Inventory Management: Four Causes Of Excessive Inventory

Too much inventory weighs a company down with tied up capital and warehousing costs. When a company profits little from its sales, excessive inventory is often the culprit and is an important challenge of inventory management. There are a number of ways that excess inventory can build up.


Four of these are considered below:

Excessive Demand Variability

Demand variability forces you to maintain safety stock to cover unexpected demand surges. While safety stock allows you to fulfill unexpected orders, most of the time the stock simply sits in the warehouse. If the items generate significant revenue, it is worth the effort and cost to improve demand forecasting. This makes it possible to only stock the items when they are needed.

If you have many different items with unpredictable demand, where each get only a few sales per year, it might be possible to order them from your suppliers only after you get orders from your customers. This may cause reduced customer satisfaction and you will have to determine whether this costs you less than keeping the extra inventory.

If these items are variations of a common item such as a chair that comes with and without arm rests, then you can stock up on the basic chair and attach arm rests in-house for orders requiring chairs with arm rests. This process is called delayed differentiation. If you know that you get 10 orders of chairs per year but don't know how many of these will have arms, you only have to keep 10 armless chairs with their arm attachments in inventory. Otherwise, you would have to keep 10 armless chairs as well as 10 chairs with arms to cover all the possibilities.

Supplier Unreliability

The less reliable the supplier, the greater the uncertainty of knowing when orders will arrive. This requires more inventory to cover this uncertainty. Supplier reliability can be improved by sharing your demand forecasts and inventory levels with them. This makes it possible for them to better anticipate your orders and have the items ready for shipment when you need them. You are essentially improving their demand forecasts of your demand.

Too Many Warehouses

If a single warehouse location can effectively service the same region that is currently covered by two warehouses, you should consider consolidating the two warehouses into a single centrally located warehouse. Warehouse consolidation reduces the amount of safety stock.

The square root law is a rule of thumb that governs how the number of warehouse locations affect safety stock. Safety stock increases by the square root of the number of warehouse locations. Therefore two locations increase safety stock (over a single location) by the square root of two or 1.414. Four locations increase safety stock by a factor of two and so forth.

Poor Inventory Management

Poor inventory management is a term that covers a whole host of issues. Many relate to poor tracking of inventory quantities, ordering mistakes, and poor coordination between departments involved with sales, customer service, and purchasing. Many of these issues stem from the lack of a single integrated inventory management software for all departments to use.

Use of multiple software that only cover parts of the problem is inefficient and is prone to mistakes caused by manual data entry and the lack of integration. If you are interested in an inventory and warehouse management system that solves the issues of effective inventory management, please contact us.

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