Using Analytics to Manage Inventory

It’s true that inventory management is a challenge for both manufacturers and distributors. Each supply management issue that can arise has repercussions. For example, excess inventory can cause a decrease in product turnover and a loss of profits, while stock-outs can cause backorders, unhappy customers and lost sales.

Optimizing inventory can ensure that the right product is available in the right quantities, at the right time and the right locations, to meet supply and demand. Not only that, organizations that optimize their inventory can reduce stock levels and subsequently avoid associated carrying costs and obsolescence write-downs.

The use of performance analytics plays a key role in the inventory management and optimization processes by helping manufacturers and distributors better determine their stocking targets and if there are any upstream or downstream issues that need to be addressed.

Let’s take a look at two key areas for which analytics can be applied for maximum benefit: as they relate to inventory surplus and stock-outs.

Inventory Surplus

While inventory surpluses can negatively impact the bottom line, there’s often more at stake than decreased profits. Food producers and distributors, for example, are especially sensitive to product perishability, which makes effective inventory management even more critical in ensuring that only safe product is being delivered to customers.

For these and other manufacturing and distribution businesses, the insights gleaned from tracking key performance metrics like the ones listed below can help them do a better job of planning:

• Sales to Inventory ratio, which shows the rate of inventory flow to customers.

• Days of inventory, which indicates how much cash is used for stored capacity. This metric should be compared to both lead times and product demand for effective inventory planning.

• Total inventory, which is a big factor in asset utilization since inventory is usually one of the largest items on the balance sheet.

• GMROI (or gross margin return on inventory), which shows inventory investment by product. GMROI is an excellent measure because it allows decision makers the chance to analyze inventory-related data all the way down to the SKU level and more accurately determine how it relates to profitability.

Inventory optimization based on insights from the metrics above can help businesses provide a better balance between supply and demand variability – often with immediately noticeable results. This is particularly true for distributors that have a significant amount of working capital in inventory. For them, even small improvements in inventory planning can have a major impact on cash.

Out of Stock Items

Besides surpluses, stock-outs are a real challenge for supply chain-focused businesses because they can result in both lost sales and lost business.

Manufacturers and distributors shouldn’t underestimate the importance of using analytics to assess fill rates to reduce stock-outs from occurring. Interestingly enough, in a recent industry survey nearly 50% of respondents reported their fill rates (or service levels) to be lower than 98%. I found this surprising because Service Level was indicated by them as their number one metric of success.

As the saying goes, “what you don’t measure, you can’t improve.” Solely managing end points like product in-stock or inventory turns doesn’t help identify the causes of issues and may lead to poor stocking decisions. Using the right set of metrics to provide a holistic view of the overall state of the business and the ability to identify trouble spots related to product (and even, supplier) performance is crucial to inventory management success.

I’ll be addressing more about those additional types of metrics in future posts. Stay tuned!