Inventory Management: Keep It Simple, But Not Too Simple
Inventory management is a key component of running almost any business, and yet so many struggle. The problem is that there is either no system in place, or the system is far too simple. The key is to keep it simple, but not too simple. How?
Let the system be 'complicated', but let running the system be simple. Let's look at a simple example.
Many businesses have a baseline inventory system, meaning they need at least X days of supply regardless of the demand variance or desired service level of the product at any given time. While this is simple, it isn't very efficient.
By using more sophisticated systems and analytical tools, the Wall Street Journal found that companies improved inventory control by 20 to 50 percent, resulting in years of savings. These costs are savings that would not ever noticed as 'waste', because they actually do go to useful product. However, it is an inefficiency, and that capital could be in better inventory.
What does more sophisticated mean?
Rather than just a base line of required inventory, having an understanding of fluctuations in demand throughout the year. These demand curves are far more accurate and protect costs better than simple baseline standards.
Determining the correct amount of safety stock needed to meet the desired business goals are done at a SKU level. By considering the historic variances in demand, these systems can more accurately calculate the amount of safety stock needed and in many cases result in inventory reductions with no decrease in service level.
Again, the systems that are put in place that determine these inventory needs are complex, but easy to use, in order to keep the actual management simple and efficient. The easier it is to actually use the system, the more likely it is to be used and followed.