The cost of inventory distortion can be high for businesses competing on thin margins. Imagine the horrors of a clogged-up supply chain, inflated storage and logistics prices, and dissatisfied customers who rarely give second chances. By optimising your inventory to align with actual demands, you can minimise stockouts and achieve significant cost reductions.

Let’s discuss key techniques and strategies for rightsizing your inventory.

Why inventory optimisation should be a top priority

Did you know retailers in the United States are sitting on $740 billion in excess inventory?

The maths is simple: unsold goods do not generate profits for you. Stockouts or excess inventory snowball into lost sales, wasted capital, and unhappy customers. That’s why rightsizing inventory must be a top priority for businesses operating on tight budgets.

The goal is to have just enough of the right items in the right locations to fulfil demands.

Compared to a system riddled with inefficiencies, efficient inventory management systems lead to a lean, proactive, agile supply chain.

Why do you need to manage and optimise your inventory?

Inefficient Inventory Management Efficient Inventory Management
Inefficient Inventory Management
Stockouts lead to missed sales and the loss of customers.
Efficient Inventory Management
‘Just enough’ inventory is always available, and stockouts are rare.
Inefficient Inventory Management
Excess stock ties up working capital while accumulating storage and handling costs.
Efficient Inventory Management
Avoids unnecessary capital lockup, as inventory matches ongoing demands.
Inefficient Inventory Management
Outdated or expired items occupy warehouse space without generating ROI.
Efficient Inventory Management
Sustainably minimises waste and write-offs in stocks.
Inefficient Inventory Management
Production slowdowns occur when raw materials are unavailable.
Efficient Inventory Management
Smoother production operations, as sourcing is done based on accurate forecasts.
Inefficient Inventory Management
Your supply chain is thrown off, severing customer and partner relationships.
Efficient Inventory Management
Brings harmony across all links in the supply chain and better collaboration with partners.

9 inventory management strategies

First, let’s understand how inventory flow works.

It’s simply the journey your goods take, from raw materials to the point of sale, through several intermediaries. Inventory management systems support this journey, ensuring the flow is continued and efficient.

Now, how do you get the maximum output from these systems? Here are some tips:

  1. Implement standardised processes

    Standardised procedures help you avoid unpleasant surprises. Pick what works for your business needs, demand patterns, and supply chain. For example:

    • Reorder point (ROP): the minimum stock level before replenishing an item as per lead times and demand rates.
    • Economic order quantity (EOQ): calculates the ideal reorder size by factoring in ordering and holding costs.
    • Days sales of inventory (DSI): measures the average number of days a business holds stock. A lower DSI signifies efficient inventory turns.
    • Cycle counting: involves regularly auditing select items to verify stock accuracy.
    • Other processes like ‘first expired, first out’ (FEFO) and ‘first in, first out’ (FIFO) optimise usage and reduce waste for short shelf-life goods.
  2. Use ABC analysis in inventory management

    Divide your inventory into three categories based on annual consumption value and demand:

    • High: A items are top 20% by value. Prioritise their availability and keep safety stock, as they have the highest impact on profitability.
    • Moderate: B items are mid 30-40% by value. Monitor the stock regularly.
    • Low: C items are bottom 40% by value. Review the stock quarterly or biannually. You may not need safety stock here.

    For example, a mobile phone manufacturer would classify expensive processors and LCDs as A items and other electronic components as B or C based on their consumption value.

  3. Implement lean ‘just-in-time’ models to cut waste

    With just-in-time (JIT) inventory management, raw materials or components arrive just as they are needed in the production process.

    • JIT inventory reduces warehousing expenses associated with holding excess stock.
    • For example, cellphone makers can follow JIT practices to procure touch panels only when a production batch is scheduled.
    • It can be risky if not supported by accurate systems for supply chain forecasting and collaboration.
  4. Liquidate slow and obsolete stock (SLOB)

    SLOB holds up much of your inventory and adds to warehousing and handling costs. So:

    • Analyse your sales records and inventory age to identify dead stock that has become obsolete or unlikely to sell.
    • Liquidate such inventory through fire sales, auctions, supplier returns, or safe disposal.
  5. Use data for accurate demand forecasting and visibility

    You may be sleeping on an ocean of data across your supply chain. Utilise it to optimise your inventory levels:

    • Regularly review past sales records, invoices, and POS data to uncover demand patterns, seasonal fluctuations, and historical variability. This will help you identify trends and project future inventory needs.
    • Implement barcode scanning, RFID tagging, and IoT sensors for real-time visibility into item movement and transactions.
    • Leverage predictive analytics and artificial intelligence and machine learning to create highly accurate demand forecasts.
  6. Optimise your overall supply chain

    Inventory is interlinked with other elements of your supply chain. So:

    • Go beyond internal data to incorporate demand signals from external supply chain partners and stakeholders.
    • Factor in vendor supply availability, logistics lead times, and retailer promotions for better coordination.
    • Choose reliable logistics providers to ensure predictable transportation capacity and shipment visibility.

    Maersk offers visibility into delays, disruptions, and shipment arrivals so you can adjust your inventory plans dynamically. Explore our supply chain and logistics solutions.

  7. Negotiate better terms with suppliers

    Try to get better deals with your suppliers to ensure supply stability and lower costs.

    • Suppliers often keep higher minimum order quantities (MOQs) for each order, which may increase your holding cost and create cash flow blocks. Negotiate lower MOQs for more frequent, smaller orders.
    • Discuss volume flexibility to handle unexpected demand surges, especially for essential items.
    • Use multi-sourcing to create competition and have backups in case of disruptions.
  8. Automate key inventory operations

    Integrating technology with some parts of your inventory operations boosts accuracy and speed.

    • Automate reorder points (ROPs) with inventory management software to ensure parts/materials are replenished proactively as stocks deplete.
    • Leverage robotic process automation (RPA) for repetitive tasks like validating order receipts, updating inventory records, and stock takes.
  9. Leverage digital tools in the supply chain

    With digitisation, you can bring more visibility, coordination, and efficiency to your inventory processes.

    • Implement integrated logistics and supply chain solutions that centralise all your data and bring 360-degree insights for efficient inventory planning.
    • Use APIs to integrate your inventory management systems (IMS) with other tools for better data exchange within your business operations.
    • Work with reliable logistics partners offering end-to-end digital capabilities to streamline your supply chain.

Adaptable and lean inventory models build resilient supply chains. Take control of your inventory by leveraging technology, implementing disciplined processes, and choosing efficient logistics partners.

At Maersk, we give you end-to-end visibility into your inventory health and optimisation opportunities across your supply chain. Explore our supply chain services.

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