CHANGE THE GAME IN YOUR QUEST FOR INVENTORY OPTIMIZATION BY THE ACCURACY OF YOUR DATA

Today I want to share some thoughts with my fellow inventory management enthusiasts about inventory optimization. But here's a little secret - accurate data is the real deal when it comes to inventory management and optimization. It's the key to reducing costs, increasing productivity, making customers happy, and keeping the morale of planners and personnel doing inventory-related work at a high level! But trust me, I've seen businesses overlook the importance of data accuracy in inventory optimization more times than I can count. So, in this article, I'm going to share some insider knowledge on the most crucial data to track and explain how it can impact your business. Now, buckle up for a journey that will help you change the game!

What are some of the most important data to keep track of in inventory management and optimization and why are they important?

Sales and Demand data

Past sales data as well as future demand predictions are critical components of inventory optimization. These will help to determine the demand for products and can inform decisions related to inventory levels, replenishment, and ordering. Calculating statistical parameters such as the coefficient of variation of demand will give you an idea about how volatile your demand is likely to be. This will make it easier for you to determine accurate safety stocks for your inventory items.

Lead time

Lead time is the amount of time it takes for a supplier to deliver products after an order has been placed. It can also represent the time it takes to produce and put away the product in your finished goods warehouse if you manufacture the product in-house. Accurate lead time data is essential for inventory optimization, as it can help to ensure that inventory levels are appropriate to meet customer demand. You must keep a record of past lead times of your inventory items. You can then use these records and the demand data to estimate a statistical distribution of demand during lead time. This will help you set accurate safety stocks and reorder points in your MRP/ERP system.

Bills of Materials

If you are attempting to optimize the inventory level of a raw material or component used in a production process, past consumption and bill of materials data come into play. Your MRP system will generate a future consumption estimate by using the bill of materials and master production schedule. Inaccurate bills of materials will cause very frequent exception messages in the MRP system, your planners will turn into firefighters, and they will eventually lose faith in the system.

The unit cost of inventory items

According to the context, the unit cost of an inventory item may be the purchase price, the purchase price including per unit transportation costs, or the cost of goods sold. Multiplying the unit cost of each inventory item by the quantity in inventory and summing the result across all items you can easily get a snapshot of the monetary value of your inventory. You can do that periodically and monitor the progress in inventory levels.

Stockout data

A stockout occurs when inventory levels are too low to meet customer demand. Accurate past stockout data is essential for inventory optimization, as it can help to identify opportunities for improving inventory levels, reducing lost sales, and improving customer satisfaction. If you have this data, you can set goals to reduce the frequency of stockouts in the future.

Supplier performance data

Supplier performance data includes information related to the reliability, quality, and timeliness of deliveries from suppliers. Accurate supplier performance data is essential for inventory optimization, as it can help to inform decisions related to supplier selection, lead times, and order frequency. If the collected data is incorrect, you may end up choosing the wrong supplier and may even lose credibility in the face of your suppliers because of your incorrect evaluation of a reliable supplier as “unreliable” in your records.

Replenishment Period

Replenishment period data refers to the frequency with which orders are placed. It is sometimes also termed as replenishment cycle or order frequency. Accurate replenishment period data is essential for inventory optimization. More frequent orders mean smaller order quantities hence lower inventory levels. On the other hand, this causes more ordering workload and therefore high ordering costs. Many ERP systems have fields where you can enter the replenishment period for each item. If this data is entered incorrectly, you may receive more frequent deliveries than planned, which will likely increase the workload not only of your planners but also of the warehouse personnel who will have to perform more frequent unloading and put-away tasks. There will inevitably be more internal transport inside your warehouse and more frequent quality checks of received items, and so forth. On the flip side, the orders may be less frequent than planned, resulting in increased inventories.

Minimum Order Quantity and Lot Size

Your suppliers are likely to expect you to keep your order quantities above a certain minimum because a smaller quantity will increase their per-unit costs. If you want to reduce your inventory for an item, you must work with your supplier of that item to find ways to arrive at a minimum order quantity that works for both parties.

When it comes to manufacturing, the lot size typically matches the production batch size, or an integer multiple of it if the batch doesn't fill an entire container. However, for transporting the product from the supplier to the buyer, the lot size corresponds to the capacity of either a pallet or the container in which the product is shipped.

But the key here is to not forget to enter the minimum order quantity and lot size data in your ERP system. Otherwise, your system may generate an order quantity less than the minimum, which is likely to create confusion on the part of your supplier, or one that will not fill a container, which will raise your per-unit transportation costs.

How can you ensure data accuracy in inventory optimization?

I like to summarize how to ensure data accuracy in inventory optimization in three steps:

1.??Establish inventory-specific data quality standards:

To ensure data accuracy in inventory optimization, you must establish data quality standards. A top-down approach is best because my industry experience shows that when there is a lack of understanding on the part of managers about the importance of data accuracy in ERP systems, failure is inevitable.

These standards should include rules and procedures for data collection, storage, and analysis. They should cover all aspects of inventory data collection, including the type of data that is collected and how it is collected.

You may need to appoint personnel specifically responsible for collecting and updating data as well as setting the standards for data collection. I remember a time when I and a colleague from my team were responsible for collecting the expected lead time data from a few hundred suppliers for thousands of inventory items because the lead time data in the system was either out-of-date or the fields dedicated to the lead time were left blank. If your organization is relatively large, you may even consider dedicating a department responsible for inventory management data.

It is essential to ensure that the data is stored correctly, as this will affect its accuracy. Right from the start, you should have a system in place to double-check any data entered into your inventory management system.

By establishing inventory-specific data quality standards, you can ensure that everyone involved in inventory management and optimization knows what is expected of them.

2.??Implement regular inventory-specific data audits:

Regular data audits can help identify errors or inaccuracies in the data and provide opportunities for corrective action.

The frequency of data audits will vary from company to company but for most cases, once every three months is a good starting point.

Data audits should include procedures for correcting errors, and even more importantly, ensuring that they do not occur again. This includes identifying the root cause of the error and taking corrective action. According to my experience, even in many organizations that perform regular inventory data audits, identifying the root cause is usually overlooked, so the same data errors occur repeatedly.

3.??Train your planners about relevant data:

A good understanding of inventory management parameters is crucial for success. Your planners must understand how a minor error in one of the parameters creates a big problem causing what is usually known as the bullwhip effect in inventory and supply chain management. As an example, let us say that you only require 5 units of a certain item, but the minimum order quantity is incorrectly entered as 100 units in your system instead of just 10 units. In this case, you will end up with an excess inventory of 95 units rather than just 5.

In order to train your planners, you can get assistance from internal experts in your organization or hire external consultants. I have had the privilege of training planners both as an internal expert and as an outside consultant over the course of my career. Both approaches work as long as you can keep your planners engaged and let them understand how accurate data makes their life easier at work, makes work more meaningful and fun, and provides more time to them for strategic thinking instead of them having to spend too much time on firefighting.

In conclusion, data accuracy is the backbone of effective inventory optimization. If your data isn't accurate, you're essentially traveling blind when it comes to inventory management. That can lead to all sorts of problems, like increased costs, lost sales, reduced profits, unhappy customers, and low employee morale. Whether you are a manager or a specialist in the field of inventory management, it's your job to prioritize data accuracy if you want to be proud of your work, have fun while doing your job, and let your business thrive in the long run. So, set out to improve the accuracy of your inventory data!