Business Management

Businesses around the world spend millions of dollars on software and inventory management systems in an effort to maximise their return on investment (ROI) from inventory. Until now even the most sophisticated of these systems left businesses way short of best practice. In fact most of these systems institutionalise excess inventory.
The problem is that most software relies on optimisation and this limits the opportunity to reduce inventory because it ignores external influences. Software can only optimise the values it has, not what could be.
World's best practice inventory management demands that the ‘management system’ is optimised not just the inventory. Most inventory software takes today’s data and runs an algorithm to optimise holdings. What they miss are the changes in the management system that could further reduce the total level of investment. This flaw makes software systems self-limiting in their results.
Inventory management is much more than just the software system. Inventory management is the combination of know-how, process, measures and reporting that together provide the opportunity for maximizing availability while minimizing cash investment.
The five reasons why your inventory management is not best practice and is costing you money are:
1. The Responsibilities Are Misaligned
The people that make the day-to-day decisions will typically not be responsible for the working capital outcomes; they will be responsible for availability. The problem is that if you run out of stock all hell breaks loose but if you overstock there is no repercussion. This is especially the case with indirect inventory that is not subject to the usual planning scrutiny. Given this, what do you think most people do? That’s right, they over stock!
2. The Optimization Is Incomplete
Sophisticated software can track all sorts of data and in many cases the software can make optimization decisions based on that data. This can reduce your inventory but it is self-limiting. The problem is that software optimizes only on known data and ignores process and behavioural changes that can impact that data. This is software optimization not system optimization. The software should only be a tool within a bigger process of optimization.
3. It Is Managed Reactively
Inventory is often seen as ‘set and forget’, that is, once the item is optimized for the current situation the requirements are not systematically revisited. It is often only when there is a ‘cash crunch’ or some other emergency that action is taken. Yet, even indirect inventory can represent millions of dollars of investment and deserves frequent attention. When action is taken it usually addresses the highly visible items rather than the real ‘cash burners’.
4. There Is A Significant Time Lapse Before Problems Emerge
The number one question asked about inventory is ‘what do I do with slow moving or obsolete stock?’ Depending upon the accounting policies in your company this stock has taken 3–5 years to reach the point where that question is asked. By this time it often seems irrelevant to revisit the original decision or processes that produced this result. No one would accept this approach to quality management! No one ever asks ‘how do I prevent the accumulation of slow moving or obsolete stock?’
5. It Is Painful To Fix And Easy To Ignore
In most cases the removal of obsolete inventory will result in a ‘hit’ to the profit and loss account. However, if a reason can be found to justify it for another year then few will argue. Eventually someone is going to have to make a decision and it will be painful. For this reason, obsolete inventory decisions are often driven by the opportunism of results reporting rather than good management principles.
To truly achieve best practice your organisation must review these issues and develop systems that will minimize their impact or eliminate them altogether.