Tips and insights: inventory management

Effective inventory management is about managing each stock keeping unit (SKU) in each stocking location (SKUL). Management of individual “A”-item SKUs (the 10 percent of SKUs making up 90 percent of revenue, volume, profit, etc.) is necessary, but other less critical items can be managed in groups of similar SKUs (“B”, “C”, etc.). Here are some important guidelines to consider.

5 tips for inventory management

  • Manage SKU categories by location

The basis of effective inventory management is managing each SKU category in each location. A central distribution centre (DC) may hold more or different SKUs to regional DCs. The reason for this categorisation is for each SKU at each location to be linked to clearly defined policies related to that category. Customer service targets (in terms of stock availability and lead time from customer order to delivery, or delivery in full on time (DIFOT)) must be clearly set for each location and SKU category.

  • Set customer service levels for each stock location for the footprint that it serves

The aspect of service level that is a direct result of inventory is that of stock availability. This is expressed in terms of a percentage availability of the quantity of a SKU available to fulfil a customer order. This percentage must be stipulated for each inventory category and each customer group. Once the percentage availability is agreed, this can be translated into days of cover for any SKU at that stocking location.

The region served or footprint of each DC or stock location must be clearly defined in terms of both customers and SKUs. This is a basic necessity and a first step to more accurate demand forecasting and the setting of stock levels. Each region must also have clearly defined sales responsibility linked to each salesperson’s KPIs, to ensure that demand forecast accuracy can be measured and linked to specific roles, responsibilities and performance measures.

  • Consider online selling

The region served by each DC or stock location is even more important when online selling is introduced. Fulfillment of online orders from existing stocking locations results in out-of-stocks (for “A” items especially).

  • Forecast demand effectively

Effective demand forecasting that is useful for inventory management must be at a SKU-by-location level and in units. This is obviously not possible for thousands of SKUs, but it is essential for “A” items. All items will be forecast by the computer based on historical demand, but “A”-item forecasts must be supplemented by the relevant sales and marketing teams to reflect future conditions and market activities.

By focusing on “A” items, greater attention is given to inventory that constitutes 80 to 90 percent of the business value. Linking the forecast accuracy to individual’s KPIs is also essential.

  • Set policies and operating parameters

The setting of clear, realistic policies and operating parameters (lead times, order frequencies, review cycles etc.) will result in accurate input values for the formulae used to calculate stocking targets. These values must be continuously monitored and regularly updated to reflect reality.

Indicators of potential for improvement

Inventory management is essential to effective sales and operations planning (S&OP). Here are some symptoms of an inadequate inventory management process:

  • Frequent need for internal product transfers between stock locations and branches
  • Multiple over-stocked warehouses
  • Inappropriate stock mix at the stocking points (too many slow movers; too few fast movers)
  • Excessive working capital tied up in slow-moving obsolete (SLOB) inventories
  • Little formal linkage between the demand forecast and replenishment orders
  • The need for urgent supplier orders and expensive inbound freight options
  • The need for urgent customer orders and expensive outbound freight options
  • Inventory not categorised as “A”, “B”, “C”, “non-stock”, etc. by stocking location
  • Service-level targets not set by SKU category and by location
  • Unclear or inadequate inventory management policies and business rules