The Value of an Inventory Health Check

By Brad Walker
NETSTOCK Australia Pty Ltd

In my previous article I introduced the concept of an inventory health check and the creation of an optimal inventory model. To recap, the inventory model is an optimal stock level for every product at every stockholding location. At a macro level, you can measure the health of your inventory by comparing your actual inventory to the ideal model – the closer they are the better.

The inventory model is a powerful tool that can not only be used to understand your current inventory position but also to determine your future direction.

ASSESSING YOUR CURRENT POSITION
Each product you hold in stock can be classified into one of the following categories according to how its current position compares with the optimal levels:
• Stock-out; where you are already out of stock or will be by the time the next order arrives. Stock-outs often occur when your target stock levels are too low to cover the volatility of demand and supply. Raising the level will reduce future stock-outs and minimise lost sales.
• Excess; where you currently have stock in excess of the optimal maximum level. These products are over-invested and due to financial constraints in the business may also result in under-investing in products that are continually stocking out (a double whammy).
• Surplus order; where you will have excess stock in the future because there is too much on order. These orders are candidates for either cancellation (if no penalty applies), a reduction in the order quantity or a delay in the delivery.
• Balanced; where the current inventory and orders are in agreement with the optimal stock levels. For these products you are in perfect balance and the levels are appropriate for the product risk and the desired target stock availability.

Using these categories, you can see where you are holding more inventory than you need to and why you are still experiencing stock shortages. You will also have a better understanding of the need to target investment where it will improve service and reduce excess generation.

STRATEGIC DIRECTION
The inventory level comparison provides instant feedback at the lowest possible level of detail - by item per location. The inventory health check can also provide significant strategic benefits in terms of determining:

• The overall optimal level of inventory investment for your desired stock availability, which when contrasted with your current inventory investment will usually show the potential for a simultaneous inventory reduction and improvement in service
• The quantification of lost sales due to stock-outs and, by modelling alternate target service levels, the incremental additional investment in inventory required to improve service (and minimise lost sales).
• The value of inventory that is excess to requirements that should form part of a formalised excess stock reduction program.

CONCLUSION
An inventory health check is a valuable analysis with many potential benefits, including an assessment of your current position and assistance with your strategic objectives. If this service is provided by a software provider free of charge, it will also give you the opportunity to test the system with little effort or risk.

To learn more about an inventory health check, click hear to contact Enabling.

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