Optimized Inventory Management

Optimized Inventory Management

Inventory is a great asset and adds value for an organization by meeting customer needs. However, inventory is typically expensive to purchase and maintain and when not managed properly can become costly; decreasing the value-add for an organization. The difficulties (and opportunities!) are even greater when dealing with perishable products as the turnover on these items is very high.

Dealing with inventory is a basic operational activity and there are many approaches to best manage it. The decision of how much and when to buy is a difficult decision and the appropriate balance between order costs and holding costs should be considered to best manage your inventory. Lots of inventory can be kept for extended periods of time and volume buying can lead to discounted procurement costs. However taking up floor space in a facility, handling stored products, and holding purchased inventory increases your downstream supply chain costs. Determining the most equitable order quantity (EOQ) is important for organizations and considerations of good Inventory management can lead to efficiencies and cost savings.

Even when you have balanced your purchasing and inventory costs there are other considerations that are important for truly optimized inventory management. Safety stock is the minimum amount of stock that must always be kept on hand and will alter an organizations EOQ. Additionally, human factors such as employee motivation, scheduling, training, and difficulty of handling stored products should be considered.

As there are many factors to consider for optimized inventory management it can be challenging to sort through and determine the EOQ’s for your inventory. There are many software applications that can be beneficial to assisting your organization and evaluating the factors that are deemed most important for your organization. The right research or consulting on the best software for your organization will support the decision of how to approach your inventory management.

Inventory Management Best Practices

Automatic Inventory Ordering: Often if an organization has a strong grasp on demand fluctuations automatic inventory ordering can be implemented which can be an efficient method to ensure strong inventory levels. Automatic inventory ordering can cause issues though when demand is less certain and standardized orders will cause over or under stocking inventory; leading to missed sales and or waste.

First-In-First-Out (FIFO): FIFO is an easy system to implement and simply follows that the first stock that comes in is the first stock that flows out. This is effective in managing inventory and reducing waste but also includes a significant increase in work to manage/track stock.
Single Period Inventory Systems

Single Period Systems: This work on the idea that stock is only ordered and sold for a set time period and any inventory that is over or under stocked in that period is a straight loss. This denotes that mis-orders of inventory cannot be adjusted with time. A newspaper is a classic example as it can only be sold on the specific day it was printed for.
First Expiry Date Out

First Expiry Date Out: This is similar to a FIFO system, however, your first in and first out product is based on its code dating. Regardless of the date the product was received, all inventory is organized by code dating and moved through a facility by expiry date to minimize, and hopefully eliminate, product shrinkage.
While the process of optimizing inventory management may be difficult the opportunity for efficiencies and cost savings are considerable when done well. Often it is beneficial to have an outside party identify which factors are the most important for your organization to consider. No matter how your organization approaches inventory management, its role in operations and considering its optimization will be beneficial for the organization as a whole.
 Supply Chain and Logistics Podcast