Inventory flows reveal a lot about the health of a company, and 2020 put many stresses on inventory management processes. There were demand shocks, rising transportation costs, supply chain shortages, labor constraints and many other impacting factors. Manufacturers and distributors were suddenly faced with a slew of underperforming SKUs while others were in short supply.
The start of 2021 is a good time to review trends, make decisions and plan for the future.
Bring Data-Driven Decision Analysis Into Your Inventory Management Processes
Relying only on historical performance to support your next annual plan may prove detrimental. The new environment in which manufacturers and retailers find themselves requires detailed, data-driven analyses to accurately manage at the portfolio and individual SKU level.
Third-party data and trend analysis should be procured and analyzed. The insights gleaned will provide a competitive advantage. Customer-level data should be parsed looking for trends in all relevant areas. A good place to start is by product attribute (e.g., color, performance, count). Product data should be cross-tabbed with customer types in an analysis of velocity, lead times and margins. (Watch out for geographic or seasonal differences). Done well, these types of analyses can improve purchasing, warehousing and profitability. They can also help prepare the business for continued external shocks.
Utilize these data across profit centers to drive discussions with your supply chain vendors, segment customers, improve fulfillment and drive future investments. A look at some key action areas within each category will highlight the numerous options companies have for improving their operational stability and profitability.
Reduce Costs in the Supply Chain
Focus on increasing flexibility, improving negotiating position and limiting disruptions to reduce total costs across your supply chain:
- Increase communication across your supply chain to increase flexibility including forecast planning to lock in capacity.
- Diversify risk and lower distribution costs with additional vendors or co-packers.
- Utilize warehouse space at co-packers, and ship direct to larger customers.
- Seek to align purchase orders with inventory on hand and sales order frequency.
- Consider contractual purchase agreements to lock in pricing and capacity.
- Increase purchasing position by utilizing financial tools, like LCs, to offset payment risk.
Make sure to communicate early and often. Be a partner, not just a customer.
Use Customer / Demand / Segmentation to Improve Inventory Management
It’s easy to lose sight of some customers. To let stock sit on shelves. To focus too much on customers that buy in bulk vs. those that buy less but more often. Or to take the sale in front of you regardless of margin. To improve your inventory management processes, try the following:
- Increase information sharing with your customers to improve your DIO (i.e., days inventory on hand). Gather feedback on your product to perfect the amount of inventory each customer should be holding in their warehouse and stores.
- To evaluate SKU proliferation across customers, analyze products at the attribute, SKU and category levels. Use multiple data points to reflect changes in customer preferences and help drive replacement of slower moving, less profitable SKUs.
- Limit customers’ product options when data suggests only certain SKUs be stocked – not every sale is a good sale if it takes up space from higher velocity SKUs.
- Don’t lose focus on keeping customers to the detriment of building new pipelines.
- Be willing to lose a sale to maintain better overall profitability. This level of planning chaos will normalize again, and you don’t want to be worse off from discounting now.
- Periodically determine the financial viability of your larger customers, and monitor all collections in a timely manner.
- Revisit or consider customer agreements that require high levels of committed inventory on hand. Or negotiate new agreements to lock in new customers or better shelf placement.
Focus on creating a mutual benefit for you and your customers. It may help to weather demand or supply shocks and maintain your customer base.
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Working Fulfillment into Your Inventory Management
Managing the entire fulfillment process from production through logistics and ending with billing supports the sales organization. Here are some tips for considering fulfillment in your inventory management processes:
- Capacity is the main constraint, and it will take time to add warehouse footage and shipping partners. Maximize existing warehouse space across your operations from your suppliers, warehouses and customers.
- If you have more than one warehouse, evaluate positions across the system to ensure items are optimally placed. Use a variety of data points like order fill rates, shrinkage and overage, store-level and distribution center levels on hand and dating to understand the opportunities and risks across your footprint.
- Look for seasonality patterns that may suggest that some warehouse space could be subleased out periodically to companies with alternating seasonality to offset costs.
- Work with your customers on their inventories and warehouse procedures so that your product doesn’t get lost or sit, especially with customers that have a right of return. Help them manage your SKU placement and velocity.
- Availability will still be a driver of increased distribution costs for the near future. Procurement of warehouse space near rail and population centers will be critical.
- Within a warehouse, position faster moving items closer to outbound locations to improve order cycle time and improve picking accuracy.
- Maintain focus on in-transit inventory to prevent delays as re-routing orders are becoming more common.
As e-commerce continues to grow, expect availability across the fulfillment system to limit growth for some companies, forcing logistics and SKU management to the forefront.
Invest in the Future
Investment in the future needs to remain a key component of inventory management processes and current business plans.
- Automation of facilities will yield benefits from space savings, lower building costs, improved productivity, more efficient flows, fewer people and safer operations that will lower operational costs.
- Invest in systems such as inventory management modules, especially if the existing financial software does not include it.
- Consider investing in certain customers – pay for placement in exchange with new customers. Don’t invest with customers that are not meeting your investment or are not moving your products.
- Create value by letting go of underperforming SKUs. Use the cash spent on slow moving inventory to promote new items or those with higher velocities.
- Divest underperforming SKUs and use this trapped capital to support existing channels or new product development.
- Develop fallback positions as part of your business contingency planning. Understand and update footprint options in the case of port delays or surges in competition for rail or truck, and consider locking-in production capacities with additional suppliers.
Understand that perfect efficiency may not be the ideal objective given the frequency of demand and supply shocks that many industries have been facing. Investments in future performance may take longer to achieve returns.
It is time to reassess your inventory management processes. Given the complexity of the task and the specialization it requires you may want to reach out to experienced, external consultants for assistance. Visit our manufacturing finance consulting services page to learn more, or contact us directly.
If you’d like to improve your long-term planning, you can also download our project timeline, which offers insight into how to create a five-year strategic plan:
Categorized in: Financial Planning & Analysis, Manufacturing