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What do you do if your manufacturing business is losing money due to poor inventory management?

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Inventory management is a crucial aspect of running a profitable manufacturing business. It involves planning, controlling, and optimizing the amount and location of raw materials, work-in-progress, and finished goods. Poor inventory management can lead to wasted resources, excess costs, customer dissatisfaction, and lost revenue. If your manufacturing business is losing money due to poor inventory management, here are some steps you can take to improve your situation.

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1 Assess your current inventory

The first step is to assess your current inventory situation and identify the root causes of your problems. You need to know how much inventory you have, where it is, how fast it moves, and how accurate your records are. You also need to analyze the demand patterns, lead times, and variability of your products and suppliers. You can use tools such as inventory turnover ratio, inventory accuracy, and ABC analysis to measure and classify your inventory performance.

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Amitav Bhattacharjee

Founder & CEO at TechAsia Lab, Independent Director, SDG, ESG, CSR, Sustainability practitioner!
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Retool your inventory for profit! Operations Research (OR) offers powerful tools to combat poor inventory management. Utilize forecasting models to predict future demand patterns with greater accuracy. This reduces the risk of stockouts or excessive inventory holding costs. Additionally, implement inventory control models like the EOQ (Economic Order Quantity) model to determine optimal order quantities that minimize total inventory costs. By analyzing factors like ordering cost, holding cost, and demand, you can identify the most cost-effective order frequency and quantity, preventing overstocking and stockouts, ultimately boosting your manufacturing business's profitability.

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2 Implement a forecasting system

The second step is to implement a forecasting system that can help you anticipate the future demand for your products and plan your production and purchasing accordingly. A forecasting system can use historical data, market trends, customer feedback, and other factors to generate projections of future sales and orders. You can use tools such as time series analysis, regression analysis, and exponential smoothing to create and update your forecasts.

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Amitav Bhattacharjee

Founder & CEO at TechAsia Lab, Independent Director, SDG, ESG, CSR, Sustainability practitioner!
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Struggling with inventory costs at your bike manufacturing plant? Use the EOQ model from OR! It considers factors like ordering cost, storage costs, and demand to determine the ideal order quantity for your bike parts. By calculating the EOQ, you can avoid overstocking parts that take up space and tie up capital, while also preventing stockouts that halt production. This data-driven approach ensures you have the right amount of inventory on hand, maximizing efficiency and profitability.

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Meinolf Sellmann

Creator of Optimization Solvers, Architect of the ECB Transaction Settlement System, Inventor of Algorithms
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You can consider using timeseries forecasting as part of a cascading forecasting system where the timeseries becomes one of many inputs in a downstream forecasting model. By itself, a timeseries will not work though, because too many causal factors influence the inventory (price changes, events and disruptions, fulfillment variability, demand, order policies, etc).

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3 Adopt an inventory control policy

The third step is to adopt an inventory control policy that can help you determine how much inventory to keep, when to reorder, and how much to order. An inventory control policy can balance the trade-off between holding costs and ordering costs, as well as the risk of stockouts and overstocks. You can use tools such as economic order quantity, reorder point, safety stock, and service level to design and implement your inventory control policy.

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Meinolf Sellmann

Creator of Optimization Solvers, Architect of the ECB Transaction Settlement System, Inventor of Algorithms
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This is what many companies still do and, as a result, find themselves either unprepared for disruptions and bullwhip effects, or they incur massive inventory costs. There is another way. Namely, just as you use AI for forecasting, you can use OR to optimize your decisions under uncertainty. The latter is crucial here: In inventory management, you cannot use point forecasts and run an optimization model to optimize ordering and pricing and relocation decisions for that one forecasted future only. If you do, you will have very poor results. However, if you incorporate the uncertainty in your joint forecast into account, you can create a robust action plan that is tailored for your current situation.

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4 Use a software system

The fourth step is to use a software system that can help you automate and optimize your inventory management processes. A software system can integrate your inventory data with your production, purchasing, sales, and accounting systems, and provide you with real-time visibility and control over your inventory. You can use tools such as enterprise resource planning, inventory management software, barcode scanning, and radio-frequency identification to manage your inventory with a software system.

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5 Monitor and improve your inventory performance

The fifth step is to monitor and improve your inventory performance on a regular basis. You need to track and evaluate your inventory metrics, such as inventory turnover, inventory accuracy, fill rate, and obsolescence rate, and compare them with your goals and benchmarks. You also need to identify and resolve any issues or discrepancies that may arise in your inventory processes. You can use tools such as dashboards, reports, audits, and feedback loops to monitor and improve your inventory performance.

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6 Learn from best practices

The sixth step is to learn from best practices and examples of successful inventory management in your industry or sector. You can benchmark your inventory performance against your competitors or industry standards, and learn from their strategies and techniques. You can also seek advice or guidance from experts or consultants who have experience and knowledge in inventory management. You can use tools such as case studies, research papers, blogs, podcasts, and online courses to learn from best practices.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Rwitam Jana, PhD

Mathematician|| Industrial Engineer || Supply Chain Consultant
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Most of the cases, understand the business and don't go blindly with an ML algorithm of forecasting. Try to understand where the problem lies. In fact why does inventory management become a bottleneck! Doing forecasting is not enough as you are ultimately making decisions under uncertainty. While many of the people stopped by estimating the probability distribution of the target variables, which is basically "How much we need to keep it". The concept of "What to order and when to order" has different layers. The sequential decision making under uncertainty along with simulation always give you a better edge. Learning OR is a crucial thing. Take a Newsboy vendor problem. It will give the idea of how inventory optimization works.

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What do you do if your manufacturing business is losing money due to poor inventory management?

1

2

3

4

5

6

7

1 Assess your current inventory

2 Implement a forecasting system

3 Adopt an inventory control policy

4 Use a software system

5 Monitor and improve your inventory performance

6 Learn from best practices

7 Here’s what else to consider

Operations Research

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What do you do if your manufacturing business is losing money due to poor inventory management?

1

2

3

4

5

6

7

1 Assess your current inventory

2 Implement a forecasting system

3 Adopt an inventory control policy

4 Use a software system

5 Monitor and improve your inventory performance

6 Learn from best practices

7 Here’s what else to consider

Operations Research

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