Why do I need to manage, plan, and optimize inventory? Is there a difference?

First, we must define the terms more explicitly – for the purposes of this article -so we can determine the differences between them:

Inventory management refers to the process of ordering, storing, using, and selling a company’s inventory. This includes the management of raw materials, components and finished products, as well as warehousing and processing of such items.

Inventory planning is the process of calculating the right quantity of a product and ordering it at the right time so that it is available to be used or sold when needed. It takes into consideration things such as minimum order quantity, safety stock, maximum stock etc.

Inventory optimisation is the process of maintaining the right amount of inventory, in the right locations in the network, required to meet variable demand, keeping logistics costs low and avoiding common inventory issues such as stock out, overstocking, and backorders.

Often people will refer to Inventory management and include some or all elements of inventory planning. When talking about inventory planning, will also include elements of Inventory optimisation so we need to be careful and specific when using these terms.

We can also think of these three parts as three different layers to the same challenge – those being Execution, Planning and Strategy.

What is Inventory Management?

Typically, the day-to-day execution layer or Inventory management is recorded in an ERP (Enterprise Resource Planning), IMS (Integrated Management Solutions), WMS (Warehouse Management System) or even on a spreadsheet. The recording of deliveries and inventory movements is handled by people often physically in contact with the goods. Inventory management enables us to know what we have, how much of it we have and where it is, both in the processes and in the warehouse.  A timely accurate recording of this information is needed to support the next stage – Planning.

What is Inventory Planning?

This involves understanding where the stock is going to be needed and when –where we make sure we have the right stock in the right place at the right time.

Planning inventory considers several factors and is in essence a balancing act considering the demand for an item which will translate into sales and the supply of that item.

For inventory planning, we need to have a forecast of the demand (note – we are talking about demand and not sales; if you wish to know more about this, it can be discussed in detail in a future article), a measure of accuracy for this forecast so we can understand it’s reliability, physical lead time, variability of that lead time, Information lead time, minimum order quantities, economic order quantities, safety stock calculations (of which there are many), customer service level requirements, rate of sales, the number of locations, historic seasonality, the event calendar, a promotional calendar and many other factors.

What is Inventory optimization?

How many locations do we have? How many locations do we need to store our inventory? Not all types of inventories need to be stored in all locations. Inventory optimisation is about making sure that we can offset the costs of holding the inventory in multiple locations with the cost of transportation from fewer, more distant locations. Where should those locations be? And which SKUs should be held at which location?

Optimisation is about getting these decisions right at an individual SKU level throughout the supply chain.

All these considerations are needed, but without the foundation of accuracy at the execution level and robust planning metrics, Optimization becomes very challenging.

Why is Inventory optimization important?

Too often we see businesses looking to optimise their inventory without first ensuring their execution layer is solid and that the planning is accurate. Setting up a clear planning process be it S&OP (Sales and Operations Planning) or IBP (Integrated Business Planning) is key to being able to lower costs across the organisation through strategic optimisation.

Effective management of inventory helps in reducing costs which further keeps accounts and finances in check. From a customer’s point of view, it helps you to provide better customer services through fast delivery and low shipping charges, hence, meeting customer expectations.

At ebp Global we use a 5-layer model for Inventory management – splitting Inventory management and Inventory planning into two further levels. We assess the level of maturity of an organization at each of those levels. If you would like to know more about how we can help improve your Inventory management and free up your cash flow, please contact us at info@ebp-global.com