Apr 8, 2014
Inventory risks affecting your business
As the manager or owner of a business focused on providing customers with a high level of service while targeting a specific inventory value or stock turn, you will most likely have experienced the frustrations and difficulties in achieving the desired results.
So why is it such a struggle? Let’s have a look at the details
The main purpose of carrying inventory is to provide customers with their expected level of availability or service whenever they ask for your product. In other words, you need the right quantity in stock at the right time.
That seems simple enough if:
- You know exactly how many of each product your customers will be asking for in the next cycle. This requires an accurate forecast
- Your supplier lead time information is accurate
- You know when it is time to order
- You know what quantity to order
- You trust your suppliers to deliver on time
Stock-outs pose the biggest risk of all. Losing a sale due to one or two stock-outs may seem relatively trivial; losing a customer has huge consequences as you may never get that customer back and you have strengthened your competitor’s position.
Just keeping track of one stock item is a challenge. Keeping track of thousands is a daunting task, unless of course your team has the training and tools to manage the details and you, the owner have the metrics to make sure the risks are being managed.
What are the more obvious risks from a demand perspective?
- Inaccurate forecasting. Yes, I fully understand it is impossible to forecast demand in your business – however, every time you place an order you are estimating the future offtake. This is just another word for “forecasting”
- Under-estimating demand results in stock-outs
- Over-estimating demand results in excess stock and consumes precious cash
- The lack of a forecast error calculator means this high risk element goes undetected and is difficult to manage
- Every item you plan to keep in stock will need a forecast. How do you generate good quality forecasts in the minimum time?
- New items – forecasts are generated from sales history. How do you forecast that recently introduced range of new items for which you have great expectations when they don’t have any sales history as yet?
- Is it realistic to manually review and adjust each items forecast?
- Do you have the tools to identify which items you could let the computer forecast and which items require your attention?
- The sales history will typically contain a lot of noise and anomalies which may generate poor quality forecasts. How do you deal with this?
Let’s look at the more obvious risks on the supply side:
- Unreliable supply. The supplier quotes a lead time of 12 days but sometimes delivers in 18 and sometimes in 8 days. You swing from having too much to stocking out.
- Late delivery. Continual late delivery is the result of using a lead time that is too short. Increasing the lead time will resolve the problem. Does this come at a cost to you?
Let’s take a slightly deeper look at the supply management:
- Do your purchase orders specify the correct expected delivery date for each item? If not, how will you hold your suppliers accountable?
- Do you have a process to identify late delivery for expediting purposes?
- When did you last verify each suppliers lead time for every product? Using the incorrect lead time is already a lost cause
- Do you simply accept over deliveries from suppliers? This impacts cash flow negatively
- Do your suppliers short deliver?
- Is product quality an issue?
- Are you purchasing at the right price?
You may now be inspired to start focusing on suppliers. How you know which suppliers are problematic and where to start? The likelihood is that nothing will be done. This increases the risk further.
One cannot ignore data quality.
- Getting the above factors perfect and then placing orders against inaccurate stock on hand data negates all the hard work.
- Taking weeks to prepare all of the above and then placing orders with information that is out of date creates risk.
A lack of metrics to identify existing inventory risks as well as risks not yet obvious further compounds the situation.
- A Potential stock-out alert that warns of potential stock-outs before they occur is of priceless value
- Knowing how to identify the excess stock that can be disposed without compromising customer service levels addresses a problem already existing in your warehouse.
- A Surplus order alert warning that the quantity on order from a supplier will create additional excess stock allows for proactive resolution before it becomes a problem
So, what do you do about all of this?
Fortunately there are many solutions that make it possible to manage a large number of items effectively and achieve those elusive inventory targets.
It is a matter of finding the best tool for your business at a cost that you can afford and that does not require a huge team to do the job.
A requirement of the toolset is the setting of an additional buffer or safety stock level to protect against the risks. This is in itself a complex subject that we may well discuss at another time.