Inventory Management: Improving Profit Performance

A truly effective inventory management system will minimize the complexities involved in planning, executing and controlling a supply chain network which is critical to business success. The opportunities available by improving a company’s inventory management can significantly improve bottom line business performance.

From a financial perspective, inventory management is no small matter. Oftentimes, inventory is the largest asset item on a manufacturer’s or distributor’s balance sheet. As a result, there is a lot of management emphasis on keeping inventories down so they do not consume too much cash. The objectives of inventory reduction and minimization are more easily accomplished with modern inventory management processes that are working effectively.

Inventory Management Problems

In actual practice the vast majority of manufacturing and distribution companies suffer from lower customer service, higher costs and excessive inventories than are necessary. Inventory control problems are usually the result of using poor processes, practices and antiquated support systems.

The inventory management process is much more complex than the uninitiated understand. In fact, in many companies the inventory control department is perceived as little more than a clerical function. When this is the case, the fact is the function is probably not very effective. The likely result of this approach to inventory management is lots of material shortages, excessive inventories, high costs and poor customer service. For example, if a customer orders a product that requires a manufacturer to acquire 20 part numbers to assemble a product and then, only 19 of the 20 part numbers are available, you have nineteen part numbers which are excess inventory. Worse, the product can’t be shipped to create revenue and the customer is not serviced. Think for a moment about the complexities of making products that require hundreds and maybe thousands of part numbers to be available in the right quantity, at the right place and at the right time to make products to satisfy customer orders. It is a complex network to control and a set of inventory management tasks that must be performed with precision.

What Should be Done?

Too much inventory and not high enough customer service is very common, but unnecessary. There are proven methods that can help you accurately project customer demand and to calculate the inventory you will need to meet your defined level of customer service. Using the right techniques for sales forecasting and inventory management will allow you to monitor changes and respond to alerts when action needs to be taken. The right approach to inventory management can produce dramatic benefits in customer service with lower inventory, no matter how complex your network is.

Modern inventory management processes utilize new and more refined techniques that provide for dynamic optimization of inventories to maximize customer service with decreased inventory and lower costs. These improved approaches to inventory management are of major consequence to overall competitiveness where the highest level of customer service and delivered value can favorably impact market share and profits.

Understanding the Process

The overall process of effective inventory management crosses a number of functions. The inventory management process can be divided into the following general categories:

1. Demand management which covers the processes for sales and operations planning, sales forecasting and finished goods inventory deployment planning.

2. Inventory planning and ordering which is often accomplished with material requirements planning, often referred to by its acronym MRP or in a lean manufacturing environment kanban ordering is used to effect deliveries of material.

3. Inventory optimization systems are being advocated by some as the supply chain management mechanism that should be used to mathematically calculate where inventory should be deployed to satisfy predetermined supply chain management objectives.

4. Physical inventory control is a phrase that describes the receiving, movement, stocking and overall physical control of inventories.

Inventory management is a vital function to help insure the success of manufacturing and distribution companies. The effectiveness of inventory management is directly measurable by how successful a company is in providing high levels of customer service, low inventory investment, maximum throughput and low costs. Certainly, an area where management should apply a philosophy of aggressive improvement.