Inventory Management 101: Time to step up to the plate

High inventory costs, constant stock-outs, low SKU turnover rates and getting stuck with too much obsolete inventory are just a handful of the challenges that companies run into when they don’t use good inventory management practices. In today’s fast-paced, e-commerce/omni-channel distribution world, any one of these challenges can have a negative impact on the bottom line.

However, achieving optimal inventory levels requires a delicate balance. Procure too little of a product and you wind up with stock-outs, lost sales or unhappy customers. Buy too much and your carrying and storage costs go through the roof right along with the number of obsolete products sitting on your warehouse or DC shelves.

“The problem we see most frequently with inventory is that companies have too much of it, and rarely too little of it,” says Ian Hobkirk, president at Boston-based Commonwealth Supply Chain Advisors. “We can show them, mathematically and six ways to Sunday, how to reduce those inventory levels, what the stocking levels should be for each SKU, and so forth. However, at the end of the day inventory is a security blanket that’s largely rooted in emotional decisions—logic just doesn’t apply.”

The good news is that this and other challenges can be avoided—or mitigated—by using inventory management software that provides inventory visibility on a real-time basis. By effectively removing the emotional component of inventory management, and putting real data and insights into a logistics professional’s hands, these platforms enable a more streamlined, optimized, reliable approach to inventory management.

Over the next few pages we’ll explore the key inventory management challenges that are plaguing most logistics operations, show how inventory management solutions are helping them work through those issues, and take a peek at some inventory management innovations that are just around the corner.

Dropping the security blanket

Focused on running lean operations that aren’t plagued by excess inventory or hampered by wasteful processes, more logistics operations are looking at inventory turnover and trying to develop good inventory management strategies. In doing so, these shippers can not only adapt to evolving customer demands, but they can also minimize the amount of working capital that they have tied up in inventory.

Indeed, many logistics professionals are looking to inventory management solutions for help. An otherwise time-intensive process that was traditionally handled with paper, pens, clipboards and scheduled cycle counts, inventory management has come a long way in the last few years. By providing a snapshot of inventory across the entire supply chain (or just a portion of it, if so desired), inventory management systems track the various “moving parts” across the supply chain, thus enabling better procurement and replenishment decisions.

Comprised of software (i.e., a centralized database plus the associated analytical functions) and hardware (handheld barcode scanners and mobile apps that can handle barcode scanning), inventory management solutions also incorporate the necessary documentation, labeling, and reporting procedures (just in time [JIT] and first-in/first-out [FIFO]) needed to create an end-to-end management system.

As he looks around at modern-day inventory management systems, Norm Saenz, managing director at the supply chain consulting firm St. Onge Co., says he’s seeing fewer paper- and clipboard-based tracking systems and says that even radio frequency (RF) barcode scanning is being replaced by more advanced systems. And while most shippers rely on the latter—or, are still stuck in their paper-based ways—Saenz does see a time in the future when barcodes become “old technology” and systems incorporate the Internet of Things (IoT) and mobile devices to track inventory across the supply chain.

“We’re seeing a push for real-time information and inventory visibility, both of which are being pushed by the growth in e-commerce,” says Saenz. “Companies want more efficient ways to serve their e-commerce customers which, from the retail perspective, means gaining better visibility over store inventory across the entire network.” From there, companies must use that inventory to efficiently allocate orders at the store level, and all within a very compressed time frame that’s getting shorter and shorter every year.

Saenz, who works with many firms that are just getting to the first step of barcoding, or that are still even tracking products by hand in their warehouses and DCs, says e-commerce companies are leading the charge and pushing solutions providers to develop more warehouse-centric inventory management solutions. Those solutions must not only support their fast-paced, high-velocity operations, but in many cases also have to integrate with shippers’ material handling systems and warehouse control systems (WCS).

“Vendors are talking a lot about the whole idea of one large, connected warehouse,” says Saenz, “but from what I’m seeing, that’s not necessarily being put into action just yet.”

Inventory: The last domino to fall

Good inventory management may sound like a no-brainer for most logistics managers, but it actually presents some pretty high cultural hurdles for many companies.

“Many times you run into situations where salespeople and marketing departments really want to have a lot of inventory on hand, so that they never miss a sale,” Hobkirk explains. “On the other side, supply chain managers grasp the cost of inventory and want to reduce it, but the salespeople are better at advocating their positions, and tend to scream pretty loudly when too little inventory creates even minor issues.”

In the end, says Hobkirk, even the best data models—and all of the reasons in the world to manage inventory better—still hit a wall, with little or no progress made in that direction. “We see companies move through all kinds of transformative supply chain projects, but inventory projects are the hardest ones to get off the ground,” he says. “Shippers can recognize the logic in opening a DC or putting automation in their warehouses, but inventory management is often one of the last ‘operational efficiency’ dominoes to fall.”

To buck this trend, Hobkirk tells shippers to come up with CEO-led, top-down inventory management initiatives that directly affect sales, marketing, operations and other departments.

Making that happen isn’t always easy, he admits, but the end results are usually well worth it, and come in the form of improved cash flow, lower labor costs, reduction in dead stock, improved forecasting capabilities and enhanced supplier, partner and customer relationships, among a long list of benefits.

Eliminating the emotional side of inventory management

Once a CEO is onboard with the idea of improving inventory management, Hobkirk says that a good first step for logistics operations is to truly quantify the cost of carrying excess inventory.

Hobkirk advises going beyond the value of the products themselves (i.e., the price you paid for them), and look at how much it really costs to store, track, and maintain that extra 20% of inventory that you don’t really need. “Consider, for example, the negative impact on new order fulfillment, or how much time it takes for warehouse employees to navigate around the 20% of warehouse stock that’s essentially ‘dead’ or obsolete,” he says.

These and other realities can quickly turn an inventory “safety blanket” into a money pit for the average logistics operation. Hobkirk adds that avoiding this trap requires some solid rules and procedures, both of which are enabled by technology.

“Take your data targets, add 10% to them, and then use that as a guideline for ordering and maintaining safety or contingency stock,” says Hobkirk. “At least then you’ll be operating with a sound policy—and not making decisions based solely on emotion.”

Future focus

While shippers continue to grapple with the realities of e-commerce and omni-channel distribution, and as they strive to minimize carrying costs while also keeping their sales and marketing teams happy, software and hardware vendors are coming up with new ways to ease those inventory management pain points.

For example, Dwight Klappich, research vice president at Gartner, envisions a time when inventory functions like slotting are managed autonomously, thus removing much of the “human” or emotional component from the process. Autonomous robots will decide the optimum location for a product based on changes in demand, for example, even if age-old company policies discourage such repositioning.

“Many shippers today will run their inventory optimization and choose not to move stuff around because doing so requires labor and time,” says Klappich. However, five years from now, the same shippers may not have a single person working during the third shift, when autonomous lift trucks completely re-slot the warehouse and position inventory in the best possible location for the next morning.

“Right now, moving stuff around requires labor, and that’s just wasted money for the typical company,” says Klappich, who points out that there are currently more than 20 autonomous mobile robot vendors on the market, and probably more to come in the near future. “By refocusing labor on more important tasks, and then allowing autonomous robots and lift trucks to handle inventory-related projects,” he concludes, “companies will be able to more effectively leverage automation on the inventory management front.”