Inventory is the measuring stick of your entire supply chain. It reflects the agility and profitability of your supply chain. Every make-to-stock organization suffers from excess stock in inventory that ties up capital and hurts profitability. Some companies even struggle with large quantities of obsolete stock, which is even worse for a distributors balance sheet and is notoriously difficult to liquidate from inventory with a return on investment.
The only sustainable way to reduce inventory is to improve your supply chain processes. To do this, your organization needs an end-to-end view of the entire chain and the walls between departments need to be torn down. Furthermore, the company needs to have insights in all key performance indicators.
Distributors & manufacturers that keep an eye on the these 4 key performance indicators will reduce inventory levels
1. Target service levels — Target service levels measure the performance of your inventory system. Certain order fill rate goals are defined and the service level gives the percentage to which those goals should be achieved. In the case of inventory management key performance indicators, you will want to track the percentage of customers that do not experience a stock out. Knowing what service levels are needed per stocked item across your supply chain will ensure you can meet customer demand and keep your customers happy.
2. Capital tied up in stock — Be sure to always have a pulse on how much capital you have tied up in stock by running ABC analysis. You should always have a healthy balance across your A classified products because they are your high volume, fast moving products. With B and C classified products, companies have more wiggle room to experiment with lower volumes of stock to reduce overall capital investment. If you can reduce capital by lowering C or B level products while maintaining high service levels, you will free up capital for other high priority business needs (i.e. marketing promotions, R&D for new product innovations, etc.).
3. Back order recovery — Inventory planners need to be careful when managing their backlog of back ordered or stock out products. While having a consistently high level of backorders can indicate a strong market demand for a company’s product, there are also risks with losing customers or having canceled sales orders due to long waiting periods for delivery. In this instance, having an automated system in place with fail safe reorder points and replenishment processes, can save a company opportunity cost of lost sales.
4. Supplier performance — A failure to manage and monitor supplier performance can lead to major supply chain disruptions, delivery problems, poor quality, and other issues that damage a company’s credibility, as well as their bottom line. Make sure you have a way to track and measure each of your suppliers as it relates to their performance metrics.
How to Systematically Improve Your Demand Forecasting, Planning and Replenishment
There are different types of technology systems and platforms that support inventory planners and purchasers with their day-to-day work. The most common system utilized by the distributor and manufacturing industries are Enterprise Resource Planning (ERP) systems. The issue is that ERP systems do not help optimize inventory management and key performance indicators.
There are three core components every company can incorporate into their already established processes to maximize the performance of your key performance indicators:
- Setting ANNUAL strategic planning of performance targets
- Running MONTHLY demand analysis, forecasting and parameter updates
- Creating DAILY or WEEKLY replenishment order calculations
ERP systems were developed for transaction processing, data collection and data reporting. Inventory planning and optimization initiatives on the other hand establish the optimal mix between inventory investment and service levels for each inventory item at each location. Review your ERP-system functionality and evaluate potential add-on solutions that can help you better manage the inventory challenges.
There is huge potential savings that can be achieved with the right type of solution. Inventory planning solutions keep all your planning parameters up to date and ensure that each item is planned and replenished in the best possible way.
In software solutions like EazyStock, you get all of your key performance indicators calculated and updated automatically so you can actively follow your service level, development of your capital tied up in the stock, backorders, and inventory turnover rate.
If you are in need of a solution to help you with your annual, monthly and weekly management of key performance indicators, watch a demo of EazyStock to see how easily you can manage these processes as an add on to your existing ERP.
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Originally published at https://www.eazystock.com on December 8, 2014.
