How do you compare your inventory control methods?

The devil lies in the details. It is important to peel the layers to understand the slow movers from skus with high GMROI. Building good inventory should not be compromised at the expense if managing down bad inventory. These must happen in parallel.

Plan, communicate, implement and control. Without these 4 strategic phases, you to not be able to achieve any of the inventory management objectives. - Enhancing cash flow. - Maintaining sufficient stock. - Optimizing storage cost. - Reducing purchase cost of goods. - offering solutions to customers. So, wether the objective is to avoid waste, optimizing, cost reduction, achieving profit, customer satisfaction and retention....... Objective should be well planned.

In crafting an effective inventory control strategy, my foremost priority lies in enhancing customer satisfaction and delivering top-notch service. For our A-class products, I aim for an impressive 97% service level, while ensuring the rest fall within the 90% to 95% range. My secondary focus centers on smartly minimizing inventory carrying costs. To achieve this, I'm exploring innovative techniques like ABC analysis for product classification and Just-In-Time (JIT) inventory management. It's a delicate balancing act, but by continuously optimizing our inventory processes, we can guarantee stellar service while keeping costs in check. For some products, I will opt MTO production technique.

You can define your goals by determining how inventory control supports your overall business strategy, such as market responsiveness, cost leadership, or product differentiation. You can also choose methods that can adapt to fluctuations in demand or changes in the supply chain.

The most important goal in inventory management processes is to improve the customer service level. The KPI, meaning the CSL, is the leader unit of the inventory control process. Obviously, while determining that KPI, it is essential to rely on financial calculations rather than “hunch”. Company’s inventory holding cost, and lost sales or shipping delay costs should be determined. Production or supply leadtime are also necessary to know. With a CSL calculation covering all the three, it is possible to decide to what extent the customer will be served and the inventory availability. If the company operates according to that solid CSL calculation and reaches the targets, there is no point in pushing the system even further.

At the end of the day, the purpose of inventory ?? is to cover potential future sales. However, holding it comes with a cost ??. For this reason, the most relevant metrics we can assign to inventory are tied to the financial realm ??, especially regarding the cash conversion cycle and value creation ??

While managing inventory, not one but several measures should be defined and followed together. Because those measures are not independent players. Setting the CSL as the beating heart, safety stock and optimum supply quantity are computed. They all help us set the inventory targets both in terms of product and collectively (financially). As a result, the most critical measurement units in inventory control are CSL, min. and max. inventory targets.

If the strategic alignment mentioned above is in place, one can proceed with determining specific KPIs that correspond to the overall goal - e.g. holding cost metric with a target reduction by XX% if cost is the number one priority. However, an ABCXYZ analysis must be done prior to that step to determine which categories would be tackled how. Regardless of the performance objective, we need to differentiate between AX products and CZ products as too low service level on AX products can get your business into serious trouble. Not all inventory has the same value to the organisation. The Pareto principle applies for the majority of the industries. So that is always a good starting point.

In any valuation method there are data that are part of the equations necessary for its own determination; but there are two metrics that, in my opinion, are the most important: Inventory accuracy. Shrinkage record. Any inventory valuation will always be inaccurate if these two points are not met correctly. So it seems to me that efforts should be focused on actions aimed at inventory integrity.

?? The purpose of inventory is to satisfy the customer while keeping the organization's finances healthy. ?? The key metrics are service level and cash conversion cycle. ????

With perpetual inventory you can set safety stock counts which many ERP systems can use to automatically reorder inventory to prevent stock outs, but this type of inventory system requires a system that can tract incoming inventory from vendors as well as a point of sale system which identifies which inventory items and quantities are being purchased by customers. Just-in-time inventory systems can be used with demand planning to order inventory to arrive just in time to fulfill orders, reducing carrying costs. However, any delays in logistics can mean delays in fulfilling customer orders in a timely manner.

In recent years especially with the implementation of comprehensive ERP systems, the perpetual inventory system has become widely adopted. In reality periodic inventory review would always be needed as inbound of stock is largely relying on efficient methods which do not allow for 100% stock inspection and count upon receipt. As no quality system can guarantee output with 100% accuracy, cycle counts would always be a necessity. I believe a hybrid system would continue to be utilised in the foreseeable future unless AI advancements allow us to achieve a higher percentage of quality output and more elaborate inspection methods upon receipt. The increasing utilisation of automated retrieval systems is going to impact the picking accuracy.

In recent years especially with the implementation of comprehensive ERP systems, the perpetual inventory system has become widely adopted. In reality periodic inventory review would always be needed as inbound of stock is largely relying on efficient methods which do not allow for 100% stock inspection and count upon receipt. As no quality system can guarantee output with 100% accuracy, cycle counts would always be a necessity. I believe a hybrid system would continue to be utilized in the foreseeable future unless AI advancements allow us to achieve a higher percentage of quality output and more elaborate inspection methods upon receipt. The increasing utilization of automated retrieval systems is going to impact the picking accuracy.

Among the periodic and perpetual inventory control systems, the former is the dominant one. The main reason is the demand forecasting process. Forecasting each customer’s demand is definitely an uphill battle. Instead, it is much easier to collect the customer demands in certain periods, make a timeline, and create a demand forecasting model. The fact that the demand settling on a certain periodical structure will require that the connected supply chain system to be handled with a periodical structure as well. Thus, it is not wise to claim that a continuing system would be more effective.

Having considered different factors, in my opinion, the comparison between the chosen methods will depend on the nature of the products in the inventory, the management of different product lines and the orientation towards different business strategies.

EOQ and ROP systems alone are not sufficient for inventory management. EOQ is operable only if deterministic demand is assumed. ROP does not consider the supply or production constraints while placing orders in a stochastic environment. Instead, a supply model combining the both would be much more effective. That system should be optimizing the inventory by centerizing the CSL. Considering demand and supply variance, the system should absorb the possible deviations of the business’ stochastic nature, and also bear in mind the supply constraints, which are one of the most important factors in today’s market. The unified supply model would bring excellent results and achieve the targets in a periodical planning system.

Testing inventory control methods in real-world scenarios is vital. It offers practical insights, data-driven decision-making, cost assessment, risk analysis, customization, employee input, adaptability, and continuous improvement. Tailoring tests to your business’s specifics ensures the chosen method aligns effectively with your needs, making informed choices essential for success.

In a system, product-based inventory health is also an important measurement unit. A company can keep its key performance indicators at top by focusing on the most profitable customers and/or the best selling product. But when we check the system specifically, that is, on a product basis, we see some at very low inventory level, whereas some at quite high. Especially the new products and the ones that are close to the end of their life cycle may easily fall into the pit. In midterm, the situation of these products may harm the business unit. Inventory health check can control that process. Measuring the inventory status by product would put all of them on the table and balance the attention of the experts.

I fully agree with this perspective. Looking from a product view is much more objective opposed to a categorized and generalized view. Considering product lifespan, demand, seasonality, value and difficulty of sourcing product are all factors to be considered at a micro level.

I believe that there is no ideal time to review an inventory valuation methodology: it all depends on operational cycles, changes in accounting practices, changes in the nature of the business, inflationary times, changes in information systems, etc. But, of course, any method will always work if the basis is as accurate as possible: the integrity of the inventory.

With around 18 years as controller of a company with $2M-3M of inventory, here are some thoughts: - Sales should have little control over inventory. Sales is concerned about having the product to sell, overstocked inv is somebody else's problem. All purchasing should be through the inventory manager or purchasing. - Prove you can sell product before you purchase large amounts. It's easy to become "inventory poor" by buying too much. - Have a plan in case you get way overstocked to avoid writing it off. - Daily counts are vital in confirming accuracy. Highly active items should be counted several times a year, less active items should be counted less. Do a yearly count of all inventory.

Optimizing inventory management starts by clearly defining how much inventory to hold (e.g., in days). ?? Analyzing the variability in demand, supplier, and systems is crucial. ?? With proper planning, operations become more streamlined and efficient. ?????

When measuring inventory shrink, focus often centers on operational controls and external factors like theft and fraud. However, it's crucial to consider the entire value stream. In retail, every business function affects shrink exposure: purchasing, pricing, category management, supply chain, and technology. Examine the value stream upstream to identify downstream impact. For instance, poor buying decisions can lead to excess inventory and waste. Consider shrink in supplier negotiations. Inaccurate product data can cause uncontrollable errors downstream.

A warehouse should never be at full capacity. Having a program that determines how full a warehouse is or communicating with the warehouse can be very beneficial. If the warehouse is at full capacity and more and more inventory keeps arriving, you loose productivity and potentially product.

In this age of Technology, Artificial Intelligence, etc… don’t get afraid of start testing all of this new tools. It is proven that some of these will offer several advantages when it comes to inventory control. Advantages like, improved accuracy, data driven insights and cost savings are some of the most mentioned. Test, evaluate and if works for you, keep it!