Our last regular article of 2019 was about the major challenges we see coming in Manufacturing and Distribution, particularly in the food industry. This year we wanted to start with something that drills down a bit deeper into one of those challenges – Inventory Management. The good news on this topic is that most of the challenges you will have in 2020 are the same as the ones you were having in 2019. The bad news is that they are just getting harder is the speed and complexity of transportation and logistics continues to evolve, and there is one important new one.
Today we’ll cover FOUR challenges you need to be monitoring and solving for if you are not already doing so:
- Knowing Your Inventory
- Inefficient Processes
- Customer Demand
- The Coming Packaging Revolution
You Need To Know More Than What’s In The Bin
Inventory at its most basic definition implies knowing what you have and where it is. But it’s never that easy is it? Apparently not. In a survey of Global Chief Supply Chain Officers, IBM reported that 79% of their respondents reported that lack of visibility significantly impacts their supply chains. This is because “Inventory” is not defined by “What I have on hand right now” (though it may mean that to a single facility manager), but more accurately “what I he at every stage of my supply chain.”
Why is this so hard? Many old-school catalog companies had much of this figured out thirty years ago, BEFORE the internet and the age of digitalization. In a database that tracks ALL of your inventory, you may have to account for each SKU and its quantities in the following statuses, with the most obvious ones being IN the facility, like these:
- On hand – Inventory available in the picking aisles, not already committed to an order.
- Committed – In the picking aisles, already committed to an order on the books.
- In Picking – Pick wave already commenced, product en route to Packing.
- Packed – product packed and ready to ship.
- Shipped – product left shipping dock and scanned into truck.
And others that are also in the facility, but PRIOR to being available in picking:
- Reserve – inventory in reserve racks, usually still in the cases or pallets they were received in.
- Receiving – inventory received but not yet put away to reserve (or where necessary, directly to picking).
- Q&A – product that may have been diverted from Receiving to be inspected before the batch or load is put away.
And others that are not yet in the facility but in transit or at the manufacturer:
- Backordered – product that has been manufactured and is en route. Usually with a date that it is expected to arrive at the facility (thus allowing sales to communicate when it will be available AND allow for customers to order it knowing it is available).
- On order – Quantities that may be in production, but not completed and ready to ship yet, so without a firm date range for customer availability.
How many of these statuses do you track in YOUR business? How many should you be tracking? Even without a fully connected system that updates all of these automatically, you should be ensuring your systems have a way to track the ones that are relevant to your business.
Visibility like this is just one major area of the inventory challenge, but perhaps the most important one because it directly impacts customer satisfaction, sales, revenue forecasting, and more.
Other elements of the Inventory Challenge include sales forecasting, seasonality, SKU control and more. But all of these are easier when you’ve been able to solve your visibility issue first!
Inefficient Processes and Tools
How do you forecast your sales – and how does your inventory take cues from that? Let’s look at an example:
If you forecast sales of a specific product for Q4 to be 1,000 units, then ordered 1,100 to have on hand and sold them ALL, then how many should you order for Q4 of the following year? You might say “We’re targeting 10% growth, so we’ll order 1,100 + 10% = 1,210.”
But how do you know if that’s enough?
What if you had orders for 1,300 units but could only fulfill 1,100? Did you record the “lost sales” of the additional 200 units? If you did, then you would be basing your forecasts on “Demand”, not “Sales”. In a business that is not as seasonal you might be able to capture all of that demand later, but if not, then you might lose additional sales the following year too if you did not capture the actual demand to start with.
The need to be the bridge between your suppliers and your customers is an awesome responsibility – it requires a way to incorporate historical data, sales goals, production capacity, pricing, etc. and turn it into a forecast that will maximize customer satisfaction without leaving the warehouse stuffed with overstock. So it makes sense to start with a solid set of processes that are logical, data-driven and measurable, and then support it with an appropriate software system that can incorporate the various data inputs created in one season and help build the forecast for another in the future.
Related to the forecasting elements discussed above, customer demand is something that even the best inventory managers have no control over. External factors as big as the macro economic factors, interest rates, changes in taste, unexpected competitor innovations or market disruptions.
This is not a challenge for “Inventory” to solve alone.
It requires a set of shared data, shared vision and shared strategy across management including Marketing , Sales, Merchandising (including Product Development), Operations and Production. This is where the ability to partner internally matters more than ever. For seasonal businesses especially, everything is amplified even more. Examples of what is impacted by the variables in Demand might include:
- The need for additional space and labor during peak season
- Changes in shipping rates as volume rise or fall
- Sales above forecast because of Marketing decisions (i.e. in the fashion industry, the color that sells the most tends to be the one worn by the model in the photo!).
- Product quality issues that generate returns or sink demand for a key product.
- Positive or negative unsolicited PR
The important aspect here, again, is the need for good processes and tools. They will provide the discipline required to collect and analyze the data needed to create forecast models that will provide the ability to respond to various customer demand scenarios in a controlled manner.
The Coming Packaging “Devolution”
This is not on everyone’s radar yet, but it would make sense now to start re-imagining your warehouse design for a world where packaging is minimized or for many types of products, or eliminated altogether. With brands as big as Nestle, McDonald’s, Asda and more pledging to go plastic-free, the growing plastic bans that have already started in Europe and the general move towards lower-impact packaging and shipping materials, facility managers will start having to rethink their facility designs and the equipment that goes into them. In the food and beverage industry, this could result in greater numbers of smaller facilities closer to the customer in order to accommodate the reduction in packaging that might result in a shorter freshness window.
It might also compete with the move to greater automation – as less packaging may conflict with the growth of robotic automation. It’s not clear yet HOW this trend will develop, but it is clear that inventory management practices will be forced to accommodate it as it grows. The key is to understand how to be part of the innovation and not be forced to respond where timing may result in potential lost sales to evolving customer tastes.
Supply Chain Visibility Matters
While we are focusing today on matters specific mainly to inventory management, the key takeaway here is about “visibility”. Investing in upgrading your processes, software and equipment as part of a warehouse modernization effort in order to improve data capture, and analytics helps solve challenges not only in inventory but up and down your supply chain.