HOW TO SET AN INVENTORY STRATEGY
An inventory is a detailed, itemized list or record of goods and materials in a company’s possession. The main components of inventory are cycle stock: the order quantity or lot size received from the plant or vendor; in-transit stock: inventory in shipment from the plant or vendor or between distribution centers; and safety stock: each distribution center’s inventory buffer against forecast error and lead time variability.
Most successful companies find that as their economic fortunes rise, so do the complexity of inventory logistics. This increase in inventory management is primarily due to two factors: 1) greater volume and variety of products, and 2) increased allocation of company resources (such as physical space and financial capital) to accommodate that growth in inventory. The transition from seat-of-the-pants ordering policies and little or no record keeping to a formal inventory system that includes specific ordering policies and a formalized inventory record file is a difficult one for most companies to make.
It is but one of the many sources of growing pains that emerging companies experience, especially those in the fast-growing industries, such as fast food or high technology. This transition requires the creation of new job functions to identify the costs (holding, shortage) associated with inventory and to implement the inventory analysis.
The inventory record file also must be maintained by someone, and, on a specific basis, it must be audited by someone. In addition, the transition requires more coordination between different company functions. This transition often leads into computerization of inventory management. This can be a daunting prospect, particularly for companies lacking employees with appropriate data management background.
Setting an Inventory Strategy
No single inventory strategy is equally effective for all businesses. Indeed, there are many different factors that can impact the usefulness of a given inventory strategy, including positioning of inventory, rationalization, segmentation, and continuous improvement efforts. Moreover, small businesses in particular often face financial and logistical limitations when erecting their inventory systems. And of course, different industries have different inventory needs. Consumer goods producers, for example, need to have well-balanced inventories at the point of sale, while producers of industrial and commercial products typically do not have clients that require the same degree of delivery lead time.
When a company is faced with a need to establish or re-evaluate its inventory control systems, business experts often counsel their corporate clients to engage in a practice commonly known as “inventory segmenting” or “inventory partitioning.” This practice is in essence a breakdown and review of total inventory by classifications, inventory stages (raw materials, intermediate inventories, and finished products) sales and operations groupings, and excess inventories. Proponents of this method of study say that such segmentation break the company’s total inventory into mush more manageable parts for analysis.
Inventory management is a key factor in the successful operation of fledging businesses and the long-term industry veterans alike. For both kinds of companies, determining whether their inventory systems are successful or not is predicated on one fundamental question: Does the inventory strategy insure that the company has adequate stock for production and goods shipment while at the same time minimizing inventory costs? If the answer is yes, then the company in question is far more likely to be a successful one. Conversely, if the answer is no, then the business is operating under twin burdens that can be of considerable consequence to its ability to survive, let alone flourish.
According to business experts, perhaps no factor is more important in ensuring successful inventory management than regular analysis of policies, practice, and results. Companies that hope to establish or maintain an effective inventory system should make sure that they do the following on a regular basis:
- Regularly review product offerings, including the breadth of the product line and the impact that peripheral products have on the inventory.
- Ensure that inventory strategies are in place for each product and reviewed on a regular basis.
- Review transportation alternatives and their impact on inventory /warehouse capacities.
- Undertake periodic reviews to ensure that inventory is held at the level that best meets customer needs; this applies to all levels of business, including raw materials intermediate assembly, and finished products.
- Regularly canvass key employees for information that can inform future inventory control plans.
- Determine what level of service (lead time, etc.,) is necessary to meet the demands of customers.
- Establish and regularly review a system fir effective identifying and managing excess or obsolete inventory, and determining why these good reached such status.
- Devise a workable system wherein “safety” inventory stocks can be reached and distributed on a timely basis when the company sees an unexpected rise in product demand.
- Calculate the impact of seasonal inventory fluctuations and incorporate them into inventory management strategies.
- Review the company’s forecasting mechanisms and the volatility of the marketplace, both of which can (and do) have a big impact on inventory decisions.
- Institute “continuous improvement” philosophy is inventory management.
- Make inventory management decisions that reflect a recognition that inventory is deeply interrelated with many other areas of business operation.
Indeed, every cursory examination of inventory statistics can sometimes provide business owners with valuable insights into the company’s foundations. Business consultants and managers alike note that if an individual business has an inventory turnover ratio that is low in relation to the average for the industry in which it operates, or if it is low in comparison with the average ratio for the business, it is pretty likely that the business is carrying a surplus of obsolete or otherwise unsalable stock inventory.
Conversely, they note that if a business is experiencing unusual high inventory turnover when compared with industry or business averages, then the company may be losing out on sales because of a lack of adequate stock on hand.
It will be helpful to determine the turnover rate of each stock item so that you can evaluate how well each is moving. You may even want to base your inventory turnover on more frequent periods than a year. For perishable items, calculating turnover periods based on daily, weekly, or monthly periods may be necessary to ensure the freshness of the product. This is especially important for food-service operations.
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