Four Causes Of Excessive Inventory

Avatar 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 several ways that excess inventory can build up.

Four Causes of Excessive Inventory

Excessive Demand Variability

Demand variability forces you to maintain safety stock to cover unexpected demand surges. While safety stock allows you to fulfil unexpected orders, most of the time, the stock 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 in storage.

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. Planning your raw materials, shelf space, and customer demand is a key factor in eliminating the disadvantages of excess inventory.

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Supplier Unreliability

Less reliable suppliers would increase the uncertainty of stock availability and delivery. Business would require to stock up inventory to cover up this uncertainty. Supplier reliability can be improved by sharing your demand forecasts and inventory levels. Sharing this information makes it easier for the supplier to anticipate your orders and have the items ready for shipment when you need them. You are fundamentally improving their demand forecasts of your demand, and improving the supply chain processes.

An inventory management solution can help businesses increase the accuracy of forecasting. Based on historical sales data, planned future promotions and external factors, an estimate can be made to help businesses plan inventory replenishment. This can improve cash flow, improve inventory turnover, and prevent overstock inventory.

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.

This can be explained with the square root law in warehouse utilisation. 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. Optimising the use of warehouse and storage space minimises excess inventory being stocked as safety stock.

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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. An end-to-end solution to manage your warehouse and inventory management enhances inventory visibility and improves labour management which in turn will reduce operating expenses and increase profitability.

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Having a robust solution to manage your inventory and warehouse is key to maintain optimal inventory with sufficient safety stock to bolster demand surge and inconsistent supply from suppliers. Improve procurement processes, have better replenishment workflows, gain full visibility of stock movements and make better demand forecast with an end-to-end solution.

If you are interested in an inventory and warehouse management system that solves the issues of effective inventory management, please contact us at 1300 440 444.

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