Inventory is a pivotal reason why many businesses succeed or fail. Too much or too little has a direct impact on profits and losses. Even global retail giants like Walmart, Nike and Best Buy sometimes encounter inventory problems of massive proportions.
Despite the high stakes involved, many business owners still take a laid-back attitude toward inventory planning. It is only when the numbers head south that business owners start scrambling to fix their inventory woes. Unfortunately, by that point, the losses may already be too big to deal with.
Here are four inventory planning red flags to watch for in order to keep things on track.
1. Frequent Overstocking or Stock-outs
Overstocking means having too much of stock beyond your business requirements. In inventory management, the maximum stock level metric helps identify when your stock levels near or hit the overstock mark.
Maximum stock level implies that there is adequate inventory to handle maximum production capacity. Ideally, no more purchase of inventory should transpire at this point. Overstocking should be prevented because it inflates inventory carrying costs (like warehouse rent, carriage, insurance, extra taxes, etc.) without yielding any benefit to the business.
The opposite of overstocking is referred to as stock-outs. Stock-outs happen when there is an excess demand for inventory than current inventory holding or scheduled purchases. When stock-outs happen, production comes to a standstill which disturbs the entire supply chain. Stock-out situation can possibly harm distributor-customer trust in the business and eventually lead to loss of market share.
Frequent overstock or stock-out situations are clear indicators that your inventory planning process needs to be improved.
2. Deadstock is Piling Up
Deadstock is stock that is no longer saleable. It has either expired, perished or lost its market value. Ignoring market conditions such as changes in customer preferences – and failing to make inventory purchasing adjustments for them – leads to deadstock pile ups.
Many businesses must purchase and stock up on inventory based on annual inventory forecasts. In this case, the annual forecast should be segmented into various equal time periods with special attention to increase in inventory requirement during peak seasons.
Deadstock pile up can be prevented by comparing historical information of inventory purchases and seasonal sales. Such historical information will help you see the big picture of when to buy and how much to buy to meet orders efficiently.
3. Order Fulfillment Rate Dips
Order fulfillment refers to the number of orders or deliveries that are completed, as against the total orders received from customers. Although it is meant to be 100%, businesses often fail to achieve total order fulfillment due to reasons like inventory shortage and logistics challenges.
Inventory planning and order fulfillment go hand in hand. Especially in e-commerce and retail industries, orders are often processed even when stocks are not physically available. This is referred to as a back ordering.
The orders are processed and goods dispatched to customers upon receipt of the inventory. Alternatively, they are also ‘drop-shipped’ straight from the manufacturer’s or supplier’s warehouse to the customer locations.
If inventory planning does not take into account the cycle of receipt of goods and orders to be honored, order fulfillment rate will begin to decline. A business, which has a steadily declining order fulfillment rate, is bound to fail in the long run. And your poor inventory management will be to blame for that.
4. Lack of Real-time Information
This is the era of omnichannel commerce. You have orders flowing in through multiple sales channels on a continuous basis. This makes inventory management complicated. If your inventory management is still based on manual records and spreadsheets, keeping real-time track of orders, inventory movement, cancellations, etc., will be difficult if not impossible.
Lack of real-time information will lead to duplicated order processing or even inventory purchases at multiple locations.
To cite an example, warehouse A at location X will buy the same product that is already available in excess in Warehouse B. This would lead to unnecessary pile-up of inventory and also deadstock in the long run.
If you have experienced any of these red flags in inventory management in the recent days, it’s time to rethink your inventory management procedures. Inventory planning mistakes translate into lost money you will never be able to recover.
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