High inventory levels directly increase carrying costs, warehousing costs and transportation costs. If you can reduce your inventory, you can reduce its associated expenses — key to staying competitive no matter what your industry.
What if we told you there was a way to reduce your inventory expenses, without leaving your business exposed to stockouts or other crises?
In this post, we’ll explain how leveraging predictive visibility technology can help you better predict the flow of inventory into and out of your operation, improving your reaction time and widening your margin of error for inventory-related crises — all while lowering operating costs.
What’s more, we’ll give you some top tips used by some of the industry’s biggest players to improve inventory management through enhanced supply chain visibility.
What Is Inventory Management in Supply Chain, and Why Does it Matter?
Generally speaking, inventory in the supply chain falls into one of two categories: raw materials and finished goods.
The time it takes for raw materials to come in to your warehouse, get processed into finished goods and be sent on their way to the customer is known as “turnover”. Ideally, you want as many inventory turnovers as possible in a given time period, so being able to identify bottlenecks in getting those goods quickly into and out of your warehouse is critical to accelerating inventory turnover and increasing inventory efficiency.
Having the right amount of inventory on hand to ensure prompt fulfillment of customer orders is crucial to any product-based business. It’s so important, in fact, that many companies shoulder huge warehouse costs to house more inventory than they need at any given time. This is known as safety stock. While safety stock ensures that companies always have enough materials on hand to meet customer demand, it comes with a huge price tag.
As new technology enables companies to adopt leaner workflows, real-time transportation visibility creates opportunities for companies to maintain lower levels of safety stock while still meeting and exceeding customer expectations.
Knowing the variations of ETAs in real time allows us to better manage our inventories… even reducing the percentage of safety stock of some raw materials that we can change to plan for ‘just in time’.
-Fernanda Ongay, Transportation Manager, Constellation Brands
How to Improve Inventory Management with Real-Time Visibility
Inventory management is far from a new idea. However, a growing number of companies are using technology like real-time visibility to optimize traditional inventory planning processes and reduce inventory carrying costs throughout their organizations.
Improved inventory in the supply chain means effectively managing the following concepts:
Gross margin/inventory cost: Goods cost you more the longer you have them in stock. Getting them into and out of the warehouse more quickly means reducing holding costs.
Shrinkage: Shrinkage occurs when the amount of goods you have on paper is different then the goods you have on hand, typically because product was lost, stolen or damaged at some point along its journey.
Sell-through rate: This is the product of how much you sold compared to how much you had in stock to begin with. If you are able to operate with less stock on hand, your sell-through rate will improve.
Stock turn: Stock turn is very similar to sell-through rate, but speaks instead to the value of the cost of goods vs. the average cost of the inventory. The more stock turns you have, the better.
Product performance: Who doesn’t keep an eye on their highest and lowest product sellers? Knowing how much demand exists for a given product is key to effectively managing how much of each type of inventory is required to meet customer expectations and prevent stockouts from occuring.
Lost sales: Lost sales, also called stockouts, occur when a specific product is not available for sale, despite consumer demand for the product.
The risks and costs associated with each of these concepts can be minimized with the effective use of real-time visibility. For example, shrinkage can be minimized by virtue of knowing where things are in real-time, and from that being able to establish an unbroken chain of custody for the items in question. Knowing instantly where popular products are in their journeys from plant to warehouse means you can more quickly and effectively respond to changes in consumer demand and avoid lost sales and stockouts.
Finally, stock turn and sell-through rates can both be improved by virtue of the improved comfort and confidence of having a smaller inventory level to manage in the first place.
4 Tips for Inventory Management in Supply Chain
- Pick one or two metrics that you are going to focus on
- Set baseline metrics so that you can measure your inventory levels each quarter
- Consider extending your “warehouse” to goods that are inbound to reduce stockouts, lost sales and inventory performance
- Consider managing your inbound inventory by exception with real-time visibility
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Inventory is considered a company asset and is recorded on your company’s balance sheet. The better you can manage and track the movement of your goods, the more control you will have over your inventory. Real-time visibility is a key component of any sophisticated inventory management process.