It is important to be aware of how much stock or inventory is being stored. Accurate control over inventory the stocking process leads to timely order fulfillment and therefore positive cash flow. Inventory is thus the ‘Ace’ of the supply chain game. However, being over-stocked can erode profits.
Inventory should be dynamic and cycled through the warehouse as quickly as possible. If inventory is stored for too long it will cause expensive problems as well as cash management issues.
Businesses usually base inventory needs on projections/forecasts. Storing a considerable stock is an advantage as it reduces the chances of running into “out-of-stock” situations. It is estimated that out-of-stock levels are at 8.3% worldwide with faster sellers and promotional products at 10%. As a result, retailers lose around 4% of their sales. However, there are several disadvantages of holding a large stock. The major ones are:
There are several reasons for goods getting accumulated and not being sold as expected or predicted. These vary with different industry sectors. Here is a list of the common ones:
Relying heavily on historical data : While it is a common practice to rely on historical information for projections, history may not always be a correct predictor of the future. Market situations can fluctuate wildly and goods may not sell as expected. Result—an inventory pileup.
Inappropriate or unethical practices : The production company inflate sales revenue by offering its wholesalers/distributors extra-attractive discounts. In turn, wholesalers/distributors force it on to retailers when there is no actual demand or consumption. Called “channel stuffing,” this unethical practice makes the production company business look good, but creates inventory pile up for retailers.
Sudden market changes : While all internal factors are in order, external market or political conditions can trigger unusual situations. A classic example: our beloved smart devices which are constantly upgraded with features that make perfectly functioning devices obsolete.
Avoiding pileups starts with shifting focus from projections/forecasts towards planning strategies to improve utilization.
Incentivize actual sales and profits : Marketing can aim to make the product hero and not the promotions. Promotions and discounts have little long-term impact on sales and, at times, sales promotions actually dilute brand value. Therefore, management should focus on incentivizing actual sales and profits.
Change in production planning methodology : Planning based on historical information can be deceiving. Real-time sales information should be taken into account as well. In the case of B2B, businesses can query customers to gain further insight into future demand estimates.
Pull-off replenishment method : This means a product is produced and shipped only when the product is ‘sold.’ This seems like an ideal option, however, management experts need to weigh its feasibility against factors like competition in the market and delivery time-frames of industry peers.
Monitoring for simplicity : Constantly monitoring the supply chain operations for streamlining and simplifying operations helps. No process can be made ‘effective’ unless constantly monitored for improvement.
Effective management of inventory enhances supply chain operations in several ways. It helps execution of orders on time and thereby improves cash flow.
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