Maintain Inventory to Gain Productivity

Within an organization, the activity of managing and handling inventory impacts a company's economic and financial balance and its ability to win or retain new business and customers. Excess inventory has serious consequences for cash flow and financial statements (fixed assets, obsolescence, etc.). A lack of inventory leads to a direct loss of profits due to a lack of products for sale, a potential loss of customers due to non-delivery, and increased costs due to production lines stopped due to a lack of inputs.

For those who manage a company, regardless of its size, the task of efficiently managing stock forces them to face the challenge of achieving a very delicate balance, one that lies at the center of powerful forces within the organization: Sales, Finance, and Production. For this reason, and in seeking to optimize stock movement to ensure supply to our customers, it is vitally important that management focus on creating a function, area, or position within the organizational chart with simple objectives that have a high economic, financial, commercial, and operational impact:

• Ensure the availability of products to the customer or raw materials to the production process, that is, avoid stockouts at any stage of the supply chain.

• Avoid the generation of excess stock with weak demand, called "slow movers"

• Avoid the generation of obsolete stock when the marketing or use of an item is discontinued

• Minimize the generation of losses or "expired" stock, also known as "write-offs." This occurs primarily in activities that handle items with expiration dates.

Stock has a "life." It constantly moves like a flow from our suppliers, our company, and our customers. Most importantly, its flow can also vary depending on demand, forcing us to act quickly and take the necessary measures to accommodate that "flow" again.

Those who lead a company's inventory management function establish a process linked to the company's core activities, as previously mentioned, such as Sales, Production, Finance, and, in some cases, Marketing. All of these functions make daily decisions that impact stock flow fluctuations. Imagine the following situations:

• Marketing announces the release of a new product

• Sales, win a business that represents a large turnover

• Production decides to modify the production plan for operational reasons

• Finance sets a new financial target of generating more cash, and imposes a holding limit on current assets

• Marketing decides to discontinue marketing a product

• Pricing decides to increase the prices of the product portfolio from one month to the next, notifying customers 15 days in advance.

• A buyer decides to purchase a large batch of a certain item because the supplier assures them of significant savings.

  
  

What would happen if each of these areas acted in isolation, failing to report or delaying sharing information about each of these actions? How would this impact stock performance?

Any of these actions taken without the knowledge of the area that manages the inventories would cause:

• Stockouts occur when there is no stock available to handle a promotion or new business, the launch of a new product, a run on customer orders due to price increases, and line shortages due to changes in the production schedule.

• “slow movers” or “obsolete” items, in case of having stock of items that will suddenly be commercially discontinued or losing large customers

  
  

The most common mistake made by stock managers is to fail to take into account or to have weak monitoring of the actions of these areas and to not establish common communication processes (Sales & Operation Process meetings, forecast analysis meetings, among other processes that can be implemented) and frequent exchange of information (Business Cases for new products, migration and replacement of components and products, etc.), in which the planner incorporates this vital information to anticipate and activate supply actions.

It is not enough to just have a sales forecast or plan.

In a country experiencing an inflationary economic climate, it can be inferred that a good financial strategy may be to increase the acquisition of assets in inventory, for example, raw materials, with the certainty of subsequently selling the products at a higher selling price, speculating on the inflationary projections and thus obtaining a higher profit. But be careful: in these situations, there is a tipping point determined by the cost of maintaining inventories, which consists of the following components:

• Cost of capital invested in holding inventory. Money tied up in inventory that is decided to be held is not invested in another asset, from which a higher return can be obtained. There is an opportunity cost.

• Cost associated with the space occupied by the inventory

• Cost of handling and moving inventory within the warehouse

• Storage costs, if an additional warehouse is rented to maintain inventory

• Costs associated with the risk of obsolescence, breakage due to movement, expiration, theft, and exposure to merchandise deterioration.

• In case the inventory is insured, the cost of the insurance

  
  

Faced with this situation, there must again be a balance, considering all these cost aspects.

There are no tools applied in isolation, nor specific recipes, to optimize the costs of inventory and the cost of lost sales due to a stockout.

Stock management begins with the implementation of a stock policy and its subsequent plan, which will outline strategies and activities to achieve the policy's objectives or targets.

The policy flows from the company's management to the area that manages inventory. It may address different visions depending on the company's primary interest. It may aim to maintain a certain inventory level; a specific level of customer delivery performance, etc.

When we talk about a Plan, we must establish:

• “What” to supply

• “How” to supply

• “When” to stock up

  
  

The "What" involves precisely establishing which items will be purchased and kept in stock. This refers to a group of items or SKUs (Stock Keeping Units) that are eligible for ordering and that we are certain will be used in the production process. This may seem obvious, but products or components can be subject to changes or replacements, or eliminated from portfolios, leading to the future generation of obsolete stocks, as one of the worst consequences.

The right tool for managing what the planner must order is to maintain and permanently update a "Master List." This will allow you to include relevant information on consumption, history, and logistical parameters, providing up-to-date knowledge of the portfolio, not only for the planner but also for all business partners.

The "How" focuses on determining the supply calculation method that will be used to replenish stock. Basically, reorder point replenishment systems, or Periodic Stock Review systems, are already widely used in many industries.

Here too, the necessary tools to monitor stock levels must be considered to avoid potential stockouts or distortions in the flow of stock through the process.

In the "When" section, the optimal frequency (days, weeks) for replenishment is analyzed, based on the desired average stock level or the level set by the Stock Policy.

This foundation allows for the definition of an inventory management system, which must be maintained over time throughout work cycles, leaving a "trace" or traceability of the planning actions carried out. If it is a plan, errors may exist, due to calculations or inaccurate information, but these must be identified at their root causes and corrected to prevent them from recurring in the future. A stockout is a situation with a high negative impact on the company's activity, as we have already seen, but like any system, feedback must be provided to improve actions and procedures.

In recent years, thanks to the incorporation of computer systems or ERP (Enterprise Resource Planning, such as SAP, JDEdwards, etc.) within companies, the efficiency of inventory management has improved. This is thanks to the availability of almost online information on the status of stock in the supply chain: inventory available in the warehouse, inventory in quality close to arrival, orders in transit, and placed orders not yet shipped by the supplier. The stock analyst or planner has the ability to monitor stock throughout the chain and gain proactivity to improve the supply of a production line or distribution center.

Although this description may seem like an ideal situation, it requires the company to integrate all its processes and information into the system, and for all operations and transactions to be correctly recorded. If the information contains inaccuracies, errors, or is not entered in a timely manner, we will be blindsided and will incur calculation errors when replenishing stock. We see the stock and its different states through the system.

As a complement to ERP systems, it is highly recommended to build inventory management tools using spreadsheets. Spreadsheets can adapt the information downloaded from ERP systems in different ways, tailored to the analysis the planner needs to monitor, project stock coverage situations, and even place replenishment orders, if the ERP system doesn't have an ordering module or isn't implemented yet. Furthermore, it is an ideal tool for exchanging information within the company, as very few people are unfamiliar with its basic operation. Those who manage branches and/or companies are highly recommended to continuously train those who manage inventory using this tool, which has become a standard for any industry.

Lucas R. García (Editor SC Tank Blog)