What is inventory optimisation?
We have previously discussed in detail how inventory management can be achieved with Sage barcoding. However, even if you don’t currently use Sage barcoding, you probably already have inventory management practices in place, that are being implemented into your supply chain to enable you to manage your stock. In this latest blog we are going to dig a bit further into inventory management and investigate inventory optimisation, what it is and how can you utilise it.
Inventory optimisation is a method of balancing capital investment constraints and service-level goals over a large range of stock-keeping units, whilst taking demand and supply volatility into account. Sounds pretty complex right, but to put it into simpler terms, inventory optimisation is the implementation of processes to help you achieve the right levels and variety of inventory to meet your target service levels, whilst tying up a minimum amount of capital. You may recall that in a previous blog we investigated the costs associated with inventory, so how can this be achieved?
Inventory optimisation is achieved by accounting for both supply and demand volatility. By having the right stock control solution in place, planning for volatility is achievable for all businesses. Inventory optimisation is the next level of stock management for warehouses and supply chain managers and buyers.
Inventory optimisation with Sage barcoding will make you more competitive
Today we live in a world of disruptive technology, the rapid changes in the IoT, digitalisation, globalisation, and advanced technologies are shaking up industries and causing many to rethink the way they currently do business. Alongside this, consumer habits and behaviours are also changing and evolving rapidly, where consumers are looking for instant gratification and are more likely to look for elsewhere if stock is unavailable or they need to wait for delivery. New technologies allow for the sourcing of more competitive and better products from all over the world, what do you do if your company or organisation isn’t at the heart of it all?
The simple answer is, failing to optimise your inventory means that you will fall behind your competitors. Complex and intricate global supply chains, where every aspect of an organisation is linked, leaves opportunities for failures, but those who are ready and can account for uncertainties will be a step ahead of their competition and more importantly, in a better position to meet consumer demand.
Big companies like Amazon and eBay already have advanced stock control systems in place for optimising the supply chain, allowing them to source products from all over the world and deliver to their customers – sometimes within only a few hours. Not only this, but they will also have the internal capabilities set up to monitor inventory levels and manage the movement of stock from warehouse to warehouse due to their stock control systems. But this is far from reality for many small- and mid-sized warehouse businesses (SMBs) who are still trying to calculate order quantities, safety stock and reorder points in Excel. Manually managing the supply chain often results in rough estimates for inventory quantities, which in turn can lead to excess inventory (that will eventually become obsolete) or, alternatively lack of stock and consequently poor service levels for their customers.
However, by utilising Sage barcoding technology you will be able to predict seasonal demands, track diminishing and new trend products, as well as set minimum and maximum stock level alerts. In previous times consumers would be willing to wait for the right product to come into stock, but in today’s competitive market and with the wide availability of next day delivery, you are more likely to lose that customer to another competitor if you aren’t able to deliver. After all, your competitor is just a click away.
Key elements of inventory optimisation
Determining exactly how much stock you need to order and when it needs to be ordered, means you can optimise your inventory to meet the demands of your customers. However, it is more of a science than a simple ordering system. Optimising your inventory with Sage barcoding technology takes seasonality and promotional campaigns into account, as well as monitoring supplier lead times and schedules. By staying on top of these fundamental trends and always having an insight, you will have much better control over your inventory, warehouse levels and will minimise the amount of capital you are tying up in stock. However, there are also other key elements that you need to consider such as Demand Forecasting, Inventory Policy and Replenishment.
There are different ways of forecasting demand, from qualitative forecasting, when historical data is not available for a product, to time series forecasting, for products with historical data which involves the comparison of two periods of time. While time series analysis, can be highly effective for identifying seasonal fluctuations and cyclical patterns, it can steer you in the wrong direction if used in isolation. Successful demand forecasting often relies on looking at both qualitative and time series forecasting. Looking at estimates of seasonal and demand trends should be an ongoing process of testing and learning. With Sage barcoding technology, you can analyse seasonal peaks and troughs through time series analysis, as well as identifying new trends to help you get a real insight into your warehouse.
Every product has a life cycle. When a product is first introduced to the market it will have no historical demand, therefore you will not have any historical data to compare it to. Therefore, you will need to look at estimates of trends for the product from market analysis, reviews and comparative analysis. From the introduction, most products move into to a positive trend of growth, where the demand is continually growing until the product reaches maturity and demands becomes stable. After reaching maturity, most product demand eventually becomes more irregular and finally moves into a negative trend of decline, where consumer demand is falling and the product becoming obsolete. The product lifecycle is a general rule of thumb and by no means a set lifecycle for all products in all industries, and can also be subject to change due to the revival of trends. But to accurately forecast your demand, it is a good idea to know where your inventory is in the product life cycle and how it is moving through it.
Another key factor to be aware of is seasonality. For example, a product where demands peak mainly in the summer, such as suntan lotion or sunglasses cannot be forecasted purely based on the previous year’s demand. Other factors need to be considered such as the predicated weather trends, the steady trade from holidaymakers, new products on the market and new competitors, as these factors will also influence the market.
To be able to effectively analyse the demand and manage your inventory levels to meet these demands, the right stock control solution can help you to find and analyse this information making it easier for you to optimise your inventory management.
Another key factor in inventory optimisation is Inventory policy. Inventory policies are the guidelines and policies set for your business to ensure that your inventory is correctly controlled and cost and losses and shortages are minimised or prevented. Inventory policy may seem similar to forecasting demand; however, your inventory policy is the black and white of your warehousing and stock levels.
Your organisation will need to consider at what minimum stock level you will set your reorder points and what your order quantity will be when you hit that point. This will help your business to insure minimum stock levels are kept, to be able to cover a sudden peak in demand or supplier disruptions, which can simply sometimes be unforeseen.
However, even if your inventory policy is set and working, if you have multiple warehouses for your stock, it can be difficult to keep track of all items. Advanced functionality like our PSS Sage barcoding multi-location capability allows you to optimise your inventory and distribute it to the correct location, in the correct quantity. Making it easier to locate all of your inventory at any time, and helping you to fulfil your consumer demand.
Last but certainly not least is stock replenishment. Stock replenishment uses your inventory policy and the minimum stock levels set to turn them into actual orders. For example, a typical replenishment model will choose the minimum stock value as the reorder point, and the difference between the minimum stock level and the maximum stock level as the target quantity to order. By implementing the right stock control solution, you won’t have to worry about doing this manually, as replenishment rules can be automated.
Replenishment is a crucial element to having the right stock, in the right places, at the right time. This is the foundation of inventory optimisation. These calculations can be done in Excel and be manually entered into your ERP, but if you have a few hundred items in your inventory (or more!), it’s almost impossible to correctly track everything manually.
With a Sage barcoding stock control solution, your replenishment can be automated you only need to take action when the system alerts you. All you need to do is implement the right solution and watch the success unfold.