Excessive and obsolete inventory can cause a business to fail. This is a significant and vital issue. One needs to mitigate these challenges and learn how to optimize inventory. Healthy inventory optimization management can help a company flourish like a wealthy field. That is why optimizing inventory and reducing obsolescence is a necessity.
Let’s explore how certain principles can be applied to optimize inventory management:
Inventory Management Systems
We have a different perspective on implementing an inventory management system. This entire debate depends on robust management systems such as ERP and WMS. A company can gain a lot by applying the appropriate techniques and significant software usage. Such as:
- Real-time visibility into stock levels
- Visibility of stock location and movement
When accurate and up-to-date information on the product quantity is available to a particular firm, it dramatically helps a company’s growth and reduces obsolescence. Moreover, inventory movement is vital in optimizing a company’s success, as this sector plays a prominent role in transferring, shipping, and adjusting the flow of received products.
When transparency occurs in all aspects, it empowers a firm decision and helps prevent stock from being stocked out or excessively stocked. Moreover, Obsolete inventory damages future stock as well.
Watch videos on SCMDOJO’s YouTube channel to learn more about inventory optimization best practices! Click here!
Demand Forecasting:
We perceive that advancing forecasting methods is essential. They improve demand prediction accuracy, helplessly align production, and procure 14 forecasting methods that can be applied to a business for growth and future improvements. If you want to avoid obsolete inventory, focus on the following techniques.
Those 14 forecasts are distributed between 2 categories: quantitative and qualitative methods.
Quantitative Methods:
The Quantitative forecasting method is engaged where there is access to historical data, and unlike the former, it is objective to the degree of the reality of the data. Its types are stated below:
- Moving Average
- Exponential Smoothing
- Regression Analysis
- Adaptive Smoothing
- Graphical methods
- Econometric modeling
- Life-cycle modeling
Qualitative forecasting:
The qualitative forecasting method is a subjective judgment based on the opinion expressed by consumers and market experts. This method is adopted when there is no historical data. It is further distributed in a few sections stated below:
- Expert opinion
- Market Research
- Focus groups
- Historical analogy
- Delphi method
- Panel consensus
Watch videos on SCMDOJO’s YouTube channel to learn Why Demand Forecasting Matters! Click here!
Supply Chain Collaboration
Solid relationships with suppliers can enhance supply chain visibility. Collaboration is at its peak when forecasting is robust and solid industry relationships guarantee growth. Supply chain visibility with a responsive community is a fantastic combo that optimizes inventory and reduces obsolescence in the blink of an eye.
Supplier relationship management and buyer-supplier relationships are highly essential and are kept as a demand for better outcomes.
Read In Detail About Supply Chain Collaboration Here
Practical Strategies To Reduce Obsolete Inventory
MOQ Reduction
Reducing the minimum order quantity is very important in optimizing inventory. The MOQ strategy helps free up capital; however, it also helps minimize loss by reducing the amount of inventory they need to purchase at once.
Vendor-Managed Inventory (VMI):
This is a collaborative approach in which suppliers manage inventory levels for customers and partner with them on real-time demand dates to decrease the inventory burden on both shoulders.
It is one of the most responsive and well-known techniques, which helps reduce obsolescence, optimize inventory, and boost the supply chain.
Read About Vendor-Managed Inventory Here
Lead Time Reduction
Lead time refers to the point from where the order is placed to the endpoint where the order is received. Optimizing routes in this scenario is also essential because it helps reduce timing. However, the time the inventory sits in the warehouse idly is supposed to be cut to make the inventory reach its desired destination early.
Get Access To Inventory Optimization Best Practice Here
ABC Analysis
In the supply chain, most of us have been performing ABC inventory analysis for many years and in many different ways. Additionally, this method has served us well and gives us several advantages. However, most supply chain analysts perform ABC analysis on value, as you can see in this Wikipedia article and YouTube video.
Get Access to ABC Analysis Tool
Safety Stock Optimization
Safety Stock Optimization is a type of insurance policy that covers fluctuations in unpredicted and unforeseen events, such as sudden erratic demand, poor supplier delivery performance, or force majeure.
Learn About Safety Stock Optimization Here
Inventory Turnover
Want to avoid financial losses? Implementing inventory control techniques is the best medicine. However, these techniques help prevent issues like dead stock and spoilage. Inadequate inventory management of perishable items, like food, can cause losses. Moreover, efficient inventory control templates should be used to avoid spoilage and dead stock.
Stock Turnover Calculation
Businesses need to calculate stock turnover to understand inventory status clearly. When inventory status is shown clearly, it’s easy to interpret the company’s future needs and wants and the factors that need to be pushed or lowered to calculate turnover.
Download Free Supply Chain KPIs Cheat Sheet PDF
Obsolete Inventory VS Optimized Inventory
Feature | Obsolete Inventory | Optimized Inventory |
Impact on Profitability | Reduces profitability due to write-offs and lost revenue. | Increases profitability by reducing holding costs and improving cash flow. |
Impact on Cash Flow | Ties up capital, limiting financial flexibility. | Improves cash flow by reducing working capital requirements. |
Impact on Customer Satisfaction | This can lead to stockouts and decreased customer satisfaction. | Enhances customer satisfaction by ensuring product availability and timely delivery. |
Operational Impact | Increases storage and handling costs. | Reduces operational costs through efficient inventory management and streamlined processes. |
Strategic Implications | Hinders business growth and innovation. | Supports business growth and innovation by freeing up capital and resources. |
Inventory Levels | Excess inventory that is not moving. | It balanced inventory levels to meet demand without excess or shortages. |
Demand Forecasting | Inaccurate demand forecasting leads to overstocking or understocking. | Accurate demand forecasting helps avoid excess and obsolete inventory. |
Supplier Relationships | Weak supplier relationships can lead to supply chain disruptions and excess inventory. | Strong supplier relationships enable better collaboration and efficient inventory management. |
Technology Adoption | A lack of investment in inventory management technology can hinder optimization efforts. | The adoption of advanced inventory management systems improves visibility and control. |
Continuous Improvement | The lack of a culture of continuous improvement can perpetuate inventory problems. | A culture of continuous improvement drives ongoing optimization and efficiency. |
About the Author – Fatima Salman
Fatima Salman is a dynamic content writer and social media influencer with a knack for crafting compelling narratives that engage and inspire. Currently contributing her expertise at SCMDOJO, Fatima brings over five years of experience as a content writer and two years in media. Her passion for storytelling and strategic content creation has made her a key player in digital marketing.
Fatima earned her bachelor’s degree in Economics and Finance from the NED University of Engineering and Technology, where she cultivated a strong analytical foundation that complements her creative skills. Her versatile background allows her to seamlessly blend data-driven insights with captivating content to drive impactful results.
Beyond her professional endeavors, Fatima is a recognized social media influencer. She shares her unique perspectives and lifestyle inspirations with a growing online community.