Business owners and managers had been changing their approach to Inventory management toward a just-in-time approach. Then major supply chain disruptions started to occur over the last year. Supply chains are still showing signs of vulnerability, no matter which inventory management methodology is selected. Companies must be proactive in reassessing their practices to keep orders flowing in a predictable manner.
Inventory Management is Crucial for Business
Active inventory management is a major contributor to manufacturing success. Manufacturers who still do inventory management and planning on spreadsheets will have found major problems during the pandemic. In normal times, it takes time and effort: a monthly review is just about manageable, let alone trying to keep up during this current period of upheaval.
Turbulence has become the “new normal,” change happens more frequently, volatility has increased, and it persists longer than in the past. Demand is less predictable. Pandemic-induced supply and demand shocks have demonstrated the fragility of the old order. During these last 18 months, in order to keep track, it has become increasingly important to know in real-time what’s happening with raw materials and parts coming in, with work-in-progress, and finished goods.
With greater visibility of inventory through the value chain, many businesses have been able to increase efficiency and revenue and improve customer service. Areas where modern inventory techniques and solutions have shown benefit, include:
- sales: higher-order fulfillment and on-time delivery
- manufacturing: keeping manufacturing operations going, leading to improved plant efficiency
- warehousing: greater cost-effectiveness through more efficient use of space, and reduced obsolescence
- management: better, more informed decisions
Just-in-Time Approach v. Just-in-Case
The just-in-time inventory management approach focused on using capital more efficiently but relied on accurate demand forecasting and supplier reliability. Any errors or shocks, as has occurred during the pandemic, led to significant problems with incomplete or late supplier deliveries, over-stocking, or items that weren’t ordered as expected, and when unexpected new orders arrived, a build-up of back-orders and customer dissatisfaction.
The original purpose of keeping inventory was to function as a buffer against uncertainties from upstream (suppliers) and variability downstream (customer demand). Although just-in-case may have been considered expensive in the past, it has paid dividends to those companies using it who have been able to keep factories running with enough stock, shop floor staff working, holding prices steady, and customer orders fulfilled. Inventory strategies that promoted redundancy, rather than super-efficiency, have been shown to be more effective.
To cope with new realities, manufacturers will need to reimagine their supply chain and inventory management approaches, re-engage with suppliers, and ensure they have visibility of operations, no matter where they are.
Supply-Chain Operations Reference (SCOR) Model
The Supply-Chain Operations Reference model (SCOR), a process reference model for supply chain management, provides six high-level processes that a company must execute in order to meet the primary objective of fulfilling customer orders. While some say it’s a little out-of-date in the modern technological business world, it enables businesses to identify the data, processes, and KPIs that need to be addressed at every stage. So, if changing your inventory management to adapt to new situations is a priority, the different process levels of SCOR will offer useful and appropriate guidelines
The Plan stage is where existing inventory management and supply chain processes are reviewed, and opportunities and capabilities are explored. One of these will be to adopt new digital disciplines and the tools to sense, collaborate, optimize, and respond. In terms of the internal value chain, this may require investing in technologies that provide real-time tracking of items. Supplier communication can be digitized via a portal so that suppliers can electronically track and update the status of orders and delivery schedules. This not only makes these processes more efficient but also reduces errors and improves order accuracy.
If changing the sourcing strategy is required, such as near- or alternative sourcing, the organization will need to look at better ways of managing suppliers and monitoring their performance. To guarantee inventory arrives in time and in the right quantity, the company may want to consider blanket orders. To improve the management and costing of imported goods, a system may be required to track shipments, monitor the estimated arrival times, and establish a reliable estimate of costs. With quality control becoming ever more important at every stage, a system should be implemented to ensure materials are receipted and quality checks performed before being accepted into the warehouse.
The role inventory management can play in helping production is to make the process of finding and picking parts and materials as efficient as possible. This means knowing where items are used in the production process, their precise location in the warehouse, and when they need to be re-ordered. For certain industries, this may also entail recording and tracking serial and lot numbers for quality control or compliance purposes.
Once a product has been manufactured, it needs to be recorded as a new inventory item and allocated to a finished goods warehouse. This may be in a different location (e.g., to be closer to customers) so tracking goods in transit will be required. As with other parts of the value chain, this is increasingly being done using digital technology to get real-time updates. Knowing the precise location of goods in the finished warehouse is also required to make picking and packing more efficient.
There are many manufacturing sectors where managing the returns process can still be improved. When a customer returns a product, it should go into a returned goods warehouse for inspection prior to determining the next step—repair or return to supplier—and to prevent the product from accidentally being reshipped to another customer. Active inventory management in this process would also identify if the returns were part of a lot or set of serial numbers that may require a larger recall process.
In the current state of flux and uncertainty, this stage could be seen as the key to a more efficient, flexible, and resilient inventory management function. One area of focus would be to strengthen internal controls around inventory to ensure it is safeguarded, replenished, and maintained. Another focus area would be to automate processes to improve the accuracy and completeness of inventory tracking. The best way of implementing these is through an ERP system that integrates and unifies processes throughout the organization. In addition, it ensures accurate master data, so decision-makers have a real-time view of quantities and their locations.
Data-Driven Approach to Inventory Management
Moving forward, a data-driven approach to inventory management gives business owners and managers a basis for better and faster decision-making. Companies are being called to make significant investments in technology rather than simply updating their existing processes. Lean inventory is not likely to be an effective business strategy for some time. Making changes to inventory management strategies will not be a quick or simple process; however, the benefits will be profitable.
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