The Importance of Inventory Management in Your Supply Chain

April 23, 2021

Step one in delivering the most enterprise value is to design the supply chain capabilities to eliminate the need for inventory. Once this strategic work is complete, inventory management is critical for remaining piles of inventory and flow of supply needs to move at the speed of global commerce. As in many other industries, the most significant trend in inventory management systems is the rapid adoption of automation and machine learning.

With data collected at every step of a global supply chain, inventory managers have a deluge of data to parse. The information is only valuable for supply chain management if you can analyze it and use it for inventory optimization—that’s where AI comes in.

Many inventory management systems use AI to harness the power of big data. You can analyze trends in your logistics, raw materials, and warehousing operations in near real-time, so you can make fast adjustments to keep your supply chain moving. Big data can even give you the power to see into the future, using predictive analytics to spot tomorrow’s trends today.

Even with these advances in modern supply chain management, global supply chains add several layers of complexity to inventory control. This means that inventory management is vital to supply chain planning. In light of the logistical and cost challenges faced over the past year, companies need to do a better job stressing the importance of the discipline. Fortunately, initiatives toward leveraging big data, AI, and machine learning are empowering inventory management systems that enable supply chain managers to meet increased demand for production and speed of fulfillment.

If the world had any doubts about the importance of a responsive and agile supply chain, the erratic demand variation associated with the COVID-19 pandemic removed them. Creating a responsive and agile supply chain and then creating benchmark inventory management capability where it must exist is vital to today’s supply chains. Global supply chain management careers are more in-demand than ever. Professionals with advanced inventory management abilities find themselves in excellent career positions. Even if your background is not in inventory management, you can gain the skills you need to impress potential employers with a supply chain management degree.

Why Inventory Management Skills in Supply Chains Are Critical

Inventory management is an often overlooked part of supply chain management, but it is crucial. Inventory management experience is one of the core competencies of a prospective supply chain manager.

There’s a good reason for companies to seek a supply chain manager with effective inventory management capabilities: Poor inventory management can have repercussions throughout the organization and detrimentally affect its bottom line. For example, if a supply chain manager for a hospital chain fails to secure adequate inventory of a crucial medical supply such as syringes or personal protective equipment (PPE), then the institution’s capacity to provide medical services would be impacted negatively.

Too much inventory can also be a significant inventory management problem. Over-ordering ties up capital, complicates warehouse management, and could result in a loss due to an outdated or expired product that the company cannot use or sell. Suppose a supply chain manager for a clothing manufacturer does not closely monitor customer demand. In that case, the company could end up with surplus items from a prior season that none of the retailers will order. 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 could significantly impact their profit margins.

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

Inventory Management Risks for Supply Chain Executives

Poor inventory forecasting. While there’s no such thing as a perfect forecast, a lack of insight into the inventory control of your supply chain makes it nearly impossible to align product supply and demand. Inventory waste and liquidity issues are headaches that supply chain managers need to address 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. Perhaps no bigger supply chain challenge was top of mind for companies, governments, and consumers like the shelf life and expiration of vaccines. States raced to raise awareness and invested heavily into putting vaccines into the arms of populations, yet a considerable amount of product waste continues to occur. In the traditional way of thinking about supply, the bottom line spend is top of mind. In this case, we were also worried about the opportunity cost of failing to spread 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 to drive product demand across industries. A significant grab for real estate is taking place. This means an increased pressure on municipalities to rezone or provide approvals for further construction which isn’t coming fast enough. Ensuring that order fulfillment continues to move product out of the warehouses and into the end customer is critical – perhaps now more than ever – as a shortage for inventory storage could mean an increase in prices due to peak demand.

Elements of Inventory 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 the act of balancing inventory based on demand: not over-ordering, not under-ordering — ordering just the right amount. Finding the sweet spot with the ideal inventory level for each item you stock requires a dynamic inventory management practice.

    An optimized inventory management system needs supply chain visibility from raw materials to sales data. It demands agile supply chain planning that can quickly respond to changes in customer demand or disruption in your global logistics operations. As a supply chain manager, you will be responsible for calculating and recalculating optimal inventory levels to meet customer demand. Inventory management’s fluid nature is one of the things that makes supply chain management such an exciting career.
  • Transportation management. Inventory management and managing transportations are inextricably linked. The transportation segment of your supply chain primarily from the factory to the fulfillment warehouse or distribution center. Proactive and aggressive transportation management is vital to just-in-time supply chain management because a delay in transport can throw a tightly structured global supply chain into disarray. As a supply chain manager, part of your job is to maintain visibility into your logistics operations, create repeatable transportation systems, and stay ready to pivot swiftly to preserve your inventory flow.
  • Warehouse management. Warehouse management 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 include your warehousing operations in your supply chain visibility, rather than trusting that transportations professionals can provide the level of fulfillment services your organization needs without proper oversight.

Techniques for effective inventory management

There are dozens of different techniques that supply chain managers use for effective inventory management. By completing the MS SCM – Online you will be adept in various methods to determine the proper inventory level and inventory flow for different items. Additionally, reviewing the GSCI white paper, “End-to-End Supply Chain Planning Framework and Key Concepts” will provide the appropriate context for this work. Below are a few standard inventory management techniques and processes:

Demand Supply Integration (DSI or called S&Op by some SCMs): 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. The GSCI white paper on “Advanced DSI Best Practices” explains this process in detail.

ABC analysis. ABC analysis is an inventory control method that classifies products into three tiers. Tier A products are either items that have the highest turnover or highest value. These products also have the highest risk of being stockouts because of backordered inventory or theft and the highest level of inventory visibility—including regular inventory control.

Tier B products don’t move as fast as those in tier A, so they are subject to less stringent inventory management. Tier C items are the slowest sellers, so counts for tier C items are infrequent.

ABC analysis focuses supply chain management on the products where inventory visibility is most crucial. This inventory management practice optimizes inventory and time management.

Demand forecasting. Demand forecasting is essential to inventory management. Demand forecasts form the basis of supply chain planning for the next quarter or the following year.

There are two basic types of demand forecasts.

  1. Passive demand forecasting bases predictions on data about past sales. Passive demand forecasting can work well for mature companies with comprehensive sales data and stable market share.
  2. Active demand forecasting incorporates growth projections and external market forces to project customer demand. Active forecasting methods work well for startups, growing companies, or industries where demand fluctuates based on external factors.

Supply chain management professionals and academics have developed a range of methods for creating demand forecasts, including:

  • Market research, which bases forecasts on trends that help illustrate how to expand market share
  • Salesforce composite, which relies on the sales team’s market knowledge
  • The Delphi method, which creates a forecast based on the consensus of a group of experts

Reorder quantity. Reorder quantity is 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.

The main goal of efficient inventory management is to set appropriate reorder quantities for every item in your supply chain and maintain sufficient inventory visibility to know when to place a purchase order.

Economic order quantity. Economic order quantity (EOQ) is a calculation to help you 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)

Understanding the EOQ of a product is essential for inventory optimization and determining the reorder quantity.

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 grind to a halt. When the Suez Canal incident halted marine traffic across three continents, it created an object lesson in the importance of safety stock: Keeping some reserve stock in distribution centers near a company’s largest customers can help mitigate this type of event.

A central goal of supply chain 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 in inventory management for supply chain managers

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

The MS SCM – Online at the prestigious UT Haslam College of Business provides the skills you need to excel in a supply chain management career. Online classes allow you to gain global supply chain management credentials without leaving home.

Supply chains emerged from the background to global prominence in 2020 and show no signs of slowing down in 2021 and beyond. As more organizations recognize the importance of global supply chains to the health of their enterprise, the value of inventory management abilities increases. As a supply chain manager, you will get the opportunity to continue to grow and learn on the job. And, with a degree from a top supply chain management program like the UT Haslam MS SCM – Online, you’ll have the qualifications you need to land the supply chain management job of your dreams.