Inventory management: How to optimize your supply chain processes

For companies, inventory management is strategically important and challenging at the same time: In order to avoid surplus goods or bottlenecks, demand must be predicted as accurately as possible. Incorrect planning can lead to considerable economic disadvantages. In order to manage and optimize inventories in line with demand, a high degree of transparency is required in all supply chain processes. In addition to the basics of inventory management, we will introduce you to methods and tools that can be used to increase transparency and thus achieve inventory optimization.

What is inventory management?

Inventories are tied-up capital and thus reduce the liquidity quite significantly. Companies are therefore keen to keep inventories as low as possible. At the same time, however, it is important to prevent supply bottlenecks and a resulting drop in customer satisfaction. Strategic inventory management synchronizes procurement as precisely as possible with actual demand. The aim is to strike a balance between security of supply and efficiency.

The world’s largest sports company, Nike, has just learned how serious miscalculations can be – it had built up high safety stocks due to the experiences of the past two years prior to the traditionally strong sales start of the school season. Alas, as supply chains worked better than expected this season, inventories swelled 44 percent to $9.7 billion. The sports company is now putting merchandise on the market at significantly cut-down prices in order  to reduce the backlog.

How does inventory management work?

Accurate forecasts and good networking of sales planning, procurement, production, logistics and warehouse management are important for successful inventory management.

Inventory management takes place in three stages:

Demand planning: Demand planning uses predictive data (historical data) in order to determine past demand. On the basis of this data, future demand quantities are forecasted and procurement is optimized accordingly.

Inventory planning: Inventory planning is decisive for cost efficiency. The goal is to achieve an optimal ratio between safety stock and maximum stock. For this purpose, for example, the optimum reorder level must be determined – at what inventory level is a new order necessary? To do this, it must be known how long it will take to re-produce and transport the new goods. One example is just-in-time inventory management, or just-in-time procurement, in which scenario companies order products and inventories only when they are actually needed. In order to minimize overstocking, inventories should reflect actual consumption as accurately as possible.

Procurement planning: Procurement planning precisely calculates the economic goals of the company. Starting with the inventory planning, the optimal order time and the optimal order quantities are derived. For the computation of the most economical order quantity the cost minimum from stockkeeping and procurement costs is determined.

Inventory management as part of supply chain management

In order to be able to precisely control inventory, it is advisable to take a holistic view of the processes in the supply chain. Especially in the case of very tightly calculated just-in-time inventory management with low safety stocks, the supply chain must function smoothly. Further, reliable forecasts are also required for just-in-case inventory management (JIC), which focuses on higher safety levels. The optimal balance of a successful JIC concept meets demand and avoids too much capital being tied up in inventory.

A good example of the complexity of procurement management is the bullwhip effect, in which minor fluctuations in end customer demand are amplified through the individual stages of the supply chain and lead to distorted forecasts. Insufficient or excess production capacity, uncertain production planning and excessive inventory levels are the result.

External support with supply chain management and optimization

A smoothly functioning supply chain requires high transparency as well as precise control and monitoring. Risks that could jeopardize procurement or interrupt the supply chain should also be predictable as accurately and in good time as possible. An optimally configured supply chain ensures supply and thus successful inventory planning. External support can help with the optimization.

Real-time data enhances security in procurement

Strategic supply chain management also supports procurement security by means of a cloud-based SCM platform. The key success factor of this tool is access to real-time data, with the aid of which the flow of goods is visualized end-to-end. This gives companies maximum transparency, control and management authority over the supply chain: delivery delays can be identified at an early stage, supply quantities can be better planned and processes can be checked at any time. From delivery date monitoring to freight management: In the supply chain management system, every step along the supply chain is transparently recorded and documented in a way that can be directly accessed by all participants.

Minimizing risks with digitization and supply chain risk management

Digitization and real-time data use in the supply chain (Supply Chain Analytics) thus offer decisive advantages for ensuring precise inventory management. The use of artificial intelligence – for example in the form of digital twins of the supply chain – also enables precise forecasts, agile control and enables immediate responses.

AI is also used in software-supported risk management: In order to identify risks due to environmental influences, strikes or similar potential impairments to the movement of goods in time, the tool evaluates thousands of text sources on the Internet and indicates where increased attention is required.

In this way, companies are not arbitrarily subject to external influences in their inventory planning and can react quickly if the planning is at risk.