In inventory management, there is a natural tradeoff between inventory investment and fill rates. Add more inventory, and you’ll (hopefully) get higher fill rates. Decrease inventory, and you’ll pay for it with lower fill rates and lower sales. But this tradeoff is not written in stone – there are several steps that can be taken to lower inventory levels without negatively impacting fill rates, effectively allowing inventory managers to “have their cake and eat it too.”
Over 90% of unnecessary inventory can be attributed to one of the following:
By addressing these root causes, businesses can free up valuable capital, improve operational efficiency, and ultimately boost their bottom line. This article provides practical, actionable steps you can take to tackle each of these problem areas.
We’ll explore how to refine your safety stock settings, optimize your purchasing policies, and implement efficient stock management techniques. Get ready to discover how to break free from the inventory trade-off and achieve both higher inventory turns and improved fill rates.
Safety stock acts as a buffer against variability in both demand and lead time. While necessary, excessive safety stock leads to overinvestment in inventory, tying up capital unnecessarily. There are three strategies that can ensure a lower level of safety stock, without hurting fill rates.
Safety stock calculations usually include a component for demand variability (for example, the standard deviation of monthly demand for an item). This is a good start, but ideally, safety stock levels are based on the variability of forecast error over leadtime. Thus, as forecast accuracy increases, the need for safety stock declines.
There are AI demand forecasting tools available that can improve the technical accuracy of your forecast – in fact, Hydrian is at the forefront of this technology. That being said, while technical upgrades can be worthwhile, we tend to find that process and operational improvements usually have an even bigger impact. For example, closer coordination between your supply chain and marketing teams, particularly when it comes to sales promotions. Incidentally, process improvements like these are another area where Hydrian can help.
System inaccuracies in supplier lead times also inflate inventory levels. Many systems rely on outdated lead time assumptions, leading to unnecessary purchases based on overly cautious safety stock buffers. Regularly reviewing supplier lead times and updating system settings is crucial to avoiding overstocking.
Variability in lead time is just as important. Some vendors consistently deliver on time, while others might have unpredictable delivery schedules. For vendors with low variability (e.g., the difference between the median and 80th percentile of their lead times is minimal) safety stock levels can be adjusted downward. For those with high variability, the safety stock should remain higher, but hopefully you can use this data to have productive conversations with suppliers about how to improve their on-time rate.
Action items to optimize safety stock:
Even with accurate forecasts and optimized safety stock, many companies still carry unnecessary inventory due to outdated purchasing practices. Simple changes in purchasing policies can lead to more frequent orders and lower average inventory levels without harming fill rates.
Lowering the spread between your reorder point (min) and order-up-to level (max) allows for more frequent purchases in smaller quantities. For example, if an item is ordered monthly, reducing the min/max spread may allow for bi-weekly purchases, lowering overall inventory without affecting fill rates.
One caveat: frequent ordering can drive up labor and operational costs due to increased receipt handling, so it’s critical to weigh the cost of handling against the benefit of holding less stock.
MOQs from suppliers are often a source of excess stock. First, it’s important to determine if an MOQ is a hard constraint, or if it’s just the quantity you have to buy to get best pricing. If ordering the MOQ results in massive overstock, the discount isn’t worth the inventory cost. One option is to adjust the sell price to reflect the higher per-unit cost of smaller purchases. Alternatively, and preferably, negotiating for lower MOQs on low volume items with your suppliers can solve the issue entirely.
If the MOQ is truly a hard requirement, consider whether it makes sense to stock that item at all. Items with large MOQs and inconsistent demand are prime candidates for discontinuation or drop-shipping instead of stocking.
Action Items for Optimizing Purchasing Policies:
Even with optimized purchasing and safety stock, poor stock management practices can still result in excess inventory and lost profits. This often includes overlooking opportunities to rebalance stock across multiple locations and neglecting vendor stock rotation agreements. Addressing these areas can significantly improve inventory turns and reduce the risk of obsolete inventory.
In operations with multiple distribution centers, excess stock at one location can be offset by stock shortages at another. A quarterly review of inter-facility rebalancing opportunities can reduce overall inventory levels and shorten the time it takes to liquidate excess inventory.
Many suppliers offer stock rotation or return programs that allow slow-moving or excess inventory to be returned or exchanged within a specific time window, often at little or no cost. By taking advantage of these policies, companies can avoid ending up with dead stock and reduce non-productive inventory. Regular execution of stock rotation (preferably monthly) can help ensure excess stock is rotated out before it becomes obsolete.
Identifying slow-moving inventory early is key to avoiding dead stock. The sooner an item is flagged as slow-moving, the more options are available to manage it cost-effectively—whether that’s returning it, redistributing it to another location, or discounting it before it ages out.
Action Items for Stock Management:
Successfully managing inventory requires a holistic approach that considers everything from forecasting accuracy and lead times to purchasing policies and stock rotation practices. By addressing the three key areas outlined in this article — excessive safety stock, sub-optimal purchasing, and poor stock management — you can break free from the traditional trade-off between inventory turns and fill rates.
By taking these steps, you can create a more agile and responsive inventory management system, leading to increased inventory turns, improved fill rates, and ultimately, a healthier bottom line.
Remember, optimizing inventory isn’t a one-time fix but an ongoing process of continuous improvement. And if you need expert guidance along the way, consider partnering with a company like Hydrian. We specialize in helping distributors optimize their inventory and achieve significant ROI. Contact us today to learn more.
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