Don’t let inventory management be an afterthought

In Asia wholesale, retail and other stockholding companies are blind to the magnitude and impact of shortages. Furthermore they are also not fully aware of the devastating impact that stock accesses have because of cash and space restrictions. As a consequence they are bound by local optima that drives the supply chain to be efficient rather than effective. Instead of organising the supply chain to operate in a way that will minimise shortages and surpluses, there is a systemic drive to save cost in purchasing and in transportation. This leads to large batches that cause ten times bigger damages downstream the supply chain.

It is time to realise that reducing shortages increases customer satisfaction. Reducing surpluses enables companies to increase their assortment of products, and hereby increasing both customer choice and sales. Lower inventories means faster replenishments. This allows for a better adjustment and matching of the product mix to the actual needs of the customer. As a result there is less need for (long term) forecasting!

Many companies today still think that using an Enterprise Resource Planning (ERP) system solves the inventory problem. This is a mistake. ERP systems mainly register transactions. It shows the actual stock level, what has come in, and what went out in terms of both goods and money. Although ERP interconnects the various functions of a company, you still need additional functionalities to optimise your processes, such as inventory management.

Companies today in Asia often have unexplained inventory shortages of one product and too much of stock of another. Wrong inventory decisions are made due to poor inventory decision support, leading to inventory imbalances. You cannot have standard assumptions regarding min-max inventory levels, but require customisation of each stock-keeping unit. Due to mergers and acquisitions as well as e-commerce, wholesale and retail have seen fast growing number of articles and expanding assortments over the past years. Advanced inventory management software is not anymore a luxury, but a pure basic need.

What role and level does inventory play in your company’s supply chain strategy? What is your inventory strategy? Quite often inventory holding can reach up to 80% of the invested capital of a company. This is true for companies such as technical wholesale, retail organisations, and spare part & service centres. For these companies there are major opportunities to improve supply chain performance through inventory management.

In Asia you still see little practice of regional warehouses. Regional warehouses allow for holding most of the inventory at this central location. This provides flexibility through short replenishing to local warehouses and distributors where the products are actually needed. Furthermore, aggregation causes the forecast at the regional level to be about three times more accurate as compared to forecasting of each individual location.

It is disappointing to see that very few colleges and universities are teaching category and inventory management properly. Academic research is limited in this field, where good academic publications are scarce. As inventory management is of interested to only a handful of people, inventory management concepts taught by professors today are not any different from 20 years ago.

What is necessary to grow you business is a solid analysis and management of inventory to maximise return on invested capital, improve perfect-order percentages, and optimise spending and investments.