Top 5 Solutions to Common Inventory Management Mistakes

Top 5 Solutions to Common Inventory Management Mistakes

Good inventory management can lead to improved cash management.

Dusty Miller, vice president of training & support, Fishbowl

When trainers visit various warehouses they see trends of what manufacturers are doing well and some of the common mistakes they make. This article documents five of the more common mistakes (and how to fix them) that many warehouses are making.

As an inventory management software company, we send our trainers around the country to help implement our software into warehouses. Not only do our trainers help warehouse managers to understand the software, but they also help overhaul outdated inventory management systems to make them more efficient and save businesses money.

When our trainers visit various warehouses they see trends of what manufacturers are doing well and some of the common mistakes they make. We have noticed and documented five of the more common mistakes (and how to fix them) that many warehouses are making.

1. Use reorder points on inventory items to keep purchasing streamlined and inventory manageable.

Reorder points (otherwise known as min. and max. levels) are the best method for making sure you have the right amount of inventory in your warehouse at all times. If you have too little inventory you could lose out on sales, but if you have too much your cash is tied up in inventory that will not be sold.

One of the biggest problems many companies have is managing their cash. A quick way to solve that from an inventory standpoint is by making sure you have set the appropriate reorder points for your business.

 2. Spend money on specialized training for mission-critical software.

Companies with a lot of inventory spend thousands of dollars on software they need in order to manage and track their items as they move all over the world. This software manages millions of dollars’ worth of assets. After spending so much money on software, some companies don’t want to spend a few thousand dollars extra to buy the specialized training they need to implement the software. This is a big mistake because this software won’t do you any good if you don’t spend a little bit more to learn how to use it.

If you try to learn your software on your own you may suffer for months before you learn the basics of how it works.

3. Rearrange the warehouse to set up for picking efficiencies.

Sometimes trainers see mistakes that are so obvious you would think they’d be corrected immediately, but warehouse managers may be too distracted to notice them. We often see 100,000-square-foot warehouses that are organized inefficiently. These companies could save themselves large sums of money by making a few changes to where they place their inventory. The items that you sell the most or send out the most should be right next to the shipping dock. This keeps your employees from having to walk all the way across the warehouse to pick them up every time you are going to send them out.

As companies grow, sometimes they just randomly put things where there is space. This works for a little while, but as you grow you need to think about efficiency because the minutes that your employees spend driving around the forklift cost you money.

4. Take time to get to know your technology so that you can use all the functionality.

Rarely will a company use all of the functionality their software provides. Most of the time there is more that the software can do for you that you haven’t explored. Software companies always hear from their customers about which features they want added to the software when a lot of the time the features are already there. The more features that you use in the software the more effective you can be in managing your inventory. You should either assign someone within the company to learn the software functionality or pay someone to come in and teach it to you.

5. Stop doing yearly physical inventories and move to a more regular, smaller cycle counting and reconciling routine.

Businesses used to shut down for a day to a week each year to go into their warehouse and physically count everything to make sure that it matched the information in their software. This practice is mostly outdated because of the amount of time and money it takes. Doing these checks in smaller, more regular cycles keeps a company from having to shut down. We recommend picking one section each day to check your product levels against the information from your inventory software.

Inventory optimization can increase your profitability - Reduce Stock...Grow Profit

Inventory optimization can increase your profitability

(Source www.ibs.net)

One of the largest capital expenses for many distributors and wholesalers is stock. Finding the balance between ensuring products are available when customers need them and not holding too much, is business critical. However, most companies make these decisions without looking at the full picture. The critical point is accuracy. In order to get accurate forecasting the statistical forecast figures have to be based on requested demand rather than delivery statistics. In addition, casual factors such as events and promotions, as well as collaborative input from the organization and trading partners have to be included or considered. An inventory optimization system is designed to help companies increase accuracy and overcome these issues in order to enhance customer service and lower operational costs.

What is inventory optimization?

The core objective of a good inventory management system is to provide the best possible customer service within the restraint of the lowest practical inventory costs. Good service is the result of ordering the right items and quantities of stock at the right time. Inventory optimization tools help companies make reliable decisions on product replenishment. Making these correct decisions quickly improves efficiency and profitability by improving the forecasting of future demand and through more economic stock holding. Reducing the volume of stock held at any given time has a massive impact on the capital outlay an organization has to make. However, this has to be balanced with the need to maintain customer satisfaction through stock availability.

Many companies are faced with a tug of war between the CEO’s desire for improved profitability; the sales team’s demand for more of everything in order to improve customer service and the CFO’s demand for lower inventory costs. It’s generally hard work for a purchase department to fulfill such demands.

The physical distribution network is the basis for an effective inventory and supply chain management solution. An efficient inventory management system requires a multi-level distribution network for each product. This covers where the product is stored, either at an external supplier or within internal production or warehouse locations. Replenishment recommendations created by inventory optimization  software can help companies decide when to buy, produce or ship goods between warehouses, thereby optimizing the total inventory situation.

Most distributors and wholesalers have fast moving products that need to be available all the time. However, there may be some specific products that are required much more rarely. They may be expensive but if the customer asks for them and they are not available, they aren’t going to wait. A dedicated solution for optimizing inventory helps ensure the right products are available when and where they are needed.

In addition, by automating many of the procedures required for effective inventory management, the people who deal with purchasing can concentrate on more profitable items.

Demand planning

In order to achieve inventory optimization, companies need to ensure they can provide accurate Demand Forecasting. There are two principles of forecasting that companies can carry out to achieve this. Statistical forecasting provides an accurate report on previous selling volumes and patterns. While this is useful information, it cannot deliver true inventory optimization because very few supply chains are consistent year on year and this leads to inaccurate forecasting data. For example, for many consumer electronics products, the life cycle is only a few months. This does not lend itself to accurate year on year statistical analysis.

In combination with statistical forecasting inventory management software from IBS offers advance demand planning capabilities, allowing the flexibility to enter many more variables to add greater accuracy to the forecasting process. It allows companies to enter details of sales demands, marketing budgets and campaigns, geographic trends and other key information that demand planning uses to generate detailed forecasting reports. The system can also bring in statistical data and, through an advanced and intuitive graphical user interface, allows users to work with data either at a very high level for a broad, strategic view of the business, or at a lower detailed level to establish specific tactics, such as defining promotion forecasts for a certain product or product group.

Implementing inventory optimization generates several options for forecasting demand with greater accuracy. It creates an automatic analysis of the demand history for each product as well as pinpointing slow-moving products. It can use this information to combine with customers’ own forecasts to create an Efficient Consumer Response (ECR) solution as a basis for future demand forecasting.

Several different forecasting methods can be applied separately to item segments, to suit differing demand patterns. Inventory optimization can also keep track of demand figures for each customer and calculate demand data on items, warehouses and time periods. With the right system and setup in place, these demand plans can be performed automatically to become a key component in the on-going business plan.

Managing the business

For many years, software companies have enabled businesses to manage and control their operations at a much higher level. The reality of this is that their ability to carry out repeatable processes is much more effective and supply chains have adapted to meet these improvements. A company that, five years ago, delivered to customers on a weekly or monthly basis, is now able to manage that relationship at a micro-level depending on specific requirements, such as the need many wholesalers have to deliver to customers daily or more.

In order to remain competitive, many companies are expected to provide higher service levels, executing higher numbers of individual transactions with customers on a higher level of frequency. However, the flip side is that often the volume of actual business is not increasing and more frequently the actual real value of the business is decreasing due to continuous pressure on prices. This results in continued pressure on the bottom line margin.

In order to meet these exacting demands, companies are being forced, more than ever, to look at their supply chain operations and processes to identify how they can reduce the overall cost per transaction to its lowest level in order to maintain profitability. Companies need to increase collaboration with trading partners within the supply chain in order to reduce the overall cost per transaction. Many internal costs cannot be reduced without tight collaboration with trading partners; this is where most money can be saved.

Once again, this is evidence of the way that effective IT systems both forces cultural change on a company and can be used to assist that change. The use of IT to provide Business Process Automation is helping to reduce operational transaction costs and maximize efficiency as well as providing the ability to monitor all aspects of the business and supply chain performance. This impacts the business in many positive ways, but it means the organization has to adapt not only its culture, but also its understanding of the business processes across the supply chain in order to fully realize the benefits.

Accurate replenishment

The expected demand, inventory storage method, existing stock levels and the physical supply network form calculable situations whereby replenishment suggestions can be made by an inventory control system. These suggestions are available online for evaluation and can be integrated directly into the core ERP system to enable automatic entry onto purchase orders.

Accuracy is one of the most critical factors when it comes to inventory control. For example, faulty lead-time figures in inventory calculations have a direct and negative impact on subsequent calculations. To assure accuracy and to measure current performance, inventory optimization provides multiple methods for analyzing current performance. These cover the volume and value of stock, seasonal trends, excess, lead-time analysis, demand variation analysis and automatic user-defined purchasing suggestions.

It is also important to have a fully integrated system that captures true demands and requests instead of simply uploading delivery statistics from the ERP system. The system needs to be ‘clever’ enough to know that if a customer is asking for a blue pen from one warehouse but, because these are unavailable they receive a red pen from another warehouse, the demand figures should show the original request, particularly as this is what the customer will probably ask for next time.

Handling customer requests and returns

In highly competitive distribution industries, service is often a crucial differentiator. Companies need tools that support decision-making and provide more flexibility to help face business challenges. They also need to respond effectively to requests to suppliers for rebates, as well as handling incoming customer returns.

When a product is returned, there are a number of variables associated with it. Was it delivered in error? If so, it probably needs to be returned to stock. Was it a damaged or poor quality product? If so, it will need to be returned to the supplier and a request for reimbursement created. These are processes that can be automated as part of an inventory optimization system.

There are some issues, such as batch recalls, that need to be carried out as quickly and efficiently as possible. To handle these effectively requires software that can track particular batches and ensure they are collected for return to manufacturers or suppliers. Quality control can be carried out on the stock returned by customers and these results can be reflected in the request, regardless of whether or not there are any faulty items.

Conclusion

Companies that will be successful in the long run are those that realize the answer lies in maximizing supply chain efficiency. This means exploiting integrated applications that increase automation and collaboration throughout their businesses, allowing them to meet customer demands faster and more accurately, generating greater competitiveness and profitability.

 

Case study - 25% stock reduction at Swiss pharmaceutical wholesaler Galexis

Swiss pharmaceutical wholesaler Galexis AG has significantly improved its stock management and replenishment with an inventory management system from IBS. Galexis has achieved tangible cost savings in procurement and goods reception, and has also been able to reduce its stock levels while maintaining a high availability rate. The optimization of Galexis’ processes was made possible by continuously monitoring and adapting the potential of the standard inventory management software on the basis of business experience and the sales development of the products. As well as the core modules, which form part of the comprehensive solution implemented at Galexis, the Swiss wholesaler also relies on the industry-specific software IBS Pharma to cover all its supply chain processes in pharmaceutical wholesale, from order processing to delivering products to pharmacies.

“The goals we set for ourselves were sustainable and reasonable stock reduction and increased automation of the replenishment processes,” says Niklaus Sägesser, procurement manager at Galexis and responsible for the optimization project. “These goals have been reached dead-on: Meanwhile all of the 40,000 items stocked in the three distribution centers have been integrated into the new system and a warehouse concept based on optimum stock levels has replaced the one based on minimum stock levels. As a result we have reduced stock levels by 25% and increased stock turnover from 12 to 17 times for common products and even up to 22 times for specialty Pharma products – without influencing availability which has always been considerably high. The proportion of fully automated procurement has risen from 38% to a current 50%.”

Joint project

IBS and Galexis set up a precise roadmap for optimizing procurement planning, which was rapidly and successfully implemented at Galexis distribution centers at Bern-Schönbühl, Zürich-Schlieren and Lausanne-Ecublens. At the center of this inventory control software is a matrix with a volume value code, which quantifies the revenue ratio of each product based on traditional ABC classification. It also contains a movability code, which defines the throughput time from slow-movers to non-movers.

This provides a stable basis for a sophisticated solution that can cope with the various parameters for each stock item. For example, to lower stock levels for some segments and to minimize procurement and reception processes for others. This two-dimensional matrix provides an accurate segmentation of the 40,000 stock items and supports accurate purchasing suggestions, which improves inventory availability and reduces the time and effort required for effective procurement. The potential for increased efficiency, speed and profitability became evident after a very short time across all three distribution centers. “In the reception area, too, the reduction of reception lines by 20% will lead to a tangible increase of efficiencies,” adds Sägesser.

Increased efficiency through automation

A purchase suggestion generated automatically by the system, based on past orders as well as current and future stock data, is much more efficient, accurate and cost-effective than a manual suggestion. Galexis defines a purchase suggestion as “automatic” when the quantity suggested by the system is transferred to a purchase order without further review. In the optimization process the automation rate has been increased from 38% to 50%.

In addition, seasonal profile control and trend analyses are planned to refine forecasts and hence to improve the quality of purchase suggestions. Further aspects concerning product life cycles will also play a more important role in the calculations.

Convincing results

Investment in the optimization of existing standard solutions has been a real success for Galexis in many ways. For a comparatively small effort, Galexis now has a purpose-specific control instrument, which significantly improves critical processes in stock and procurement management.

The solution also comprises tools that verify which items have been ordered according to the system’s suggestions. This allows Galexis to quantify the automation rate in processing purchase suggestions, and give procurement planners a reliable tool to check the relationship between system parameterization and procurement behavior.

Inventory Optimization: Five Steps to Improve Process Effectiveness

Inventory Optimization:

Five Steps to Improve Process Effectiveness

Structured approach to global inventory planning and control helps manufacturers maintain high customer-service levels and reduce variable costs.

Inventory Optimization: Five Steps to Improve Process Effectiveness

• 1.  Take a business assessment
• 2.  Develop the inventory plan
• 3.  Execute according to the plan 
• 4.  Measure performance against the plan
• 5.  Ensure continuous improvement 

Amidst the recent continued economic volatility, C-level executives’ focus has shifted from revenue growth to profitable growth, and hence global supply chain performance has gained a great deal of attention. As global supply chains are devising ways and means to respond to unpredictable customer demand and increased competition, one of the greatest challenges they face is achieving inventory optimization while maintaining higher customer service levels and reduced variable costs.

In my experience of working with a number of clients in the energy and chemicals market within manufacturing, in addition to some in the consumer packaged goods (CPG) and pharmaceutical markets, I have observed some common challenges facing these industries, including:

·Ineffective Master Data Management: Data definition and data quality are common pain areas across industries, driven by acquisitions (multiple disparate systems) and lack of data management practices. These organizations are sitting on a pile of data, without being able to use this data for effective decision making. For example, almost all of the clients I worked with had inaccurate procurement and manufacturing lead times in their transactional systems, leading to judgment-based inventory planning. Inaccurate planning leads to frequent expediting and de-expediting and the resources were constrained by available capacity. To free up capacity, each component in the value chain buffers the lead time component and this lead to excess ordering and stocking to meet customer service levels.

·Individual goals not aligned to overall objectives: While all of the clients I worked with believed that cycle time reduction would bring a competitive edge to their business, and had an overall objective of reduced order-to-delivery cycle time, individual elements of the overall cycle time did not have any goals around lead time adherence. Similarly, procurement and logistics functions were measured on cost savings only, while CXOs’ objective was to improve customer service levels and working capital. There were no processes around supplier or freight forwarder performance management on fulfillment or lead time adherence, or the processes were so ineffective that it didn’t drive any actions or behavior.

·Lack of communication and collaboration: Whether it’s within the organization or between supply chain partners (customers and suppliers), lack of communication and collaboration was one of the top three challenges across industries. Here’s a typical example: New product development or R&D developed a new product without involving procurement, which resulted in procurement of customized parts from specialized suppliers, resulting in higher total cost of ownership. In some cases procurement was involved during new product development, but quality control were not informed of the raw material testing requirements.  This resulted in material rejections and a poor supplier relationship.

To address these challenges, I recommend a five-step structured approach to set up an effective global inventory planning and control process, as follows:

1.  Take a business assessment

Assess business functions and processes in their current environment. Start with an understanding of the current order-to-delivery (OTD) process. Devising a future state while identifying gaps and improvement opportunities will set the momentum to accelerate change acceptance among the cross-functional teams involved, including sourcing, planning, commercial operations, stockroom and manufacturing. Key activities in this stage should include:

• Study “As-Is” planning and execution process within the OTD process. Aim to have an unbiased assessment of current processes and practices. Start by interviewing a representative set of stakeholders who perform the same job within each function of the OTD process. Follow up with brainstorming sessions that involve key stakeholders from each function, which will help them understand their upstream and downstream process and address any issues arising out of lack of clarity of roles and responsibilities. These stakeholders should also voice their opinion on the desired “As-Is” state to establish a baseline against which improvements can be measured, and to effectively manage change through shared responsibility among their teams. Organizations should also consider conducting lean workouts among a cross-functional team of subject matter and Six Sigma process experts to understand redundant and non-value-added steps in the process due to multiple hand-offs between various functions within the OTD process.
• Summarize findings and gaps in data, process and practices. One of the ways to effectively capture the gaps in material planning and execution practices is through self-evaluation score sheets. A score sheet typically enlists the various planning and execution categories, and asks the functional owners to score according to the importance and effectiveness of each practice. Typical scoring criteria used is 1 (low), 5 (medium) and 9 (high) to clearly differentiate high impact gaps from lesser ones.  For a more robust and objective view,  third party service provider can also assist with benchmarking current processes against some of the best run companies in the industry.
• Devise “To-Be” planning and execution OTD process. Resource and system limitations may warrant a “To-Be Intermediate” state before moving to the ideal state. The objective is to outline a streamlined, robust and sustainable process that is aligned to the overall objective of optimizing inventory, customer service levels and variable costs. Organizations then begin to migrate to ideal state once resource and system limitations are addressed.
• Communicate to the whole group the identified improvement opportunities and goals. One of the biggest challenges faced during assessment is change resistance. Data-based inferences and identification of change catalysts is the key to driving fast adoption of more easily implemented improvements. By seeing immediate results, stakeholders will be better engaged to support additional and more sweeping process changes.

2.  Develop the inventory plan

Complete and accurate data is fundamental to developing an inventory plan. Start with the data gaps identified during the assessment phase. Next, determine data availability and data quality along with their operational definitions for effective inventory planning and control. Having clear operational definitions is extremely important for process standardization and improvements, specifically if the business has grown through acquisitions and has multiple data sources and nomenclatures. Inventory planning is driven by accurate data pertaining to:

·         On-hand inventory

·         Open orders (sales, production and purchase)

·         Lead time

·         Standard or average cost

·         Bill of material (BOM)

Developing an overall inventory plan should involve the following steps:

·Classify parts into three segments: raw, work-in-process or sub-assembly, and finished goods.

·Categorize each segment into stock and non-stock categories (purchase to order or make to order).

·Plan for each segment, independent of the other others involved in the process.

·Classify raw material stock using multi-criteria inventory classification to lay a good foundation for success.

·Calculate safety stock and minimum order quantities by part to optimize inventory and transaction costs while achieving service targets. Develop a theoretical raw material inventory plan based on calculated safety stocks and order quantities.

·Repeat the exercise for other segments and come up with an overall inventory plan to meet the desired service levels.

·Identify initial inventory impact and planned inventory investment.

·Once a plan is developed, upload the planning parameters into transactional systems.

3.  Execute according to the plan 

Once the inventory plan is developed, it is important to execute to the set plan. Any exceptions to deviate from the set plan needs to be approved by management to ensure discipline. Executing to the plan involves the following steps:

·Ensure tight adherence to inventory planning and ordering policies at part level.

·Establish process controls to ensure data quality and consistency.

·Synchronize production schedules to the materials plan.

·Establish a robust supplier performance management process that captures effective contract management, performance measurement and metrics, performance review and control mechanisms, and recognition systems. Timely raw material availability is the key to optimal inventory planning, as poor quality of materials could lead to poor yields and costly reworks.

·Simplify, standardize and digitize the process globally to minimize efforts in routine execution.

·Set up a process around Delegation of Authority (DOA) to ensure disciplined and

4.  Measure performance against the plan

Organizations can’t improve what they don’t measure. Ongoing monitoring and control is key to sustain improvements, organizations should focus on near real time visibility into supply chain performance measures to proactively root cause for deviations from plan, and to take corrective actions. This step should involve:
* Establishing key performance indicators (KPIs) and metrics for each process. For example:

(a)    Planner metrics provide visibility into a planner’s performance on service levels: safety stock investment, ordering costs and total excess inventory value.

(b)    Supplier scorecards with delivery, costs, quality, responsiveness and reliability related metrics highlight top and poor performing suppliers.

(c)    Workforce productivity to drive “first time right” culture and to minimize rework and associated wastes that would consume quality time of workforce.

(d)    Production span measures overall production variations and identifies root cause variations in each work-center.

* Establishing process controls through periodic monitoring and reports.
* Empowering and encouraging people to document and share best practices and recognizing people delivering exceptional results.

5.  Ensure continuous improvement 

To meet complex and volatile customer demands, while ensuring profitable growth, organizations should focus on continuous improvements leading to faster movement of materials and information. This step should involve devising a mechanism or practice in order to:

·         Capture root causes for variations in the plan.

·         Conduct periodic reviews to discuss impact areas, assign ownership and establish timelines to facilitate resolution.

·         Run continuous improvement programs such as Vendor Managed Inventory (VMI) and consignment stock agreements with key suppliers.

·         Reduce cycle times and lead times within the order to deliver cycle, to minimize forecasting errors.

·         Minimize the ordering quantities and safety stocks.

·         Establish a data-driven decision making process.

·         Enhance and retain workforce materials knowledge.