10 min read
The Art and Science of Inventory Management
Inventory management. The term has become so familiar, and the practice such a part of the warp and woof of retail, that many don’t give it a second...
5 min read
The past couple of years have aptly demonstrated the importance of good warehouse inventory management and how it can go south. Witness the huge spike in e-commerce demand in 2020 and 2021, the resulting supply chain mess, and the just-in-case over-ordering that resulted in massive overstocks that took a year or more to correct.
Much of inventory management is inextricably linked to sales forecasting, marketing, and production — and, of course, the supply chain — and involves close coordination among stakeholders in cross-functional teams. In reality and practice, warehouse managers and executives find themselves responding to upstream factors and business objectives, tasked with fulfilling and shipping out orders on time to keep customers happy and revenue flowing in.
To make sure this happens and to keep processes in gear, there are best practices that companies can employ to ensure that SKUs in the right quantities are where they should be and are available for purchase in a store or when the website says they’re in stock.
The Importance of Optimizing Inventory Management
In a highly competitive market environment, and a challenging economy, companies cannot afford to get by on outdated warehouse inventory management practices. Way too much is at stake to NOT optimize and innovate. Your operations need to become more agile and responsive, positioned to adapt quickly to the inevitable next major disruption.
There are several key benefits of an optimized inventory management process in your warehouse or fulfillment center, including:
- Improved inventory accuracy: knowing which SKUs are on hand, in what quantities, and how much is inbound to receiving/putaway or outbound in the order queue.
- Better inventory placement: an optimized warehouse layout reduces the effort and time needed to fulfill orders and replenish forward locations, buffer, and reserve stock.
- Reducing out-of-stock: a better handle on inventory and order flow, aided by data-driven forecasting, means fewer out-of-stock notifications and more satisfied customers.
Covering the Basics of Inventory Management Optimization
An investment in an optimized inventory management approach – encompassing people, process, and technology – is one that will pay dividends for years to come. Without it, waste and inefficiency will eat away at profit margins, and late or missing orders will leave both customers and suppliers dissatisfied. Here are a few key aspects to take into consideration.
Facility Mapping
Any good inventory management optimization effort begins with the proper mapping of the entire facility. Without this, chaos results as items can’t be located in a timely manner, or are so far away that order cycle times creep to unacceptable levels.
This includes creating a detailed floor plan, including all measurements (aisle and bin widths, vertical clearance, receiving, forward pick and storage locations, etc.). Digital mapping tools can assist in creating and updating these plans. Warehouse management systems (WMS) and dedicated inventory management software often include a module for creating or updating facility mapping. Ideally, embed the use of barcodes and scanners and/or RFID tags for greater accuracy.
If new locations or inventory transfers are needed, data from the WMS and OMS and the IT team can help determine the proper placement mapped to the correct zone. This data can also help create “hot” zones for fast-moving SKUs, placing them close to pack-out locations to increase fulfillment efficiency.
“Just In Time” vs. “Just In Case” Inventory Scenarios
There are two basic strategies for inventory management: “just in time” (JIT) and “just in case” (JIC) strategies. The former is focused on a quick-turn approach, keeping less inventory on hand, while the latter calls for maintaining higher reserve levels to hedge against unexpected demand or supply chain disruptions.
Each model has its pluses and minuses. JIT requires a greater degree of precision in forecasting, ordering, and inventory placement. Advantages include lower carrying costs, improved cash flow, leaner operations, and a lower risk of product obsolescence. Disadvantages include greater vulnerability to disruptions, a higher risk of stockouts, and less flexibility to address market-driven demand fluctuations.
JIC provides greater supply chain resilience, improved agility for responding to a fluid market or supply chain disruptions, and a better customer experience due to fewer stock-outs. Of course, in the mirror opposite of JIT, carrying costs are higher, impacting cash flow, and the risk of product obsolescence increases.
Optimizing Inventory Zones
There are particular best practices for each different warehouse zone, based on its function and position in the facility and its relationship to the others.
Receiving
Nothing in the warehouse is right if inbound isn’t right! Ahead of a delivery, confirm how much inventory is arriving from the advanced shipping notice (ASN) to be prepared with staff, equipment, and space. Each item must be checked against shipping documents, with any variances noted, and inspected for damage. Unloading and staging must be done in a logical manner, with every item entered into the system by scanning before putaway.
Putaway
Barcode scanning should be performed again to verify before inventory is put away. Use ABC analysis or other categorization methods to prioritize items, and utilize the warehouse map to identify proper locations. High-demand or time-sensitive items should be placed in easily accessible bins or pallets. Again, WMS or inventory management software have putaway optimization features. Train warehouse personnel on efficient putaway processes and encourage communication to address any challenges or improvements needed. Include “teachable moments” and determine if associates are better suited to other tasks.
Forward Pick Locations
Do replenishment at night into forward pick locations at floor level for the next day’s orders. Identify hot zones and SKUs. Establish an efficiency-minded replenishment plan by setting trigger points based on predetermined stock levels or number of orders processed. Group similar items or products frequently ordered together, to minimize picking time by reducing associate steps.
Reserve Stock
Reserve stock is calculated by taking the percentage of unsold inventory from past periods, adjusting it based on market conditions, and applying it to current stocks. The reserve level is then deducted from gross inventory to come up with a net inventory figure, or what is expected to sell. It includes both safety stock (kept on hand against supply chain and production disruptions) and buffer stock (a hedge against sudden demand spikes and peak periods). Reserve stock doesn’t have its own discrete warehouse location, but is an accounting and tracking exercise to determine how much inventory to keep on hand.
FIFO vs. LIFO
First in, first out (FIFO) is an inventory management process whereby items that arrived most recently at a warehouse are typically the first to be sold. Under last in, first out (LIFO), the opposite dynamic is in effect, with the older items moving first. FIFO, which is much more common, results in a lower cost of goods sold (COGS) and higher profit, as older, lower-cost inventory is matched against revenue first.
It’s important to have the ability to do both FIFO and LIFO. Companies selling pharmaceutical products, for example, use multiple suppliers with the same type of products but with different expiration dates. Thus, using LIFO allows you to prioritize shipments of products expiring soonest.
Creating a Continuous Improvement Process
Encourage feedback from warehouse staff to identify bottlenecks or inefficiencies in inventory management processes and implement necessary changes. Also, follow a “trust but verify” model: determine a percentage of your putaway items, then do a weekly cycle count. This way, the warehouse manager gets an early view of whether the figures from receiving are correct. Lagging indicators don’t help, such as errors that surface six months later.
When errors are found, do a root cause analysis. For example, the root causes of frequent stockouts could be inaccurate forecasting, delayed deliveries, poor inventory visibility, or inefficient replenishment processes. Analysis can include reviewing historical sales data, supplier performance, and inventory turn rates. Better demand forecasting tools, negotiating improved delivery schedules, upgrading inventory tracking systems, and streamlining replenishment processes are among the potential solutions.
It’s also important to track the percentage of warehouse capacity regularly through cycle counts and checking the dimensions of pallets, SKUs, and bins to work within the cube of the building based on changing conditions.
The Productiv Difference
Productiv, a leading 3PL provider, is adept and experienced in all aspects of warehouse operations, from receiving to put away, pick/pack, shipping, inventory management, value-added services, client embed programs, and more. Our network of experts and partners is committed to excellence and achieving your goals. Whether you’re looking to add production capacity, kitting and assembly, increase throughput, shorten lead times, reduce costs, or just delight consumers, Productiv consistently delivers against your exacting requirements.
Either through managing your warehouse operations or at one of our highly efficient facilities, you get world class on-time performance, order accuracy, and inventory accuracy. Our SLAs are calculated automatically through a business intelligence dashboard you can access, with reason codes provided for any exceptions. To learn more, talk to an expert today.
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