Traditional inventory management approaches are rapidly becoming ineffective due to the requirements of multi-channel distribution, the increasing globalisation of supply chains and more dynamic product life cycles. Driving this is the expansion of the internet and the rise of e-commerce. In fact, according to the industry body that represents e-retailers, the Interactive Media in Retail Group, online spending hit €6bn in July this year.
With these changes in traditional commercial markets, inventory management techniques have had to respond and adapt. Although stock is still considered cash in disguise, the changing supply and demand landscape has left retailers, suppliers and manufacturers having to rethink their inventory management techniques.
Some fifteen years ago, the industry was just beginning to make the transition from manual, merchandise control systems to the first automated inventory management technologies. Buyers were skilled at using manual systems to maximise sales while keeping inventories in line.
As many will recall, there was a lot of hand posting of sales information, manual calculations and chasing sales of the hot items, all aimed at avoiding overstocks that would obliterate markdown budgets. Understandably, some buyers struggled to meet their inventory and turnover objectives.
Not a lot has changed apart from speed and rhythm. Many firms continue to turn their inventories too slowly, effectively tying up critical cash in inventory and taking heavy markdowns on excess stock at the end of the season.
When we look at the other side of the equation, we see some manufacturers taking a different inventory control approach altogether. Unlike retailers who have space constraints in store, manufacturers have options to ensure that supply meets demand.
In its simplest form, if a constrained factory produces one item an hour, only one item an hour can be sold. So, when products are closer to the end customer, both in a geographical sense and the amount of value-add or production completed, the time required to respond to customer demand goes down but at the cost of increasing levels of inventory investment, carrying cost and risk of obsolescence.
To the manufacturer, availability of the core value-add in its own manufacturing process is critical. Manufacturers need to establish a framework of inventory that uses postponement and risk pooling to help determine where to hold inventory to guarantee desired service levels and of course, at what stages of production and distribution to hold inventory.
Both strategically and tactically, they need to consider the number and locations of manufacturing plants, distribution centres, warehouses and even suppliers and customers. Taking this into account through materials planning to calculate how much inventory to hold at finished goods, sub-assembly and raw material levels, manufacturers will be in a position to rapidly make changes to their supply chains.
Come along to an interactive panel discussion on inventory, organised by Supply Chain Standard in partnership with Oracle, on 23rd October (4-7pm) in London. Numbers are limited to 15 places. Contact Letitia Beynon on +44 (0)20 7970 4439 or at firstname.lastname@example.org
Dave Food is business development director, supply chain at Oracle