Importance Of Inventory Level Optimization to Enhance Business Performance
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Transcript of Importance Of Inventory Level Optimization to Enhance Business Performance
Inventories are actually money converted to the
form of physical goods, stored in a warehouse,
waiting to be converted back to money. Tying up
money in this form is inevitable in order to conduct
businesses in competitive and profitable manner.
But it is not logical to build up inventories without a
real demand driven reason to do so.
Amount of Inventory at SKU Level?
Why Inventory Optimization is Crucial?
“Inventory management is a vital part of any
modern organization, especially if it is associated
with a physical product. Suboptimal inventory
management directly impacts company value
through working-capital pressure and unrealized
revenue as well as through budgeting, planning,
and risk management issues.”
The three primary inventory issues impacting working capital
•How many inventory Dollars are on hand?
•How long do inventory Dollars sit on the
books?
•Why?
“CFOs can readily answer the first two questions. However,
only answers to the third question — why? — can enable
them to determine if inventory is an asset or a liability”
Better Managed Inventory…
Inventory costs represent a sizeable component out of
total logistics costs. Up to about one third of working
capital costs are also arising from inventories.
Inventory optimization has the potential to increase
profitability through multiple cost reductions tangled
with inventory such as holding costs, handling costs,
back order costs…
Increase Profitability
Inventory Rationalization is one of the most effective
ways to release up substantial amounts of cash for the
business enhancing liquidity position.
Inventory optimization paves a direct path to improve
ROCE, Asset Utilization.
Meaningful improvements in Current Ratio.
Significant and immediate improvements attainable on
Working Capital through multiple fronts.
Better Managed Inventory…
Financial Deliverables
It is often noticed that bottom 20% of the SKUs
are usually a significant drain on profitability as
they cannibalize demand and storage space from
higher volume products and are costly to
purchase, distribute and slow moving
“Companies often fail to recover a share
of money they tied up as “push
inventories!”
Reasons to Manage Inventory Better…
Inventory Hide Problems!
Providing a better service to customers is one of the
main reasons to carry stocks. But for this purpose or for
any other, maintaining irrationalized and excessive
inventory levels could hide not only supply chain
related, but also operations as well as finance related
weak links and problems in a business.
e.g. High level of finished goods buffer could divert the necessary attention from
recurrent production breakdowns or lower production efficiencies.
Inventory Rationalization is the sensible way forward…
Inventory Increase Risks!
Reasons to Manage Inventory Better…
Inventories could reduce risks such as stock outs. But on
the other hand damages, pilferages, expiries and
obsoleting of inventory which will ultimately cause
costly write-offs will introduce additional risk elements
to a business. Proactive and reactive measure such as
insurance that are essential to encounter such risks will
carve into ever thinning profit margins.
Steps Towards Better Managed Inventory…
Traditionally, many organizations have allowed
the managers in each business unit, factory, or
distribution center to set their own inventory
levels with little coordination. Eliminating the lack
of overall ownership of the inventory levels which
leads towards sub-optimization should be the
initial step towards rationalizing inventory.
Accurate and rational planning and forecasting could
effectively reduce complications which occur with
irrational inventories such as stock out situations and
maintaining unnecessary inventory levels.
A forecasting model which could relate to real customer
demand signals while incorporating other demand
affecting factors such as promotions and competitor's
actions could lay the foundation for appropriate
rationalization of inventory.
Steps Towards Better Managed Inventory…
Forecasting and Demand Planning
Time series models, What-if analysis tools and Sales
decomposition analyses customized to match unique
requirements of different business units will be used at
this level.
Steps Towards Better Managed Inventory…
Forecasting and Demand Planning
Each SKU will have different characteristics to another.
Dynamic requirements of each SKU should be
considered to avoid irrational inventory related
practices.
SKU rationalization will help determine the preferable
optimum stock level under each SKU and pave the way
for prioritized inventory investments
Steps Towards Better Managed Inventory…
SKU Optimization
Requirements to carry inventory will vary with SBUs,
geographical locations, product and market behaviors at
regional level and requirements of regional
stakeholders.
Understanding the rational behind each SBU to carry
the level of inventory could pave way to optimize SBU
level inventory.
Steps Towards Better Managed Inventory…
SBU Optimization
Rationalizing SKU-level inventory across all SBUs and
all inventory holding locations throughout the supply
chain will enable optimal inventory performance while
mitigating inventory risks.
Steps Towards Better Managed Inventory…
SKU & SBU Optimization