Inventory management has become more crucial than ever to a company’s success in today’s fast-paced and highly competitive business environment. From small businesses to large corporations, inventory is becoming more important than ever before due to a variety of factors, including:
- Increased pressure to optimize working capital
- Increased in-transit inventory
- Lack of supply chain predictability
In this blog, we will explore why inventory matters and what companies can do to manage their inventory effectively.
Growing inventories signal an economic downturn in the US.
Wholesale and retail inventories have grown at a record pace, with companies ramping up production to meet pent-up consumer demand as the economy moved out of the pandemic recession of two years ago. However, with 40-year high inflation prompting the most aggressive interest rate hikes in four decades, demand is set to slow just as companies find themselves significantly over-stocked.
This is a classic precursor to a recession, as companies are forced to turn to discounting to tempt consumers to buy excess stock, slowing production and laying off workers. Economists expect the U.S. economy to record a peak-to-trough contraction of more than 1% in the coming year and the economy to be 0.6% smaller in the fourth quarter of 2023 than the same period last year.
The Importance of Inventory Optimization
Inventory is a key piece to leverage business strategy. Inventory is the core item that glues the entire supply chain network together. Inventory recommendations connect decisions around market service, manufacturing planning, buying strategy, and replenishment process. Also last but not least impactful, inventory recommendations affect the company’s capacity to react to unexpected situations.
Carrying excess inventory brings its own financial troubles. It is expensive if not managed properly and can quickly gobble up a company’s cash reserves. Studies have shown that the annual additional cost of holding excess inventory can be 25 percent to 32 percent, according to the Retail Owners Institute.
Costs of excess inventory may include:
- Storage costs
- Extra Freight costs
- Insurance expenses
- External or internal theft risk
- Obsolescence risk
- Spoilage risk
On the other hand, a lack of inventory affects the ability to fulfill customer demand. It is not only about a lost revenue but failing to serve your customers.
Costs of lost sales from out-of-stock may include:
- Operational costs (cost of time spent by your sales team trying to sell that unfulfilled order)
- Damage to your company’s reputation
- Inefficiencies in the sourcing process (Last-minute orders, new negotiations with providers, last-minute manufacture changes)
- Lost Customers
Balancing inventory while managing costs and maintaining service levels is a complex task. With the help of modern supply chain planning tools like GAINS, companies can achieve valuable insights into the volatile conditions that impact their operations, supply, and demand.
Different Company Sizes, Similar Inventory Challenges
Inventory challenges are widespread and impact companies of all sizes in every region. The solutions to these problems are similar for both large and small companies but at different scales. It’s vital for today’s supply chain planners to incorporate advanced analytics to achieve greater predictability in demand and supply, has updated business rules and policies managing the operations, enables process automation, and has an optimized network configuration, regardless of company size.
Smaller businesses understand that inventory management is crucial for improving cash flow. To grow sustainably, they need to take advantage of best practices in inventory management to optimize their spending. Larger companies also face challenges when it comes to inventory management. As they grow, managing inventory efficiently and profitably becomes more difficult. Keeping customers happy and attracting new ones requires a well-managed inventory.
While decisions and challenges around inventory are similar for organizations of all sizes, inventory systems are not “one-size-fits-all” companies must determine the best solution for the size and type of their business. Furthermore, it’s essential to ensure adequate buy-in from all relevant stakeholders to ensure that any potential solution is well suited to their needs and more likely to gain widespread adoption.
Right-Sizing Inventory is a Complex Problem
Many variables contribute to the complexity of inventory optimization, including unexpected changes and the increasing speed at which they occur. Additionally, data availability can sometimes make inventory-related decision-making more difficult, as it can be challenging to understand and interpret the information in front of you.
According to a 2022 survey from Hewlett Packard Enterprise: “The lack of data capabilities limits organizations’ ability to create key outcomes such as growing sales (30%), innovating (28%), advancing customer experience (24%), improving environmental sustainability (21%) and increasing internal efficiency (21%).”
In recent years, there has been much discussion about the importance of “right-sizing” inventory. This means having the right amount of stock in the right place to meet customer demands without overstocking, which can be costly due to the need to maintain and manage excess inventory.
Common causes of inventory imbalance include:
- Misalignment between sales and supply chain team
- Non-Optimal supply chain and inventory network design
- Human bias decisions based on fear of stockouts
- Inadequate and stale inventory policies and rules
- Low predictability of demand and supply
- Lack of agility to respond to unexpected situations
- Isolated sourcing process and/or manufacturing process
- Overcompensation for supply chain issues (Read our blog on “The Bullwhip effect” here)
Preventing imbalances requires a deep understanding of the market, your suppliers, and your supply chain. By embracing variability and considering different scenarios, companies can use software with advanced analytic capabilities to make better decisions and respond to market changes faster. With the help of dynamic calculations, companies can anticipate market fluctuations and make informed decisions based on data rather than waiting until it’s too late to take action.
Key Takeaways
Regardless of the economic climate, inventory management is a complex and critical component of modern business operations. But supply chain professionals do not have to figure it out on their own. By using a proven supply chain planning solution, companies can better understand the value of right-sizing inventory and use the appropriate planning tools and strategies, like the GAINS Performance Optimization Platform, to improve their bottom line and maintain customer loyalty.
Contact us to learn how GAINS can help you “right size” your inventory.
Additional reading
Ditch Excel and Equip Your Supply Chain Planners to Make Better Inventory Decisions