Company’s approach to Inventory Health

Inventory means an item of value and asset in the books of the Company. This is the most important category of item that needs to be focused upon by the management for in its management lies the business efficiency as well as profits.

Inventory holding is a must for any business organization that is into manufacturing and selling or trading of products. Technically inventory is holding stock of raw materials or finished goods for a future point of consumption. This in fact blocks the working capital employed by the company.

In any business, it is essential to have optimum inventory at all times. Over inventory stocking results in erosion of profits and increase in inventory carrying costs that effects the operational costs of the company, while shortage of inventory can lead to loss of business and sales opportunity which will not only result in revenue loss but damage company’s reputation and reliability in the market and with customer.

Inventory by nature is operations intensive. With the number of items running into thousands, coupled with the number of transactions that are involved in managing inventory operations on daily basis, it is quite possible that without water tight controls over processes, systems and operations, inventory will go out of control resulting in pilferage, loss due to damage, mis-management, theft or shrinking.

Incase of inventories having extra sensitive characteristics involving perish ability, shelf life or temperature control, tilt meters etc, it becomes necessary to keep a tighter watch and control over such inventories and their management.

Inventory Control and effective management is essentially based mainly on two prime factors, which are Company’s Inventory Management Strategy and Policy as well as Management’s focus on Inventory Operation Management.

A company which identifies supply chain and inventory policy to be the enabler that will help the company gain an edge over competition in the market and use it to leverage its position will invest into engineering efficient supply chain models and inventory management practices to meet its business goals.

Companies like HP, IBM, DELL, Wall Mart, Xerox, Procter and Gamble and Unilever etc have invested continually into reviewing and re engineering their inventory as well as supply chain strategies to meet with emerging market situations.

All these companies have done away with traditional concepts of storage and inventory management and adapted the more efficient VMI-Vendor Managed Inventory, JIT - Just In Time and Customer Response systems whereby they have management to get their suppliers to hold inventories for them right next to their manufacturing sites and supply on Just In Time Basis.

Retailing business being highly competitive most of the companies have invested heavily into soft wares and systems to be able to manage the inventory visibility and stocks as well as call offs thereby bringing efficiencies into inventory management operations.

Systems driven catalogue management, system based forecasting, Statistical analysis of Sales Data and extrapolation using complex systems enabled forecasting methods and reports have brought in lean Inventory management concepts in these companies and their strategies have paid off very well. In effect their strategic focus and approach to inventory and logistics planning have been the key factors behind their success in the markets.

While the companies focus on strategic decision making, planning and defining of Inventory rules and methodologies relevant to their business operations, it is important to realize that the effectiveness is dependant upon the ground operations.

Especially in case of Inventories which are stored at multi locations and handled by third party service providers, it is becomes that much more difficult to manage the inventory operations.

Therefore as principle owners of inventory, the companies should build very strong management focus to define processes, set up expectations, gather MIS data, analyze and control through checks and balances. This will involve setting up of very strong inventory and logistics team with right management and operational process capability and experience coupled with strong systems deployment.

Companies would have to set up independent audit teams too to audit the inventory books, systems as well as processes both from operational as well as statutory compliance point of view.

It is not enough for companies to focus on monitoring the operations of the third party services, but focus should also be on internal management of inventory planning and operations too.

Systems deployed should be capable of generating MIS reports and other data as per requirement.

Secondly inventory analysis and review should be a periodic process as laid down by process document and manual, involving inventory planning, logistics, procurement as well as finance teams.

It is only when decisions and review of inventories are done in line with changes in demand pattern or other operational conditions coupled with speedy decisions to scrap or dispose of unused, unwanted and non moving inventory will help in maintaining inventory balance and efficiency.

The company should have clearly defined metrics to measure and define inventory health as well as inventory operations health and this needs to be viewed by the senior management periodically with operating management and the rest of the team.

Authorship/Referencing - About the Author(s)

The article is Written and Reviewed by Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.