How to Increase Efficiency of Inventory Managment

Literature Review

With the ever-growing demand for goods and services across various economic sectors and geographical boundaries, managerial practices have evolved to improve the process of efficient delivery of products to customers and businesses. Inventory management is one of the strategic tools for optimizing resource usage, delivering products to customers, and improving operational efficiency across complex supply chain networks (Adamu, Budlender & Idowu 2014; Akindipe 2014). Effective inventory management is one of the pillars of supply chain management success (Christopher 2012). The management of various types of inventory, including both raw materials and finished goods, partner inventory, work-in-process, etc., anchor at the intersection of demand and supply (Aro-Gordon & Gupte 2016).

Several factors ought to be taken into account when enhancing inventory management. They include flexibility, reverse logistics, lean practices, and outsourcing, among others (Rushton, Croucher & Baker 2010; Ochonma 2015). With regard to flexibility, an entity should rely on dependable suppliers to be protected from uncertainties. With reference to outsourcing, transport functions can be improved to enable the company to focus on its core business. An efficient response to customers’ needs requires companies to embrace lean practices and invest in information and communication technologies (Bidgoli 2010; Demeter & Matyusz 2011). The purpose of this paper is to explore how the efficiency of inventory management can be improved. Part of the objectives of this research is to make observations and recommendation for enhancing inventory management practices. In order to appreciate the value of various contemporary inventory management tools and techniques, it is essential to understand the significance of inventory planning as well as the determinants of inventory management techniques (Handfield et al. 2013). This section first reviews the variables that influence the choice of an inventory management technique. The second section of this chapter analyses the strategies and tools that could be used to improve inventory management. The final section summaries the review and provides direction for future study.

Determinants of Inventory Management Processes and Techniques

The determinants of effective inventory management are variables that influence the choice of a particular process or tool, or a combination thereof. According to Aro-Gordon and Gupte (2016), the choice of an inventory management technique varies depending on the size of an entity. Some of the decisive factors that have been highlighted in literature include space utilization, inventory management objectives, product features, recurrent problems, inventory cost-reduction strategy, effectiveness of an inventory management system, and efficiency of IT systems or the software used for inventory management (Muckstadt & Sapra 2010; Suvittawat 2015). Information technology has facilitated innovations, which create new ways for retail companies to manage their inventory. For example, such companies as Apple, Dell, Wal-Mart, UPS, DHL, FedEx and IKEA use IT solutions to coordinate processes within their supply networks, including internal production, customer service, and upstream procurement (Foster & Armstrong 2015).

Strategies for Improving Inventory Management

Over the past two decades, traditional logistic and purchasing functions have transformed into a broader strategic approach to logistics and materials distribution management (Aberdeen Group 2006; Aro-Gordon & Gupte 2016). Distribution-intensive companies are marked by a large portion of their supply chain cost tied up in distribution networks and finished goods (Janvier-James 2012). Such firms include wholesale, distribution, consumer packaged products and retail entities. On the other hand, manufacturing-intensive entities have a large portion of their supply chain cost linked to the manufacturing process, including component suppliers and the management of contract manufacturers (Slater 2010). They encompass industrial equipment, high tech and automotive firms. Retailers buy inventory or stock and sell it to customer, whereas manufacturers buy components and raw materials and then sell finished products downstream – later in supply chain toward the end consumer or customer (Kumar & Suresh 2009). Therefore, depending on the nature of the business, size and buyers’ preferences, there are a number of industry-specific strategies for improving inventory management.

One of the strategic actions for improving inventory management is to optimize the efficiency of distribution centers or warehouses across supply networks (Simchi-Levi 2005). Waters and Rinsler (2014) point out that inventory management can also be enhanced by improving forecasting accuracy. Forecasts are essential for effective operations of a business entity (Michalski 2009). They provide information that can be used to guide future strategic activities of the firm (Kumar & Suresh 2009). Other strategic measures for improving inventory management include improving supply chain visibility; improving an entity’s capability to meet order dates; and making supplier more responsible for inventory, for example, through drop-shipping and cross-docking (Christopher 2012). With drop-shipping, customers’ orders are passed onto the manufacturers who ship finished products directly to customers as soon production ends. In that regard, a company avoids holding products in their warehouses, but still makes profits (Practicalecommerce 2010). According to Bidgoli (2010), drop-shipping allows online retailers to improve their sales and profits by making direct shipments to customers. The solution gives them freedom to choose from a range of options without transferring the burden of inventory management for all products. Another cost-effective approach is cross-decking, whereby inventory is passed from an inbound shipment – the product’s manufacturer – directly to an outbound shipment, with minimal or no holding time in warehouses (Cognizant 2014). According to Gue (2016), cross-docking removes the inventory holding function in retailers’ warehouses, while allowing the warehouses to serve their shipping and consolidation functions. Figure 1 illustrates the top strategic actions for enhancing inventory management.

Inventory Planning

Effective inventory management is imperative for successful operations in the retail sector. The process requires strategic decision making. According to Christopher (2012), supply chain managers can improve their inventory decisions by employing flexible inventory management strategies formulated and implemented as part of an inventory plan. Thus, retailers need to continuously assess the effectiveness of their inventory strategy designs (Aro-Gordon & Gupte 2016; Olhager 2013). The effects of employing particular inventory management strategies with the aims of meeting customers’ demands and achieving organizational goals must be strategically evaluated (Janvier-James 2012). Therefore, retailers should establish inventory management plans and specific performance goals that can be used evaluate the success of the formulated strategies (Sople 2012). All employees involved in the inventory processes must understand the developed plan, its components and their respective responsibilities (Loudin & Mazel 2010). Additionally, feedback is essential for improvement (Kumar & Suresh 2009). In that regard, strategies and goals must be monitored and then modified appropriately to achieve the desired goals. According to Loudin and Mazel (2010), inventory optimization should only begin after a customer service strategy and a supply and demand plan have been designed to achieve customer service objectives. In the same manner, appropriate statistical forecasting algorithms should be used to predict demand variability.

Minimize Cost of Inventory

Inventory management is very costly; hence, companies should strive to cut the attached expenditures. There are holding/maintenance and order costs involved in inventory management (Kumar & Suresh 2009). They include ordering, transportation, and physical handling of inventory in warehouses. More specifically, holding costs include storage, property taxes, damage, deterioration, finance, and insurance premiums (Möllering 2007). There is also the cost associated with poor resource allocation. In this regard, companies can outsource some of the inventory handling operations and focus on their core business activities. One more area that requires special attention is the effective use of capital. Pakiding (2007) stresses that excess inventory should be avoided because it reduces asset turnover and net income. For example, if the cost of the company’s capital is 10%, each $10,000 of excess inventory has a negative effect on the company’s net income of $1000. The strategy is thus to cut costs and minimize excess stocks. Additionally, sustainable relations with suppliers and service providers can reduce transportation, insurance, and storage costs. According to Cognizant (2014), the failure to build healthy working relationships among suppliers and retailers tends to result in a collapse of advanced system notification (ASN). ASN is a pillar of automated warehouse management as it informs a retailer about the time of shipment, the volume shipped, and carrier’s details. A key part of inventory management success is attributed to effective communication and sustainable relationships with suppliers and manufacturers (Akindipe 2014; Eroglu & Hofer 2011). Therefore, high-volume retailers should sustain their business relationships with various suppliers in different locations to cushion themselves from supply variability and other unforeseen interruptions (Napolitano 2013). Although retailers can induce competition among suppliers in order to attain high-quality standards, sustainable relationships with suppliers through long-term contracts also maintain high standards and low prices for raw products (Kumar 2006).

Attain Proper Inventory Mix

An appropriate inventory mix is pivotal for effective inventory management. For a globalized retailer, inventor mix entails maintaining the types of products and services that improve customer satisfaction. Some of the factors linked to a decent inventory mix include customer needs and demands, market trends, financial performance, and the company’s strategic direction (Pakiding 2007). A retailer’s inventory mix should reflect its strategic direction. In other words, the type of inventory handled by the company should be in accordance with its business offerings and vision. Pakiding (2007) asserts that customers’ needs must be understood and anticipated, either through observation or using formal systems to gather information. In the end, supply chain managers will devise strategic inventory plans to meet specific customers’ needs (Sople 2012). For example, the financial analysis of margin statistics and sales provides valuable information about the company’s past performance, which allows evaluating its strategic direction. Unexpected events (risks) and trends in the retailer’s globalized environment must also be considered in the inventory mix (Aro-Gordon & Gupte 2016; Waters & Rinsler 2014). As a consequence, regular market research must entail a detailed review of the competitors’ products and services. Regular market research allows companies to update their inventory mix. Hence, they can make necessary adjustments, including creating or eliminating product liens, and decreasing or increasing the supply of some products.

Maintain Efficient Inventory Levels

As highlighted above, the inventory mix includes strategic planning, which defines the nature of customers a company needs. In contrast, inventory levels entail operating decisions meant to achieve cost control and high efficiency (Pakiding 2007). Typically, inventory levels vary depending on the type of service or product. For instance, some products require higher inventory levels than others. The desired inventory level is determined by the demand for the product (Kumar & Suresh 2009). An efficient inventory level reduces the cost of over-or understocking. In order to improve inventory management and eventually minimize the cost associated with over-or understocking of merchandise, retailers must maintain a reasonable balance (Ross 2015). Inventory level can also be affected by supplier performance, product promotions, and delivery logistics. For retailers, maintaining the appropriate level of inventory can be challenging. However, they can maintain a lot of the products in high demand to minimize the risk of stock depletion. While this approach may be effective for many retailers, globalized entities must understand that there are hidden costs linked to the maintenance of larger inventories as well as a detrimental impact on revenues.

The ABC Analysis divides the inventory of all stock-keeping units (SKUs) into three categories: A, B, and C (Ochonma 2015). Category A holds the most important or highly valued products (Kumar & Suresh 2009). In the same manner, products in category A have the greatest impact on the overall costs of a company. The impact of category B and C drops in respective order. With this approach, a company focuses its resources on tracking and analyzing products in category A because they have a significant impact on the company’s costs. Furthermore, products can be categorised as seasonal, slow turnover, and fast turnover. Seasonal inventory should be stocked in a manner that can help meet demand and not leave excess products at the end of a season (Li 2007). According to Ross (2015), the underlying strategy is to build product supplies in an anticipation of the peak season, maintain a suitable inventory, and encourage preorders. For fast turnover products, inventories should be maintained at high levels (Ross 2015). The logic is to maintain inventories in a manner dictated by sales history, suppliers’ output, delivery logistics, and promotional activities.

Order Efficiently

Ordering products from manufacturers or suppliers is an integral part of inventory management. Proficient ordering ensures that inventory levels are kept at appropriate levels (Handfield et al. 2013). In other words, inventory should be procured in a strategic and organized manner. To improve inventory management, companies should monitor quantities ordered and kept frequently to avoid unwanted skewness in the demand and supply of a product (Slater 2010). Firms with an array of product lines may set specialized teams to be responsible for each category (A, B, or C) of inventory. Using the Just-In-Time (JIT) approach, items are purchased only a few days or weeks before they are needed, leading to low holding costs (Adamu, Budlender & Idowu 2014). In the backordering approach, a retailer places an order for a product only after it has been ordered by a customer (Anderson et al. 2011). It means that a retailer does not worry about overstocking, which translates to longer wait times for customers, which may be insignificant in case of high demand (Eroglu & Hofer 2011). The two major variable costs attached to ordering are processing and maintaining inventory. The cost of maintaining inventory grows with an increase in the quantity of ordered products. The goal that retailers should seek in ordering a particular product is to have the cost of ordering equal to the cost of maintaining the ordered merchandise. The quantity at which these cost are equal is referred to as economic order quantity (EOQ) depicted in Figure 2.

To achieve cost reductions in inventory management, it is important to keep accurate inventory records. Additionally, the companies record product sale rate to account for seasonal changes and unanticipated variations in sales. Automated inventory systems can also be used by companies to systematically control product ordering. Through computerized systems like point-of-sale (POS), a retailer can track product sales for specific categories of merchandise. Furthermore, supply chain managers should track and analyze their inventory performance through regular financial analysis. The assessment should focus on the data related to gross margins, sales, and inventory turnover.

Inventory Management Optimization Tools

The financial goal of a company investing in a robust inventory management system or software it to maximize its value. In other words, inventory management should contribute to the achievement of financial wealth (Michalski 2009). Companies are gradually moving toward advanced inventory optimization techniques, including multi-echelon inventory optimization (Aberdeen Group 2006). Moreover, simulation-based inventory optimization approaches can be used for a distributed (multi-location) inventory system (Lang 2010). Inventory optimization tools are gaining attention as businesses seek to evaluate their supply chain networks and identify the most effective inventory policies for each product and node in the supply chain. According to Napolitano (2013), the popularity of inventory optimization tools is attributed to the realization that the traditional transactional systems managing distribution centers fail to provide adequate cutting-age optimization. Typically, the optimization tools are stand-alone software techniques using data from enterprise resources planning (ERP), warehouse management system (WMS) systems, and vendor managed inventory (Loudin & Mazel 2010; Ross 2015). Normally, valuable information from ASN is transmitted by suppliers electronically through electronic data interchange (EDI), electronic-mail, and other digital communication channels, before the retailer receives the ordered products (Cognizant 2014). To that end, inventory optimization tools use readily available data about existing business operations and fiscal values for supply chain components.

Inventory is the lifeline of a company’s supply chain. For this reason, it is important to figure out a balance between demand and supply, or otherwise a company will suffer detrimental consequences. Even after figuring out the volume that should be stocked, it is important to ensure a proper flow of inventory (Adamu, Budlender & Idowu 2014). This process entails managing data and information associated with inventory to ensure that the raw materials are moved to the next node of the supply chain in time and cost-effectively. Inventory optimization tools consider demand and supply variability, as well as replenishment variables. The aim is to determine the volume of inventory that should be kept in warehouses in order to cushion a company from that variability (Napolitano 2013). In addition, inventory software is often Internet enabled. Bidgoli (2010) asserts that Internet enables inventory management to make replenishment of products at the distribution stores efficient and fast. The multi-echelon approach utilizes probabilistic (stochastic) techniques to compute a company’s inventory target (CSCO Insights 2011; Möllering 2007). Its efficiency in improving inventory management is tied to the fact that it accounts for supply chain variability, including lead time variability (Aberdeen Group 2006). Unlike in the traditional ABC approach, where inventory is categorised into frequent, fast, and sporadic movers, and then allocated to groups (Ochonma 2015), the multi-echelon approach accounts for interdependencies across various supply chain tiers (CSCO Insights 2011). As already mentioned, traditional supply chain planning tools only optimize inventory levels on echelon or node at a time. Inventory optimization software approaches an inventory problem holistically, factoring in optimal inventory levels from raw material to distribution channels simultaneously. Hence, supply network inventory levels are optimized.

Conclusion

Companies are operating in an era marked by increased complexity when it comes to supply chain networks. This literature review addresses many diverse challenges faced by modern supply chain managers while trying to achieve better management of inventory across these complex supply chain networks. Many firm are moving away from traditional approaches, such as the development of conventional S&OP processes and the implementation efforts to enhance forecast accuracy, to new technologies and tools that indeed improve tracking and automation (CSCO Insights 2011). Internet-enabled inventory management tools offer efficient and timely tracking of ordered items by integrating radio frequency identification (RFID) and QR technologies, as well as modern Internet and communication innovations (Bidgoli 2010). This review acknowledges the availability of various effective inventory management techniques and processes. Simultaneous improvement of cost-efficiency is possible as well. Hence, today business entities are able to achieve optimal performance. The majority of researchers and industry analysts contend that technology and process improvements are very important when it comes to improving inventory management. Essentially, this literature review presents information regarding strategies and techniques that could be used by companies to enhance their inventory management. While there are many tools and processes that can be used to upgrade inventory management, the sheer scale and scope of managing inventories holistically is a challenge that requires innovative processes and productive technologies. For this reason, there is a need for an empirical investigation of the efficacy of some of the new technologies and tools for inventory management optimization in specific cases. To complement the present review and improve current inventory management, empirical analysis and examples of real-world inventory management approaches in companies should be researched further, particularly in globalized companies.