Strategic Inventory Management: Some Common Misconceptions and Mistaken Approaches

Contribution by Abhishek Gupta – Supply Chain Consultant at Bristlecone

Managing the inventory effectively at various levels is seen as one of the most important contributing factors towards deriving more value out of the supply chain. Competitive environment, increasing number of sales and distribution channels, continuous need for process improvements, demand for more agility and technological advancements are augmenting the challenges in the area of inventory management and creating more opportunities as well.

Effective inventory management directly impacts cash flows and frees up working capital. Moreover, it also leads to significant cost reduction by impacting stock holding and handling cost. Inventory management is also an enabler towards being more reactive to the customer. Therefore, in addition to being a cost-related item, inventory also offers a way to gain market share by augmenting service levels and product availability.

In an attempt to improve inventory management practices, it is essential for organizations to align strategies, policies and decisions with the organizational goals and objectives. In this process, it is also vital to take an integrated approach and increase the degree of engagement and collaboration with suppliers, vendors, distributors and partners. Also, inventory management practices across the product lines and geographic divisions need to be converged and aligned.

Companies are often plagued with out-dated and simplistic inventory policies. In many cases, they are able to manage inventory locally, but at the overall organizational level, there is disconnect between the inventory management practices and the corporate goals. They tend to go out of focus from the critical areas and end up in inefficient utilization of resources.

Some common misconceptions and mistaken approaches taken by organizations are highlighted below:

[list][item icon=”128227″ ]In order to achieve higher service levels, organizations tend to stock up the inventory of finished goods. They should rather follow a logical approach and right product at right location should be stocked at the most optimum possible level.[/item][/list]

[list][item icon=”128227″ ]Organizations often depend on localized inventory management approach and let the individual divisions and levels decide their own metrics and inventory practices. This approach leads to inconsistencies and build up of higher inventory at some divisions, while instances of stock outs at others.[/item][/list]

[list][item icon=”128227″ ]There are cases where organizations strongly believe in lean inventory management approaches but end up with higher lead times and lower service levels. It is important to apply these approaches in synchrony with the corporate goals and while making the correct trade-offs. Firstly a firm needs to assess the health of its supply chain processes, then looking at strategies and tools available, apply them sequentially in phases without leading to a decline in any of their critical KPIs.[/item][/list]

[list][item icon=”128227″ ]Inventory planning is often done independently of Sales and Operations Planning. Companies tend to focus more on the forecast accuracy, meeting demand plan and attaining higher service levels. They carry out Sales and Operations Planning periodically. However, inventory planning is done on-the-go or not in sync with rest of the planning processes. A new approach with a periodic Sales, Inventory and Operations planning has been found to be more effective, providing a robust platform for integrating the planning processes.[/item][/list]

[list][item icon=”128227″ ]Primarily Middle level managers are entrusted with the responsibilities of inventory management at their localized areas of operation. However, it is important to take a holistic approach and top level management should engage in the formulation of inventory management strategies. Inventory related decision should then drill down to lower levels and the policies should remain aligned throughout the organization.[/item][/list]

In order to gain returns from the investment into inventory management, it is essential for the organizations to strategize, taking into account the stock requirements at different levels of the supply chain, segmentation across SKUs, capabilities of supply chain partners, technology tools available and most importantly, alignment with organizational goals. Technology needs to be leveraged to improve visibility across the supply chain and simulation tools should be used for efficient decision making. Best in class practices like Postponement, Supplier Managed Inventory, Safety Stock Management at granular level and managing Multi-channel Complexity should be appropriately leveraged in juxtaposition with larger organizational goals, thereby gaining a competitive edge on the operational front.