Inventory Benchmarking: Leveraging Proprietary Benchmarks to Optimize Your Inventory Management Strategy
Inventory management is an essential part of supply chain management that ensures the right amount of inventory is available to meet customer demand. Inventory can include raw materials, work-in-progress items, finished goods, and spare parts. The goal of inventory management is to minimize inventory costs while ensuring that adequate stock is available to fulfill customer orders.
In a typical supply chain, inventory management involves multiple parties such as manufacturers, wholesalers, retailers, and distributors. Each of these parties has a unique role to play in inventory management, but the ultimate goal is to ensure that products are available when customers need them.
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In a typical supply chain
Once demand is forecasted, businesses can determine the appropriate inventory levels to maintain. This involves analyzing factors such as lead times, carrying costs, and order quantities. Carrying costs include expenses such as storage costs, insurance, and taxes associated with holding inventory. Lead time refers to the time it takes to receive inventory after placing an order, while order quantity is the amount of inventory ordered at one time.
Inventory management systems can help automate and optimize inventory management processes. These systems can provide real-time inventory data and automate tasks such as replenishment and order tracking. This can help reduce manual labor, minimize errors, and improve inventory accuracy.
Effective inventory management can have significant benefits for businesses. It can help businesses reduce inventory costs, improve order fulfillment rates, and increase customer satisfaction. It can also help businesses identify areas for improvement and optimize their supply chain operations.
Trends in Inventory Management
Inventory management has undergone significant changes in recent years, driven by various factors such as technological advancements, shifting customer expectations, and changes in the global supply chain landscape. Some of the key trends in inventory management include:
- Automation and Artificial Intelligence: The use of automation and AI technologies, such as robotics and machine learning, has transformed inventory management processes. These technologies can help to optimize inventory levels, improve accuracy and efficiency, and reduce costs.
- Sustainability and Environmental Concerns: With growing environmental concerns, businesses are increasingly focusing on sustainable inventory management practices. This involves minimizing waste, reducing carbon footprint, and adopting eco-friendly packaging and transportation methods.
- Data Analytics and Real-Time Visibility: The use of data analytics and real-time visibility tools has become critical for effective inventory management. These tools can provide valuable insights into customer demand, inventory levels, and supply chain performance, enabling businesses to make data-driven decisions.
- Lean Inventory Management Practices: The adoption of lean inventory management practices, such as Just-In-Time (JIT) and Kanban, is becoming increasingly popular. These practices aim to minimize inventory levels, reduce waste, and improve overall efficiency.
Integration of Inventory Management Systems with Other Business Processes: The integration of inventory management systems with other business processes, such as order management and accounting, is becoming increasingly important. This can help to streamline operations, reduce errors, and improve overall efficiency
What is inventory Benchmarking
Inventory benchmarking is a process used by businesses to evaluate their inventory performance and compare it with industry best practices or competitors. The objective of inventory benchmarking is to identify areas for improvement and implement changes that can lead to improved inventory management and reduced costs.
Inventory benchmarking typically involves the following steps:
- Define the Benchmarking Objectives: The first step in inventory benchmarking is to identify the objectives of the benchmarking exercise. This involves defining the metrics to be evaluated, such as inventory turnover, order cycle time, and inventory accuracy.
- Identify Benchmarking Partners: The next step is to identify benchmarking partners, which can include industry associations, third-party service providers, and direct competitors. These partners can provide valuable data and insights on inventory management practices.
- Collect and Analyse Data: The third step is to collect and analyse data on inventory management practices. This can include data on inventory levels, order processing times, and inventory carrying costs. The data collected can be compared to industry averages or benchmarks to identify areas for improvement.
- Identify Best Practices: The fourth step is to identify best practices in inventory management. This can be done by analysing data from benchmarking partners, industry reports, and other sources. Best practices can be used to identify specific changes that can be made to improve inventory management.
- Develop an Action Plan: The final step in inventory benchmarking is to develop an action plan. This plan should outline specific changes to be made to inventory management practices, as well as a timeline for implementation. The action plan should also include metrics to track progress and measure the success of the changes made.
Why inventory Benchmarking?
Inventory benchmarking can provide significant benefits to businesses. By identifying areas for improvement and implementing best practices, businesses can reduce inventory costs, improve inventory accuracy, and enhance customer satisfaction. It can also help businesses stay competitive by keeping up with industry trends and best practices.
There are several different types of inventory benchmarking, including internal benchmarking, competitive benchmarking, and functional benchmarking. Internal benchmarking involves comparing inventory management practices within a single organization, while competitive benchmarking involves comparing practices with direct competitors. Functional benchmarking involves comparing practices with organizations that have similar functions, such as logistics or supply chain management.
In this project
Our client faced a challenge with their inventory management, as they were unable to meet the industry standard for lead time factor. As a result, they resorted to overstocking to compensate, which caused an increase in operational costs. This overstocking also resulted in missed opportunities to optimize their warehouse management, as valuable resources were tied up as excess inventory. The client approached us for recommendations on how to address this issue and improve their inventory management practices.
Problems faced by our client
Following a comprehensive data analysis that spanned over 19 weeks, we were able to identify several key problem areas, including:
- Excess Inventory: When inventory levels are not optimized, our client may end up with excess inventory that they are unable to sell. This can tie up valuable resources and lead to increased carrying costs, as well as the risk of inventory obsolescence.
- Increased Costs: When inventory levels are not optimized, businesses may experience increased costs associated with carrying excess inventory or expediting orders due to stockouts. This can lead to reduced profitability and a competitive disadvantage.
- Poor Forecasting Accuracy: Inaccurate forecasting can lead to overstocking or stockouts, which can have a negative impact on inventory levels and supply chain performance. Businesses that are unable to accurately forecast demand may experience higher levels of excess inventory and stockouts, as well as increased costs associated with inventory management.
- Reduced Flexibility: When inventory levels are not optimized, businesses may be less flexible in responding to changes in demand or supply chain disruptions. This can limit their ability to take advantage of new opportunities or mitigate risks.
Actions we took to mitigate this problem
- Identify Key Drivers of High Inventory: The first step in inventory modelling is to identify the main drivers of high inventory levels. These drivers can include factors such as demand variability, supplier lead times, and order cycle times. By identifying these drivers, businesses can gain a better understanding of their inventory management practices and begin to develop a plan to address them.
- Use Proprietary Benchmarks for Each Key Lever: Once the key drivers of high inventory have been identified, we used proprietary benchmarks to evaluate their inventory management practices against industry best practices.
- Identify Most Important Driver: After evaluating their inventory management practices, businesses should identify the most important driver of high inventory levels. This driver may be the one with the greatest impact on inventory levels or the one that is easiest to address.
- Create Inventory Reduction Plan: Based on the analysis of the identified driver, businesses can develop an inventory reduction plan. This plan should include specific actions to be taken, such as reducing safety stock levels or improving demand forecasting accuracy.
- Implement and Fine-Tune: The final step in inventory modelling is to implement the inventory reduction plan and fine-tune inventory management practices. This may involve monitoring inventory levels, evaluating the effectiveness of the plan, and making adjustments as needed.
Results
- Overall inventory reduction – $xx million
- Fulfillment cost reduction – $x million
- Happy customers – fulfilment improvement > 20%
Conclusion
In conclusion, inventory management plays a critical role in the success of a business’s supply chain. Effective inventory management practices can help businesses optimize their operations, reduce costs, improve forecasting accuracy, and enhance their ability to respond to changes in demand and supply chain disruptions. To achieve these benefits, businesses must leverage inventory modelling techniques to identify key drivers of high inventory, use proprietary benchmarks for each key lever, and create inventory reduction plans that are implemented and fine-tuned over time. By implementing these best practices, businesses can optimize their inventory management practices and gain a competitive advantage in their respective markets.
Key lessons
- Inventory management is critical to the success of a business’s supply chain and overall operations.
- Inventory modelling can help businesses identify key drivers of high inventory and optimize their inventory management practices.
- Businesses must leverage proprietary benchmarks for each key lever to identify the most important driver of high inventory and study its impact.
- Once the most important driver of high inventory is identified, businesses can create an inventory reduction plan and implement it, fine-tuning it over time for optimal results.
- Failing to optimize inventory management can lead to a range of problems for businesses, including excess inventory, stockouts, increased costs, poor forecasting accuracy, and reduced flexibility.
By optimizing their inventory management practices, businesses can reduce costs, improve forecasting accuracy, and enhance their ability to respond to changes in demand and supply chain disruptions, thereby gaining a competitive advantage in their respective markets
About the Author
Vivek Sood: Sydney based managing director of Global Supply Chain Group, a strategy consultancy specializing in supply chains. More information on Vivek is available on www.linkedin.com/in/vivek and more information on Global Supply Chain Group is available www.globalscgroup.com
Vivek is the Managing Director of Global Supply Chain Group, a boutique strategy consulting firm specialising in Supply Chain Strategies, and headquartered in Sydney, Australia . He has over 24 years of experience in strategic transformations and operational excellence within global supply chains. Prior to co-founding Global Supply Chain Group in January 2000, Vivek was a management consultant with top-tier strategy consulting firm Booz Allen & Hamilton.
Vivek provides strategic operations and supply chain advice to boards and senior management of global corporations, private equity groups and other stakeholders in a range of industries including FMCG, food, shipping, logistics, manufacturing, chemicals, mining, agribusiness, construction materials, explosives, airlines and electricity utilities.
Vivek has served world-wide corporations in nearly 500 small and large projects on all continents with a variety of clients in many different industries. Most of projects have involved diagnostic, conceptualisation and transformation of supply chains – releasing significant amount of value for the business. His project work in supply chain management has added cumulative value in excess of $500M incorporating projects in major supply chain infrastructure investment decisions, profitable growth driven by global supply chain realignment, supply chain systems, negotiations and all other aspects of global supply chains.
Vivek has written a number of path breaking articles and commentaries that are published in several respected journals and magazines. Vivek has spoken at several supply chain conference, forums and workshops in various parts of the world. He has also conducted several strategic workshops on various aspects of supply chain management. He received his MBA with Distinction from the Australian Graduate School of Management in 1996 and prior to these studies spent 11 years in the Merchant Navy, rising from a Cadet to Master Mariner.
More information on Vivek is available on www.linkedin.com/in/vivek and more information on Global Supply Chain Group is available on www.globalscgroup.com
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