How Healthy Is My Inventory?

By Brad Walker
Netstock Australia Pty Ltd

In order to assess the health of your inventory, you must have something to compare it to – you need to establish an optimal inventory model to contrast with your current stock levels.
An inventory model is simply an optimal stock level for every product at every stockholding location. The model is based on factors such as your active product range, desired stock availability, forecast accuracy, supply reliability and supply constraints. This can be difficult to determine on your own, but there are systems providers that can perform an “inventory health check” for you - and some will even do it free of charge. Let’s now delve a little deeper into some key aspects of an inventory health check.

Your first step is to understand (and clearly define) what your product range is. Typically you can segment your product range as follows:
• Obsolete products; you will not buy these products ever again, they are dead
• Non-stocked products; you plan to hold no stock of these products but will purchase them when you receive an actual order from a customer
• Stocked products; you plan to hold these products in order to supply your customers directly from stock
The objective is to minimise stock of obsolete and non-stocked products, and to hold the correct level of stock in stocked products to support your desired service targets.

The second step is to understand what your market offer is. Consider the following market offers:

• 99% availability on all stocked products
• 90% availability on all stocked products
• 90% availability on products where you are the market leader, 99% on products where you want to gain market share and 95% on all other stocked products

For each of the above market offers, there will be an appropriate level of inventory required to deliver that level of service. Sales and marketing will always want the service to be as high as possible, but of course inventory investment is constrained by your finances and financial strategies. The key is to find an appropriate balance between your market offer and inventory investment.

The third step is to understand the constraints in your environment, some of which may be imposed on you and some of which are an outcome of how you do your ordering. For example:

• The level of inventory that you hold will be different if you were to order a week’s worth at a time compared with ordering a month’s worth at a time.
• Where minimum order quantities imposed by your suppliers are larger than the actual demand for a product. In extreme cases this may result in you holding more than a year’s worth of stock!
• Your supplier lead times, particularly for overseas products, have an impact on your inventory. Even more important though, is your supplier’s ability to consistently deliver to that lead time.
• Your ability to accurately forecast demand, where selling more than you forecast may lead to stock-outs and selling less than you forecast may lead to over buying and excess.

Once you have clearly defined your range and decided on your market offer, your optimal inventory model (which factors in your constraints and ordering behaviours) will be ready for analysis.
You are now in a position to assess where you are in excess, where you are short and what level of service you are actually providing to your customers. You can choose to target an improvement to your service and also determine whether this can be done whilst simultaneously achieving a reduction in the value of your inventory.

In my next article I will examine in more detail the outputs from an inventory health check and the value that can be derived from it.

To find out more about improving your productivity, contact Enabling and speak with one of our Solution Specialists.

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