What is Effective Inventory Management?

What is Effective Inventory Management?  Although subjective, most would describe effective inventory management as ‘the ability to optimize between service level goals and the investment in inventory required to achieve those goals’.  Translation: maximum service with minimum inventory.

Effective inventory management requires the following:

  • An understanding of what is important to your customers
  • An ability to look ahead and predict your future needs
  • An agility to adjust to changing conditions before they actually occur
  • The capability to blend SKU importance with SKU forecasts in terms of up-to-date Min and Max values
  • IM personnel who understand that Inventory Management and Inventory Control are not the same thing.

Inventory management

Most businesses struggle to keep certain items in stock, yet you have a warehouse full of items that no one seems to want?  Why does that happen?   The reason will be found in something called Pareto’s Law.  You may know it as the 80/20 rule.  This particular phenomenon is common in all aspects of life, but never more common than in distribution.

For most distributors, 80% or more of their sales volume will be derived from less than 20% of the SKU’s being inventoried, the corollary being that more than 80% of the SKU’s inventoried will generate less than 20% of sales.  A question every distributor needs to ask is “where are my inventory dollars being directed?  Are they focused on those SKU’s working for me or are they tied up in product that is working against me gathering dust on the shelf”?

Using Pareto’s law to one’s advantage, it stands to reason that by increasing safety stocks of the small but elite group of SKU’s doing most of the work, one can only improve service levels.  After all, these are the SKU’s your customers are demanding.  These are the SKU’s that are most important to your customers.  Never let these run out.  By the same token, reducing or eliminating stocks of those items languishing on the shelf, that is, the 80 % or more group that is not overly popular with your customers, is unlikely to hurt customer service.  By knowing where each SKU sits in the customer demand spectrum, sound investment decisions can readily be made to support the winners and minimize or eliminate the losers.

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