When your inventory management falters, so does the rest of your operation. Supply chain disruptions in the wake of COVID-19 restrictions have underscored the importance of overcoming inventory management challenges swiftly. If products do not reliably get from A to B, it threatens the sustainability of any business.
Despite the inherent complexity of managing inventory, inaccurate demand forecasts, limited visibility, and inventory errors aren’t inevitable. If your organization regularly battles any of the below challenges, rest assured that there’s a way out.
5 common inventory management challenges every business can do without
1. Overstocking & Excess Inventory
Too much inventory goes hand in hand with increased costs. If a business has to rent additional storage to hold excess stock or needs to write off slow-moving products that have gone obsolete, profitability will take a hit. A study by the Massachusetts Institute of Technology (MIT) Center for Transportation & Logistics found that excess inventory is a major problem for many businesses and can lead to significant financial losses. Rising opportunity cost and depreciation are not what any organization’s bottom-line needs.
The restructuring of Ralph Lauren a few years back illustrates the lamentable financial impact of overstocking, in Ralph Lauren’s case as a result of slow lead times. While inventory grew by 26% over three years, sales saw only a 7% increase. The result: profits plummeted by 50%. Similarly, the waning demand during the pandemic in combination with continually rising inflation, has forced retailers to lower prices in order to shed inventory stockpiles that are no longer in demand.
2. Understocking & Stockouts
Inventory shortages plagued a wide range of industries in the early phase of the pandemic with disastrous results, and some are still in recovery. Whether due to delivery delays, production issues, or forecasts gone wrong, the consequences of understocking and stockouts reverberate throughout the supply chain. Lost sales and disappointed customers inevitably take a toll on a business’s reputation. A business that consistently fails to meet delivery deadlines will be seen as unreliable and lose market clout.
3. Inventory errors
Managing a complex distribution network via spreadsheets rather than an inventory tracking system does not set any business up for success. Yet, manual documentation is still a surprisingly common cause of inventory errors such as misplaced items and inaccurate inventory records.
Inventory issues also tend to stem from:
- Inaccurate forecasting: Whether it results in excess inventory or stockouts, poor demand forecasting is often to blame.
- Lack of capable management: For all the sophistication of inventory processing, an inventory control system still depends on skilled inventory managers and customer-oriented vendors to make the most of the technology.
- Lack of real-time data: Just like yesterday’s news, yesterday’s data isn’t very helpful. The ability to access real-time inventory data is a necessity to reduce the risk of errors.
4. Lack of visibility
You can’t fix what you can’t see. When inventory levels are unknown due to lack of real-time visibility, it can make management and decision-making difficult. That, in turn, results in mounting challenges:
- Inability to accurately forecast demand: Again, forecasting based on obsolete data and guesswork is bound to fail, forcing the business to pay the price in stockouts or excess inventory.
- Inefficient use of resources: Without visibility into inventory levels, a business has no way of knowing which products are moving quickly and which ones see little demand. As a result, the business may keep producing items that are not needed while failing to meet the demand for others.
- Poor customer service: When inventory management falls into disarray, the end customer eventually suffers, leading to frustration and lost trust. Not only does this create a stressful, difficult situation for your customers but also for your frontline employees, further risking the quality of your customer experience.
- Loss of control: Issues such as theft or shrinkage do not become immediately obvious without real-time inventory tracking. This can lead to a loss of control over the inventory management process.
5. Inaccurate demand forecasts
Demand planning and forecasting are at the core of inventory management. But they are also notoriously challenging to get right. The myriad of moving parts — sudden changes in consumer preferences, seasonal fluctuations, unexpected competition, failed product launches, and rising inflation — demand a lot from the inputs and inventory management software that create forecasts. Businesses that widely miss the mark will, however, pay a high price.
The way out
No business is destined to suffer any or all of the above inventory management challenges. While the uncertainty and turbulence of the last few years are likely to continue indefinitely, organizations can successfully weather the storm. The most effective way to combat the chaos is to partner with an experienced partner like GAINS.
Leveraging decades of knowledge to build a strong data-based foundation using automated, proprietary algorithms that take into account the complex variables that affect cost and source variabilities, you can mitigate the impact of supply chain disruption on your inventory. Contact GAINS about designing the inventory optimization that’s right for you.
• Complimentary Gartner® Report: Maverick* Research: It is Time to Move Beyond Traditional S&OP — Introducing Decision-Centric Planning