Inventory management is complex, much more so than its moniker suggests or than some management-teams might perceive. That’s perhaps why many small and medium-sized organisations out there make fundamental inventory management mistakes and pay the price of doing so.
Many of these inventory management ills are less than obvious, because they hide in plain sight, so there’s no shame in failing to notice them… but to know about them and fail to address them—now that would be a shame indeed.
5 Hidden Inventory Management Ills
The aim of this post is to shed light on five common—but not necessarily obvious—inventory management ills, which might be inflating your supply chain costs. With a little attention, these ills can be cured, saving money for your business and potentially improving service and supply chain performance.
1. Manual Inventory Management Processes
It wasn’t long ago that automated inventory management would have been out of the question for smaller businesses. Today though, there is really no need for your procurement, warehouse, or logistics teams to struggle with cumbersome processes managed via a mountain of paper forms and records.
Thanks to cloud technology, sophisticated yet simple-to-use inventory control solutions can automate many inventory management tasks without needing a hefty IT budget or team of technology experts.
If your people are managing inventory with manual methods, even those based largely on Excel spreadsheets, you are exposing your business to the following potential problems:
- Lost orders
- Faulty inventory counts
- Sluggish order fulfillment
- Errors in shipping
- Inaccurate returns
- Unreliable documentation
- A shortage of inventory to meet demand
- Perishable products like food, drinks, medicines, and cosmetics can spoil unless a close check is kept on expiration dates
If you are still using manual methods, you are missing out on opportunities, not only to manage inventory more effectively and hence reduce carrying costs, but also to save money on the management activity itself.
This is perhaps less of an inventory management ill, and more a case of general poor health that was once an unavoidable fact, but is unnecessary today. Curing this malady requires only that you evaluate available cloud IM software and can afford the monthly subscription costs to access your chosen solution.
The most popular software for inventory management today is specialised enterprise resource planning (ERP), while large corporations make use of highly customised Software as a Service (SaaS) applications.
2. A Sub-optimal Warehouse Layout
Your inventory carrying costs are directly impacted by the speed and efficiency with which you can move goods through your warehouse. If you haven’t optimised your warehouse layout in terms of throughput, as well as horizontal and vertical storage, you can bet you’re spending more than you need to, perhaps substantially so.
There’s no such thing as a generic guide to warehouse optimisation. It’s very much an individual exercise based on your warehouse architecture, supply chain characteristics, strategies, and resources.
However, points to consider in warehouse optimization include:
- Maximising vertical storage space, which might entail the acquisition and installation of new racking, of a design, height and weight rating which best fits your warehouse strategy.
- Maximising usable space on the warehouse floor.
- Ensuring you have the right number of aisles, and that they are the right width for your mechanical handling equipment to navigate.
- Resizing goods-receiving, storage, and dispatch areas to improve operational efficiencies.
- Perhaps most importantly, optimizing storage location and picking routes to gain maximum picking productivity.
- Practicing the first-in, first-out (FIFO) principle of inventory management to ensure that your oldest stock moves out first, not your newest stock.
Even if your company has performed a warehouse optimisation project in the past, you should consider reviewing the layout every few years, as business growth, strategy changes, or fluctuations within your customer base can all turn what was once an optimal layout into a breeding ground for inventory management ills.
3. Poor Supply Chain Communication
The link between supply chain communication and effective inventory management might not be immediately obvious, but it is of vital importance. If communication between your business, its customers, and its suppliers is inadequate, you will almost certainly be carrying more safety stock than is necessary for an efficient supply chain.
Safety stock costs money to acquire, incurs carrying costs, and cannot be profitable while sitting in a warehouse storage location “just in case”.
A certain level of safety stock is essential for supply chain health and is an important element of effective inventory management. However excess safety stock is an inventory management ill, and poor communication is commonly at the root of the problem.
If you can work on improving supply chain communication to acquire greater knowledge of customer demand, pass that knowledge on to your suppliers, and to gain timely notification of potential upstream supply issues, you’ll be able to reduce safety stock levels. As a result, you will benefit from lower inventory carrying costs, less stock to manage, and an improved level of working capital.
4. Missing Health Measurements
At the beginning of this article, I mentioned how easy it can be to miss the symptoms of some inventory problems, but an investment in some full-time health monitoring will make it much easier to see when things are not as they should be.
Without monitoring though, your warehouse team will only ever be aware when most obvious signs of trouble show up—and by the time that happens, things may already be going very wrong.
To spot the more subtle signs of inventory ills, you need an ongoing process of performance measurement, using metrics focused on inventory management. By monitoring KPIs continuously, you essentially keep your finger on the pulse of inventory in your supply chain—enabling you to spot the symptoms of a problem before it starts to have an adverse effect on your supply chain costs.
Of course, the right metrics are important, but you might be surprised at how far-reaching the effects of poor inventory management can extend, so it’s not enough to have KPIs that focus directly on inventory (like inventory turns, for example).
You should review all your supply chain KPIs to ensure they are capable of highlighting inventory issues, and if you don’t have any KPIs at all, you should implement them as a priority, ensuring that you factor inventory monitoring into their design and development.
5. Lack of Investment in Expertise
Nothing in your business, with the exception of its customers, is more important than inventory, yet it’s surprising how many SMEs treat inventory management as a peripheral activity, and simply absorb it into the everyday tasks of the workforce.
With tens or maybe hundreds of thousands of dollars, perhaps even millions invested in inventory, skimping on appropriately skilled human resources is really a false economy.
If it’s too much of a stretch to hire a professional inventory manager, or better still, an inventory management team, you would do well to train some of your staff in appropriate best practices, and delegate some responsibility and accountability for meeting inventory management targets.
This really ties in with point #4 above, because if you don’t have people with the specific skills necessary to manage inventory, the implementation of KPIs may not be of much benefit.
After all, you need somebody to monitor the metrics, diagnose any issues they reveal, and take appropriate action. At the same time, it is hard to build an effective inventory management team without relevant objectives and KPIs to provide direction and measure effectiveness.
If You Make Only One Investment – Make it in Management
Ideally, you should appoint one person experienced in handling inventory problems to oversee warehouse and shipping processes.
This inventory manager should be responsible for following tasks:
- Identifying potential shortages of stock
- Conducting regular stock audits
- Calculating levels of stock to order
- Training warehouse staff on inventory handling
- Utilising latest management techniques for optimum procurement of stock.
Get to the Causes of Inventory Ills
As illustrated by the examples in this post, inventory management issues are seldom caused by the direct interaction between man and materials. The underlying causes are often hiding elsewhere, in areas such as communication, warehouse design and layout, performance visibility, an absence of inventory management skills, or just tired, cumbersome processes.
All this goes to show that inventory management is a multi-faceted discipline and that it pays to look beyond the obvious issues when seeking to control inventory in your business. Get to the root causes and you will cure your inventory ills, and enjoy the positive consequences of reduced costs and better supply chain performance.
Editor’s Note: This post was originally published in August 2016 under the title “3 Inventory Management Ills that Inflate Supply Chain Costs”. It has since been revamped and extended, with the most recent update taking place in January 2020.