The solution for some, as was written previously on this topic, is to carry excess inventory to compensate for deficiencies in the supply chain management. This only adds to the cost. It has been estimated that annual inventory carrying costs can comprise up to 20-35% of total product value.
Maybe it's time to rethink inbound inventory management. Instead of "reducing" inventory, optimize it. A combination of proven practices supported by inventory data analytics and vendor participation can lead to optimized inventory management. Organizations can improve end-to-end visibility, heighten inventory accuracy, and free up capital not nested in excess inventory.
Starting with the production line and working from there, these seven steps can augment inventory optimization:
Step 1: Use standard pack and packaging. From the right packaging to the right-sized container, deliberate attempts at standardization can ensure two hours of material is at the line side, for example, as opposed to two days' worth.
Step 2: Create end-to-end supply chain visibility. It's been said that organizations will over-order to counter a lack of confidence in the supply chain. Instead, boost supply chain visibility. Using supply chain design software, organizations can tap data to discover inefficiencies, identify problems and analyze solutions. With improved accuracy comes increased confidence - and reduced over-ordering.
Step 3: Make sure all key departments are informed and on board. In many organizations, logistics, purchasing, packaging or a host of groups are empowered to make decisions affecting the supply chain. Do they know how those decisions will affect others? If not, teach them. Engage packaging engineers to help educate these disparate departments better understand their role in - and impact upon - the supply chain.
Step 4: Forget local, you're global. In the global economy, inventory is sourced worldwide. So manage it at a global level. Modern inventory management optimization requires an understanding of lead times and transit times, for example, or the power - and weakness - of consolidated freight. Think beyond the implications that steered 20th century logistical decisions and take a 21st century global view.
Step 5: Consider vendor managed inventory (VMI). In this symbiotic, shared-risk model especially embraced by international shippers, suppliers own, manage, store and ship the inventory. Upon its arrival at the buyer's location, often a manufacturing facility or warehouse nearby, the buyer takes ownership. VMI works best after a thorough analysis and, if pursued, with guidelines and expectations in place.
Step 6: Put product in the right place. Warehouse slotting, also called profiling, seeks to place stored inventory in the optimal location in the facility. With the help of an industrial engineer and data on inventory flow, a slotting blueprint will place products based on proximity or anticipated need. This can improve warehouse flow and overall efficiency.
Step 7: Demand supplier compliance. Organizations may have well-optimized inventory management solutions. But if their suppliers are sloppy, over-ship product, miss delivery schedules, or fail to provide accurate or current data, efforts at optimization are wasted. Supplier compliance is essential. Hold them accountable.
Supply chain inventory optimization is not a one-time act, but an ongoing habit. By adhering to best-in-class inventory practices and pursuing constant improvement, manufacturers can reduce dock-to-stock cycle time, improve order-picking accuracy, free up capital, and optimize overall inventory management.