The Importance of Inventory Management for Supply Chain Organizations

April 23, 2021

Inventory management is critical for supply to flow at the speed of global commerce. Today, many inventory management systems use AI to analyze trends in your logistics, raw materials, and warehousing operations in real time so supply chain managers can make fast adjustments to keep the flow of goods moving. Big data allows us to see the future, using predictive analytics to spot trends early.

But even with these advances, global supply chains add several layers of complexity to inventory control. In light of the logistical and cost challenges faced in the past year, companies must do a better job stressing the importance of discipline. Fortunately, initiatives for leveraging big data, AI, and machine learning enable supply chain managers to meet increased demand for production and speed of fulfillment.

Few doubts remain about the importance of a responsive and agile supply chain after the COVID-19 pandemic. Creating a responsive and agile supply chain as well as benchmark inventory management capability is vital to modern-day supply chain management. With careers in our discipline more in demand than ever before, professionals with advanced knowledge of inventory management abilities find themselves in excellent positions.

Why Supply Chain Inventory Management Skills Are Critical

Inventory management experience is one of the core competencies of a prospective supply chain manager. This is for good reason. Poor inventory management has repercussions throughout the organization, detrimentally affecting the bottom line. If a supply chain manager for a hospital chain fails to secure an adequate inventory of a crucial medical supply, such as syringes or personal protective equipment (PPE), the institution’s capacity to provide medical services would be impacted negatively.

Too much inventory can also be a significant challenge. Over-ordering ties up capital, complicates warehouse management and could result in a loss due to an outdated or expired product the company can no longer use or sell.

Suppose a supply chain manager for a clothing manufacturer does not closely monitor customer demand. The company could end up with surplus items from a prior season. If the company offloads these items on the discount market to recoup some of its costs, the glut of discounted products could harm the brand’s standing with consumers and significantly impact its profit margins.

Conversely, efficient inventory management can boost profitability, enhance visibility, and improve operations by keeping a steady inventory flow. This kind of supply chain optimization is the gold standard for today’s manager.

Inventory Management Risks for Supply Chain Executives

  • Poor inventory forecasting. While a perfect forecast doesn’t exist, a lack of insight into the inventory control of a supply chain makes it nearly impossible to align product supply and demand. Inventory waste and liquidity issues are supply chain management headaches that can be addressed using modern SKU tracking and rigorous attention to data from retail partners and distributors.
  • Driving distribution and sales within the shelf life of the product. No challenge was more top of mind for companies, governments, and consumers than vaccines’ shelf life and expiration. States raced to raise awareness and invested heavily into putting vaccines into the arms of their communities, yet a considerable amount of product waste continues to occur. Traditionally, bottom-line spend is top of mind in supply chain management. In this case, we also worried about the cost of failing to stop the spread of a disease.
  • Carrying costs due to warehouse shortage. Despite the significant challenges for brick-and-mortar retailers over the past year, the rise in e-commerce continues driving product demand across industries. A significant grab for real estate is taking place. This means increased pressure on municipalities to rezone or provide approvals for further construction, which isn’t happening fast enough. Ensuring that order fulfillment continues to move product out of warehouses and to the customer is critical, as a shortage of inventory storage could mean price increases due to peak demand.

The Role of Inventory in Supply Chain Management

Inventory management starts long before products reach the warehouse. Let’s explore the facets of sound inventory management for companies that hire the right talent with a well-rounded education in supply chain management.

  • Inventory optimization. Think of inventory optimization as balancing inventory based on demand: not over-ordering, not under-ordering. Finding the sweet spot for each item you stock requires a dynamic inventory management practice. An optimized system needs visibility from raw materials to sales data. It demands agile planning that can quickly respond to changes in customer demand or disruption in a global logistics operation. As a supply chain manager, you frequently recalculate optimal inventory levels to meet customer demand.
  • Transportation management. Inventory and transportation are linked from the factory to the fulfillment warehouse or distribution center. Proactive and aggressive transportation management is vital. A delay in transport can throw a tightly structured global supply chain into disarray.
  • Warehouse management. This includes storage, distribution, and fulfillment. Determining the best warehouse locations to meet customer demand for fast delivery and ensuring that fulfillment operations run smoothly are essential to customer satisfaction. Responsible warehouse management facilitates inventory visibility and prevents loss due to damage or theft. It’s critical to provide proper oversight of warehousing operations.

Techniques for Effective Supply Chain Inventory Management

There are dozens of different techniques for effective inventory management. Below are a few standard inventory management techniques and processes:

  • Demand Supply Integration (DSI): The leadership process to make supply and demand decisions (such as investment in inventory and customer service risk) to deliver the highest enterprise total value. This process ensures the best end-to-end decisions and multi-functional alignment to the business plan.
  • ABC analysis: An inventory control method that classifies products into three tiers to optimize visibility and time management.
    • Tier A products are items with the highest turnover or value. These products run the highest risk of being stock-outs because of back-ordered inventory or theft. They have the highest level of inventory visibility, including regular inventory control.
    • Tier B products don’t move as fast, so they are subject to less stringent inventory management.
    • Tier C items are the slowest sellers, so counts are infrequent.
  • Demand forecasting: An essential component of inventory management, demand forecasts form the basis of supply chain planning for the next quarter or year. There are two basic types of demand forecasts.
    • Passive demand forecasting bases predictions on data about past sales. This can work well for mature companies with comprehensive sales data and stable market share.
    • Active demand forecasting incorporates growth projections and external market forces to project customer demand. This can work well for startups, growing companies, or industries where demand fluctuates based on external factors.
  • Reorder quantity: The inventory level at which you need to order more stock. A product’s reorder quantity is determined by its sales velocity, production time, and transport time. To calculate reorder quantity, you must consider every aspect of the supply chain needed to produce the product, from the availability of raw materials to transport time and logistics.
  • Economic order quantity (EQQ): A calculation to help balance the cost of holding stock on hand with an inventory flow that meets customer demand. To calculate economic order quantity, start with these data points:
    • Demand rate or the volume of product moved during the prior year (or quarter or month, etc.)
    • The cost of the products you need to order to meet demand during the sales period
    • The cost of warehousing inventory (also called the holding cost)
  • Safety stock. Safety stock is an additional quantity of product to keep on hand above the reorder quantity. Reorder quantity is based on averages, but customer demand may spike, and logistics can halt. When the Suez Canal incident halted marine traffic across three continents, it created an object lesson on the importance of safety stock. Keeping reserve stock in distribution centers near a company’s largest customers can mitigate this event. A central goal of inventory management is to keep the inventory flow steady. Safety stock protects you from the unexpected, so your supply chain never grinds to a halt.

Graduate Programs with a Focus on Supply Chain Inventory Management

Supply chain management professionals need a solid grounding in data analytics to keep up with the latest inventory management trends and remain competitive in the job market. A graduate degree like the Master of Science in Supply Chain Management Online from the University of Tennessee, Knoxville, is one of the best ways to learn the advanced skills that top companies seek.

As more organizations recognize the importance of supply chain optimization to the health of their enterprise, the value of inventory management abilities increases. You must grow and learn on the job as a supply chain manager. With a degree from a top-ranked supply chain management program, you’ll have the qualifications to land the job of your dreams.

Learn more about the MS SCM Online program, including key dates, informational webinars, graduate testimonials, and registration information. Fill out the form below to request more information.

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