The importance of upgrading inventory management practices to deal with supply chain challenges in 2020 and beyond

This article is brought to you by Retail Technology Review: The importance of upgrading inventory management practices to deal with supply chain challenges in 2020 and beyond.

By Tracey Baker, Inventory Expert at EazyStock UK. 

Ecommerce businesses have had a tough time of late; firstly, there was the threat of a hard Brexit, and more recently the overwhelming impact of the coronavirus has been felt by all.

Unfortunately, the future looks set to remain uncertain as Brexit looms, Covid-19 continues to cause disruption and global geopolitical and environmental threats remain. Supply chain management (SCM) teams therefore need to find ways to deal with these challenges and face them head-on to survive and seek-out growth opportunities.

In many companies supply chain management has become a boardroom priority and IT teams are tasked with digitalising their operations, so they’re better placed to respond to abrupt changes in market demand and ongoing supply disruption. One area where big gains can be made is around inventory management.

Inventory management challenges in 2020 and beyond

Many inventory planners are still reliant on basic stock management tools to carry out their challenging roles. Whilst ERP and WMS systems are used for tracking inventory and updating stock levels, fundamental tasks, such as forecasting demand, optimising inventory levels and calculating reorder points and quantities, are often still done manually in spreadsheets. 

Manual inventory management is labour intensive and can often lead to stock imbalances. Order too much and this ties up significant amounts of working capital in excess stock, too little and this leads to stock-outs, delays to production and empty store shelves. Achieving a balance between stock availability (service levels) and inventory investment is tough.

Managing inventory was a big ask when customer demand and supplier lead times were fairly predictable, but with marketplaces and supply chains more dynamic than ever, the job just got much harder. With customer demand and inventory supply continually fluctuating up and down, ‘old-school’ inventory management practices are simply too basic. Forecasting and replenishment formulas that use historic consumption or average stock days are only effective when demand and lead times remain static and the only way for the user to consider any variance is to continually update their calculations. 

Finding solutions with inventory optimisation

Inventory optimisation is a concept that is growing in recognition as a way to deal with supply and demand fluctuations. Its objective is to achieve high service levels (stock availability) with the lowest possible inventory investment. Inventory optimisation swaps basic linear inventory calculations for probabilistic formulas, to help account for uncertainty when predicting future events. And with so much uncertainty in the marketplace right now, this could offer a real lifeline to support SCM teams. Whilst probabilistic formulas are not easy to utilise manually, there are a number of inventory optimisation tools available that simply plug into ERP systems. These take a feed of inventory data, do the forecasting and replenishment calculations, and provide the intel that can be used to make smarter purchasing decisions.

Dealing with demand forecasting

There are three key areas where inventory optimisation can support SCM teams during these uncertain times. The first is demand forecasting. Traditional forecasting calculations that use 30-day rolling averages are only effective when demand is stable and, right now, this is simply not the case. In contrast, an inventory optimisation tool employs statistical forecasting formulas that help account for demand variance. This method recognises that every inventory item has a different demand pattern because it is affected, to some degree, by its position in its product lifecycle, or by seasonality, trends or promotions. All of these are taken into account when forecasts are automatically generated and updated to inform purchasing parameters and stocking rules.

Unfortunately, with social distancing policies impacting customer behaviour, producing forecasts that are 100% accurate is very challenging right now. SCM teams therefore need a safety net for when forecasts aren’t as accurate as they should be. Processes that can help include tracking actual demand throughout a forecast period and acting when it differs significantly from the forecast, or highlighting demand irregularities at the end of a forecasting period, so they can be investigated before including in the upcoming forecast. With an inventory optimisation tool, such alerts can be set-up to happen automatically.

Carrying the right amounts of the right stock

The second area of inventory optimisation is focused around carrying the right inventory items to meet demand, without investing too much capital in stock. As we move into the next phase of the coronavirus pandemic, ecommerce businesses will need to closely track the stock levels of items that are business-critical and react accordingly to alleviate supply risks. They will also want to invest in stock that will generate revenue and not sit in the warehouse.

Inventory optimisation helps by classifying items and focusing on the availability of those most important to the business. A simple form of inventory classification can be done manually using ABC analysis, but with inventory optimisation software the categorisation can be much more sophisticated. For example, items can be classified based on a wider range of factors, including their cost to sell or profitability, pick frequency and demand volatility. The aim of inventory optimisation is to achieve the highest service levels for products that have the most regular demand and are relatively less expensive to stock – or are critical to the business. Then service levels reduce as demand becomes more volatile and stock more costly to sell. 

The big advantage of inventory optimisation software is that stocking rules and reordering parameters are automatically adjusted to ensure service levels are met. This means that reorder points, reorder quantities and safety stock levels are all dynamically calculated, based on market dynamics. Items are automatically moved from one group to another, so if an item’s demand changes from being regular to very lumpy, the service level and stocking rules will be adjusted accordingly and reordering parameters updated to prevent stock building-up in the warehouse.

Ensuring continuity of supply despite lead time disruption

Finally, replacing traditional inventory management calculations with probabilistic inventory optimisation formulas helps mitigate the risks of supplier lead time variance. Securing supply has been extremely difficult for many ecommerce businesses in 2020 and supply issues could re-emerge at any time. Formulas used to calculate replenishment e.g. reorder points or safety stock levels etc, need the ability to be adjusted when supplier lead times change, to avoid stock-out situations. This can be done manually on a regular basis or using inventory optimisation software that will track lead times and update purchasing requirements automatically.

It’s time to move on from traditional inventory management techniques

SCM has become strategically significant for ecommerce business who want to remain competitive going forward. During these uncertain times, teams need to use inventory management processes that can account for ever-changing market demand and supply chain disruption. Introducing inventory optimisation practices will allow this to happen, whilst freeing-up capital due to lower stock levels.

It’s possible to carry out inventory optimisation calculations manually, but many ecommerce businesses are choosing to use automation. This reduces the time they spend processing data, manually forecasting demand and calculating replenishment parameters. With automated processes, teams have more time to focus on customers and suppliers. By empowering them to manage their inventory in the most resourceful and cost-effective way possible, they can help keep customers happy, generate higher profits and create a competitive backdrop for the whole business.