The Right Inventory, In the Right Place, At the Right Time.
My doctor tells me I need to have a balance in my life of exercise, food and drink. My trainer works on my core muscles to help with balance. This balance thing must be important! What does a balanced Supply Chain look like? The right inventory in the right place and at the right time is the goal of any effective Supply Chain. Inventory Management is one way to improve your Supply Chain balance. We will cover the basics of the Inventory Management in this post for those Getting Good on their Supply Chain journey.
Chainalytics.com shared a key trend on Global supply chain rebalancing.
"The Third-Party Logistics Study continued the conversation on supply chain balancing, inquiring about what actions shippers are taking to rebalance inventory. Most shippers, around 80%, have made or are planning to make efforts to rebalance inventory levels. 71% say they have already rebalanced or are about to do so, and another 9% say they intend to take action."
It makes sense to "balance" your inventory, but how do you do it? What are the benefits of balanced inventory throughout your Supply Chain? When Supply Chain inventory is balanced the carrying cost of inventory is reduced. Valuable cash can be used in other areas of the business versus the investment in inventory in a warehouse. Fill rates improve which can help improve the customer experience of getting what they want, when they want. These fill rates can also drive increases in revenue reducing missed sales. High fill rates also reduce costs of stock outs and expedited freight needed to react to missing inventory.
Here are five ways to get your Supply Chain inventory healthy.
Tip #1 - ABC Assignment
The ABC method of inventory management assigns a value to a SKU or good based on its value to the business. An "A Item" should be the most valuable to the business with regards to sales revenue, margin or growth. This classification should be about 20% of your total inventory value and 70%+ of your sales or consumption. The next 30% of your inventory value should be identified as "B Items" and remaining 50% as "C Items"
Start your inventory improvement efforts on the A Items to have the biggest impact on the business. These items types should have tight controls and high visibility in your facilities. We use three different types of methods to make this analysis come to life. There can be specific types of inventory in low volume and make to order processes that don't always work with this approach.
Volume - Rank your inventory with annual sales volume by units and SKU's from high to low. The SKU's in red would account for the top 71% of the overall Annual Sales Volume and be labeled as A Items.
Sales - Rank SKU's by Sales revenue ($'s) by high to low values.
Volume x Margin - This is a hybrid metric that can help connect inventory to the profitability of the business. Sort the list of SKU's by the total units sold times the margin each SKU provides to the business
Tip #2 -Cut the Tail
Now you have your inventory assigned a value, lets look at your C Items. These low sales units have a minor impact on the business. Examples of C Items that could be candidates for elimination would be SKU's 75622 and 75991 in the bar chart above. It's time to take a hard look at these units or SKU's and answer the question if these are needed in the near future. Can these SKU's be eliminated? Can another distributor or business partner take this inventory to serve your customers? The elimination of these slow movers can free up resources and space that could be used to support your A or B Items.
Tip #3 - Move inventory closer to the customer
Many retailers took advantage of this method during COVID by adding in capabilities to ship and serve customers from retail stores. Buy Online and Pickup In Store (BOPIS) and Buy Online and Ship from Store (BOSS) models served large retailers well during this period. Additional capacity and reach quickly expanded distribution footprints with minimal investments. Local stores added pick, pack and shipping capabilities to pull orders from the store location. This forward deployment of inventory, closer to the customer, can reduce overall inventory levels, increase inventory turns and improve fill rates. This following map shows an example of the shift of inventory from a Distribution Center in Nashville, TN to 3 different stores in Kentucky, Alabama and Arkansas.
Tip #4 - Implement safety stocks and minimum stock levels
Using your assignment of A and B inventory items, look to increase inventory levels to account for forecasting errors or changes in demand. This additional safety stock will increase overall costs, but help to fill customer orders when disruptions of supply occur. We usually like to start with 2 weeks of inventory to set safety stocks. This amount would be calculated per SKU using the weekly average of sales for the past 6 months multiplied by 2.
Setting minimum stock levels can also help in addition to the Safety Stock assignment. A good way to determine minimum stock levels is to calculate your average daily sales by SKU and multiply this amount by the days of lead time that it takes to place and receive a replenishment order. The background of this inventory approach is that the last item would be shipped to the customer at the same time a replenishment quantity is received at the warehouse.
Tip #5 - Wash, Rinse and Repeat
Now you have found a few tips to help balance your inventory across your supply chain. The one time effort can help, but an ongoing review and adjustment is needed. Determine the methods that have a positive impact on your Key Performance Indicators (KPI's) and set up repeating calendar events to repeat the technique throughout the year. Usually a quarterly review will help see changes in demand by SKU and give the business time to make the recommended changes. Set a quarterly meeting with the right team.
Tips
Watch out for seasonal impacts on your supply chain. Review your sales history to find any times during the year where your demand changes up or down by more than 20%. Break up the year into segments with lower and higher demand and apply the Inventory Leveling techniques that work for you to these periods.
Please leave us a comment on the questions and issues you are having with your business and supply chain. We will use your feedback to create future posts based on your feedback. Check out how we help solve Supply Chain problems here.
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