Ask Andi: How is inventory planning done? We have a buildup of inventory on hand. It built up as usual, and then we suddenly lost a number of orders. Now what should we do?
Thoughts of the Day: Inventory planning to determine what you can and can’t use. Take your lumps: write off, clean up and get an accurate count of useable inventory. Automate what you can. Put people in charge of keeping inventory under control. Have operations work with sales and finance to improve inventory planning.
Learn to improve inventory planning
Whether you’re talking about office suppliers or a factory running at full tilt, it’s easy to build up excess inventory. That’s why it’s important to periodically identify what can and can’t be used. Try selling obsolete items elsewhere – E-bay, clients, competitors, suppliers, whatever.
Forget about what you paid for unusable inventory. If you don’t sell it, it’s worth zero. Any money you make on it, as long as you cover shipping and handling costs, is better than no money.
Whatever you can’t sell, dump. Stop cluttering shelves with unusable goods. It makes it harder to see what’s really going on with active goods.
Every piece of inventory should have its own place. Label shelves as to content and quantity. Build a system to easily eyeball if there’s enough, too much or too little.
Establish stocking counts, including minimum (min) and maximum (max). Min is the point at which additional stock is ordered. Max is the total amount that should ever be carried of that item.
Establish Max inventory by setting order frequency and calculating the amount of inventory used between orders. Keep enough inventory on hand to cover the time it takes from ordering to receipt, to next order, plus 25% in case there’s a shipping delay. If specific items have a long order lead time, look for options to cut the cycle down, so you’ll be able to carry less inventory.
For example, tracking inventory can be complicated. Build a spreadsheet. Set up rows for each item with columns for current level, min and max stocking levels, preferred vendor, terms, lead times, pricing, shipping costs, last time price was checked, etc. Make sure that someone updates the sheet regularly.
What to stock and how much to order
Remember that finance has to manage the checkbook. Paying for a big order at the wrong moment in time can be very problematic for many companies. Consider having finance review all orders over a particular limit, as a check on spending and cash flow.
Assign someone to monitor inventory. Consider setting up a reward system for that person. Focus on keeping inventory write-downs in check, while maintaining accurate min / max levels.
Meanwhile, put someone else in charge of establishing and reviewing min / max levels. Keep in mind one job is very hands-on – what inventory is on the shelves. The other job is more numerical and theoretical – how to set the mins and maxes.
Have one person responsible to shop inventory, comparing vendor prices, and delivery timeframes. It may be worth paying a little more to get faster delivery, thereby cutting down the size of each order. Smaller ordering batches can save on cash flow and reduce potential for write-downs in case the inventory suddenly becomes obsolete. Remember to factor in the cost of shipping and handling.
Above all, it’s worth having regular inter-departmental meetings – operations, finance, sales. Review new sales and losses, inventory status, pending write-downs, current ordering needs, cash flow, results of recent vendor surveys on pricing, and order lead times. In the same vein, have a group discussion about what to order, what can wait, and what to stop. Plan out who will gather information to help with decisions for the next round of ordering.
Looking for a good book? Essentials of Supply Chain Management, Third Edition, by Michael H. Hugos.
