This is the third in our series of four articles outlining smart inventory control strategies. We’re looking at four seemingly simple – but proven – strategies for smarter inventory control.
For companies that carry inventory (manufacturers, distributors, retailers and service providers) and want to better manage their inventory availability while reducing ordering and carrying costs, these strategies will be perfect for you.
Strategy 3: Inventory control improvement
With any inventory planning and control strategy, the objective is to avoid shortages while minimising the amount of inventory.
The easy way to reduce or avoid shortages is to have more inventory, since reducing inventory is likely to increase the risk of shortages.There is a way to change this relationship because there is a third factor involved—and that is variability.
As mentioned in last month’s article, safety stock is the customary way to compensate for variation including swings in demand (otherwise known as forecast error) and other unexpected changes in demand or supply (including inventory accuracy errors).
Since the future is unknown, it is impossible to cover all possible variation. We are left to cover the majority of the expected problems and live with a level of availability (fill rate) less than 100 percent. The more safety stock, the higher the fill rate.
If you can reduce variability, however, you can increase fill rate without increasing inventory.
Alternatively, reducing variability would allow you to reduce inventory (safety stock) without reducing fill rate. Simply put, to reduce inventory while maintaining or improving fill rate, reduce variation.
How can you reduce variation?
The most obvious ways are:
- Improve inventory accuracy (use cycle counting)
- Improve forecast accuracy (collaborate with customers, distributors)
- Reduce lead time (improves forecast accuracy)
- Become more reliable (tighten up procedures and controls)
- Consider implementing integrated systems like MYOB Advanced and other technologies that will improve accuracy.