’t prioritize smart stock management.
Netstock wants to assist up-and-coming companies with tools to compete in the market because we favor a diverse commercial ecosystem that includes local hardware stores, not just Home Depot. To facilitate that, we’ve created a piece of software that connects to your ERP system and extracts all the data that matters to supplier and inventory management. For example, it helps constantly measure supplier performance and checks if you’re going to stock out. We run the data through our algorithms and produce a user-friendly dashboard that gives smaller companies a powerful overview of operations. You can choose to see the top five items that are going to stock out, ranked by the ones that are going to make the most impact on your business. This often follows the 80/20 principle: typically, 20% of your products account for 80% of your business, so it’s a good idea to prioritize those. You can also set policies on investment and determine what will give the most bang for the buck when servicing customers.
The biggest challenge in implementing this system is that the data in your ERP may need to be cleaned and updated; it’s not unusual to find open purchase orders from years ago. We assist our customers with data management as part of the onboarding process. You’re already making decisions based on that data. We can help you get it right, so you can start making better decisions.
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