The Importance of Inventory Management for Supply
Chain Organizations
☐ Inventory management is critical for supply to flow at the
speed of global commerce. Today, many inventory management
systems use AI to analyze trends in your logistics, raw materials,
and warehousing operations in real time so supply chain
managers can make fast adjustments to keep the flow of goods
moving. Big data allows us to see the future, using predictive
analytics to spot trends early.
☐
☐ But even with these advances, global supply chains add
several layers of complexity to inventory control. In light of the
logistical and cost challenges faced in the past year, companies
must do a better job stressing the importance of discipline.
Fortunately, initiatives for leveraging big data, AI, and machine
learning enable supply chain managers to meet increased
demand for production and speed of fulfillment.
Why Supply Chain Inventory Management Skills Are
Critical
Inventory management experience is one of the core
competencies of a prospective supply chain manager. This is for
good reason. Poor inventory management has repercussions
throughout the organization, detrimentally affecting the bottom
line. If a supply chain manager for a hospital chain fails to secure
an adequate inventory of a crucial medical supply, such as
syringes or personal protective equipment (PPE), the institution’s
capacity to provide medical services would be impacted
negatively.
Too much inventory can also be a significant challenge. Over-
ordering ties up capital, complicates warehouse management and
could result in a loss due to an outdated or expired product the
company can no longer use or sell.
Suppose a supply chain manager for a clothing manufacturer
does not closely monitor customer demand. The company could
end up with surplus items from a prior season. If the company
offloads these items on the discount market to recoup some of its
costs, the glut of discounted products could harm the brand’s
standing with consumers and significantly impact its profit
margins.
Conversely, efficient inventory management can boost
profitability, enhance visibility, and improve operations by
keeping a steady inventory flow. This kind of supply chain
optimization is the gold standard for today’s manager.
Inventory Management Risks for Supply Chain Executives
Poor inventory forecasting. While a perfect forecast doesn’t
exist, a lack of insight into the inventory control of a supply chain
makes it nearly impossible to align product supply and demand.
Inventory waste and liquidity issues are supply chain
management headaches that can be addressed using modern
SKU tracking and rigorous attention to data from retail partners
and distributors.
☑ Driving distribution and sales within the shelf life of
the product. No challenge was more top of mind for companies,
governments, and consumers than vaccines’ shelf life and
expiration. States raced to raise awareness and invested heavily
into putting vaccines into the arms of their communities, yet a
considerable amount of product waste continues to occur.
Traditionally, bottom-line spend is top of mind in supply chain
management. Inthis case, we also worried about the cost of failing
to stop the spread of a disease.
☐ Carrying costs due to warehouse shortage. Despite the
significant challenges for brick-and-mortar retailers over the past
year, the rise in e-commerce continues driving product demand
across industries. A significant grab for real estate is taking place.
This means increased pressure on municipalities to rezone or
provide approvals for further construction, which isn’t happening
fast enough. Ensuring that order fulfillment continues to move
product out of warehouses and to the customer is critical, as a
shortage of inventory storage could mean price increases due to
peak demand.
The Role of Inventory in Supply Chain Management
Inventory management starts long before products reach the
warehouse. Let’s explore the facets of sound inventory
management for companies that hire the right talent with a well-
rounded education in supply chain management.
Inventory optimization. Think of inventory optimization as
balancing inventory based on demand: not over-ordering, not
under-ordering. Finding the sweet spot for each item you stock
requires a dynamic inventory management practice. An optimized
system needs visibility from raw materials to sales data. It
demands agile planning that can quickly respond to changes in
customer demand or disruption in a global logistics operation. As
a supply chain manager, you frequently recalculateoptimal
inventory levels to meet customer demand.
Transportation management. Inventory and transportation are
linked from the factory to the fulfillment warehouse or distribution
center. Proactive and aggressive transportation management is
vital. A delay in transport can throw a tightly structured global
supply chain into disarray.
Warehouse management. This includes storage, distribution,
and fulfillment. Determining the best warehouse locations to meet
customer demand for fast delivery and ensuring that fulfillment
operations run smoothly are essential to customer satisfaction.
Responsible warehouse management facilitates inventory
visibility and prevents loss due to damage or theft. It’s critical to
provide proper oversight of warehousing operations.
Techniques for Effective Supply Chain Inventory
Management
There are dozens of different techniques for effective inventory
management. Below are a few standard inventory management
techniques and processes:
Demand Supply Integration (DSI): The leadership process to
make supply and demand decisions (such as investment in
inventory and customer service risk) to deliver the highest
enterprise total value. This process ensures the best end-to-end
decisions and multi-functional alignment to the business plan.
ABC analysis: An inventory control method that classifies
products into three tiers to optimize visibility and time
management.
Tier A products are items with the highest turnover or value.
These products run the highest risk of being stock-outs because
of back-ordered inventory or theft. They have the highest level of
inventory visibility, including regular inventory control.
Tier B products don’t move as fast, so they are subject to less
stringent inventory management.
Tier C items are the slowest sellers, so counts are infrequent.
Demand forecasting: An essential component of inventory
management, demand forecasts form the basis of supply chain
planning for the next quarter or year. There are two basic
types of demand forecasts.
Passive demand forecasting bases predictions on data about
past sales. This can work well for mature companies with
comprehensive sales data and stable market share.
Active demand forecasting incorporates growth projections
and external market forces to project customer demand. This can
work well for startups, growing companies, or industries where
demand fluctuates based on external factors.
Reorder quantity: The inventory level at which you need to
order more stock. A product’s reorder quantity is determined by
its sales velocity, production time, and transport time. To
calculate reorder quantity, you must consider every aspect of the
supply chain needed to produce the product, from the availability
of raw materials to transport time and logistics.
Economic order quantity (EQQ): A calculation to help balance
the cost of holding stock on hand with an inventory flow that
meets customer demand. To calculate economic order quantity,
start with these data points:
Demand rate or the volume of product moved during the
prior year (or quarter or month, etc.)
The cost of the products you need to order to meet demand
during the sales period
The cost of warehousing inventory (also called the holding cost)
Safety stock. Safety stock is an additional quantity of product to
keep on hand above the reorder quantity. Reorder quantity is
based on averages, but customer demand may spike, and
logistics can halt. When the Suez Canal incident halted
marine traffic across three continents, it created an object
lesson on the importance of safety stock. Keeping reserve
stock in distribution centers near a company’s largest
customers can mitigate this event. A central goal of
inventory management is to keep the inventory flow
steady. Safety stock protects you from the unexpected, so
your supply chain never grinds to a halt.
As more organizations recognize the importance of supply
chain optimization to the health of their enterprise, the
value of inventory management abilities increases.
