By Charles N. Smart
Current economic conditions are challenging everyone's business. This is especially true for companies in the manufacturing and distribution sectors that have a large percentage of their supply chain resources tied up in inventory. With credit tight, these companies are looking for ways to preserve as much cash as possible. Because inventory is cash sitting on the shelves, a prime way to reduce costs and increase cash flows is to improve the forecasting and planning of inventory requirements.
However, because we are dealing with an economic situation distinctly different from those in anyone's recent memory, the forecasting of demand and management of inventories is even more challenging than it might otherwise be. Given these uncertain times, it may be a good idea to step back and consider what your company can do now to improve its demand and inventory planning and thus increase its chances of survival in today's turbulent economy.
For those of you with demand forecasting and inventory planning software, if you're like most software users, you're only benefiting from a small fraction of its capabilities. We've found that's because users of these applications normally do not have the time available to implement new features or truly appreciate the utility of advanced features. However, in these challenging times, adversity should be a catalyst to get you to implement some of those powerful features that can have a real positive impact your business.
Depending on the software application you are using and the needs of your organization, here are a few things you can do. Please don't be surprised if they require a reallocation of priorities and/or resources to put more time into training. But if done well, they can have a rewarding payoff that not only helps your company in the short term but also positions it for success in the eventual long-term economic recovery.
Optimize Your Inventories
In tough times, you need to get a grip on inventory. It costs you to acquire it, store it, insure it and ship it. Your company's goal should be to stock the optimal amount of inventory needed to satisfy product demand over a specified lead time and at a desired service level. Doing this successfully will help you to achieve balanced inventory levels, reducing over-stocking and under-stocking, and also uncovering obsolete inventory.
You need to find a way to generate accurate estimates of safety stock and inventory levels based on demand patterns, lead time and desired service levels. And, because the cost of trans-shipping products can be so high, you need to do it for each of the distribution/stocking locations in your supply chain. With the right software solutions, you should be able to automatically generate accurate estimates of stocking requirements to help "right-size" your inventory levels. This will let you determine how much you should have in stock for each item at each location, showing you where you're over-stocked and under-stocked, and pinpointing your obsolete inventory.
Prioritize Service Levels for Your Products
In these tough times, certain product items may be more important to your company's success than others. For this reason, you'll get even better results in your inventory planning if you prioritize service levels for your products. To optimize inventory and maximize sales, service levels should be set high (90-99 percent) for those items highly demanded by budget-conscious consumers, but can probably be set much lower (70-80 percent or even less) for other items. Try doing a revenue-based ABC analysis of your company's stock-keeping units (SKUs) and set service levels accordingly in your software planning solution. You may find that you need much less stock for many of your SKUs than you previously thought.
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