If You Stock It, They will Come: A look into the “right” amount of inventory to carry.
Do you follow a field of dreams mentality, “If you stock it they will come”? Hoping that by just having the inventory available someone will buy it? Or do you try a minimalist approach, stock the bare necessities, and everything else is special order?
We are continually challenged to provide better customer service, while at the same time reducing costs. When talking about inventory, improving customer service usually means improving order fill rates and on time deliveries. Both of these concepts are usually synonymous with carrying higher levels of inventory.
The problem is that if your inventory levels are too high, what was once considered an asset, may become a liability. It costs money to store inventory. Costs include the physical warehouse space, the workers to count and handle that inventory, and the cash-flow that is lost because it is tied up in inventory.
You can attempt to control these costs; Negotiate the lease on your warehouse, try not to handle inventory as much (reduce your touches), try to get volume deals on what you buy, try to reduce your labor costs by reducing hours, or driving down wages. The problem is that all of these are reaction solutions. Many times, simply attempting these actions causes you to work against the people that you rely on daily, such as your vendors, or your workers.
If you follow the minimalist approach, your customers may get 80 or 90% of what they need immediately, and then have to wait for the rest to arrive. For some businesses, this is simply not an option.
So, back to my first question: What is the “Right” amount of inventory to stock. There is no secret that works for everyone. The key is knowing your customers, and knowing your inventory.
You need to start tracking some different KPI’s (Key Performance Indicators)
Track Service Levels OTD (On Time Delivery), Order Fill Rate, Customer Satisfaction
Track your inventory. Stay on top of daily cycle counts. The more accurate your inventory is the better your order fill rates become.
Does it make sense to make bulk buys?
Should you buy an extra 4 weeks of stock, or will the cost of handling, and storage outweigh the cost savings?
Control slow moving items before they become deadstock
Keep an eye on the inventory that is not moving, and return it to your vendor while you still can.
Start thinking of your vendors as partners. Instead of beating your vendors down on prices, work with your vendors. Let your vendors know what your customers require, use their expertise to help you help your customers. If your vendors are part of the solution, they may be a little more willing to bend on that return that falls just outside the return date.
Use the same methodology with your customers. Many times better price is not the deciding factor for your customers. If your customers are successful, then in turn you will be as well.
It is better to control the inventory, than to try to control the costs associated with having inventory.
If you are reading this article you are aware that there are changes that can be made to your inventory strategy. You just took the first step to making a change.
Look at a few of the KPI’s I mentioned above. Have a meeting with a vendor, and explain your challenges, do something different.
Progress Demands Change