One of the biggest challenges for manufacturers is managing inventory. An excess of supplies leads to decreased turnover and profitability. Yet stock-outs result in backorders, lost sales and dissatisfied customers. So, what gives? It’s a difficult balance that has significant impact on manufacturers’ revenue streams. This article examines how manufacturers can strike this balance to improve profits and customer service.
Analytics technology and business intelligence (BI) tools, for example, are critical components to manufacturers’ processes, especially inventory management. BI tools take the guesswork out of when to buy and how much product businesses should stock by providing comprehensive analytics reports that present inventory data in an easy-to-read format so manufacturers can drill down and identify problem areas that require further investigation.
Below are four inventory-related problems organizations face, and tips on how to apply business intelligence to overcome the hurdle.
As mentioned above, excess inventory negatively impacts profitability for manufacturers. But for certain industries, such as food manufacturers, the repercussions have larger implications. Food organizations need be even more diligent of their inventory because their stock has a shelf life (literally) — foods like meats, dairy and fruits all have expirations dates, so having effective inventory management is critical in ensuring unsafe foods aren’t mistakenly delivered.
Companies with excess inventory should consider gross margin return on inventory (GMROI) analytics to review inventory decisions from a return on investment perspective. Formulas like GMROI are one of the foundations of inventory management for warehouse distributors. GMROI is used to make decisions about inventory levels and gross margin from the department level all the way down to individual stock-keeping units (SKUs). This data delivers insight into the best and worst performers, which may challenge a company’s notion of which products it should carry, or even which vendors from which to purchase.
Inventory optimization is a powerful analytic tool that is critical for wholesale distributors, as it helps set inventory targets that allow them to better predict and balance supply and demand variability. Distributors have so much working capital in inventory and the physical movement of inventory that even small improvements can have a big impact on cash.
Sometimes, a company is unable to fulfill an order right away when a certain product is not available in stock for immediate purchase by a customer. In addition to backorders and lost sales, product stock-outs can have intangible costs to the business such as customer dissatisfaction and loss of future business.
When it comes to effective inventory management, companies shouldn’t underestimate the importance of determining when to refill products from outside vendors. Fill rate reports provide warehouse managers with easy-to-read charts that illustrate the proportion of customer orders satisfied from stock on hand. Fill rate is essential to the order management process and is inherently customer service driven. It’s the percent of your orders that are shipped in full on the first shipment as a percentage of the total quantity ordered.
When looking at fill rate analytics, users are able to drill down the report by customer to see which products the customer purchased, and identify the specific product that was out of stock. For example, if a customer orders 10 glasses, were you able to provide all 10 (100 percent fill), did you fill eight (80 percent fill) or did you fill four (40 percent fill)? Leaders in fill rate are exceeding 98 percent fill rates, and the average is just under 95 percent. However, contrary to popular belief, warehouses that consistently have a 100 percent fill rate are sometimes problematic, as this could indicate over buying in which case the company may want to take a closer look at the GMROI.
Inaccurate Inventory Stock Knowledge
Warehouse managers don’t always have accurate counts of what is in stock. The on-hand quantity in the computer system may not match up with what is actually on the shelf in the warehouse. While there is no substitute for the manual verification of inventory, warehouse managers can use analytics to automatically schedule when the physical product counting should occur. Frequent or ongoing cycle counts allow managers to catch errors more quickly and avoid unsatisfied customers.
BI tools also improve stock accuracy by automatically posting customer purchase orders and product deliveries from vendors. When unpacking shipments and stocking new products — in addition to scanning the barcodes to log the product — employees should also manually verify the contents of each package to check for damaged goods, and to ensure accurate inventory counts. Verifying products are correct is critical not only for inventory accuracy, but it also ensures products can be quickly located within the warehouse.
Trouble Locating Items in Warehouse
Companies often don’t consider the benefit of having a logical warehouse layout, making it difficult to find materials. Think of your warehouse like an architectural blueprint — an easy to navigate system where each section is clearly defined. When bins are scattered throughout the warehouse floor, it creates a serious issue in knowing where certain products are located and causes problems in making sure these products are ready for shipment. Design and organize your warehouse with a logical sequence that brings people to where they need to go to easily locate an item. Analytics help managers optimize floor layouts by providing insight into current and forecasted warehouse capacity. If managers have an understanding about available space, they can effectively plan for incoming shipments and also identify if they need to downsize or expand their warehouse.
The bottom line is knowledge is power. Analytics presents that knowledge in easy to digest reports that provide a summary of both product and vendor performance, enabling users to make smart and informed business decisions. There is an excess of data available, but without the proper tools to make sense of it, valuable insight that could be derived from it remains hidden in the vast sea of big data. BI tools and analytics software hold the key to unlocking the answers held within big data.
Bob Vormittag, Jr. is a project director at VAI.