Inventory management refers to the set of practices that enable an organisation to differentiate between enough and excess inventory and implement the same to improve its operational efficiency. Here are some 12 rules which will be of assistance in effective inventory management.

  1. Enterprise Inventory Policy
  2. S&OP, MPS and MRP
  3. Focus on 3Vs
  4. Managing Supply Disruptions
  5. Accurate Forecasting
  6. Managing Echelons and Nodes
  7. Extend Pull
  8. KPIs and Metrics
  9. Benchmarking
  10. Efficient Material Handling
  11. Appropriate ABC Classification

Inventory Accounting and Auditing

Enterprise Inventory Policy: Organisations need to draft an Enterprise Inventory Policy which will establish a framework for the organisations inventory management such as aggregate level inventory, item-level inventory, forecasting methodology, inventory accounting, valuations, inventory auditing, replenishment system, structure of inventory organisation, roles and responsibilities, owner of the inventory, risk management, supplier selection process, supplier scorecard, etc.

S&OP, MPS and MRP: Craft the strategic business plan for the organisation and this shall form the key input to priority planning. Establish appropriate planning buckets and planning horizons. Priority planning shall be meticulously followed with in the organisation.

Focus on 3Vs: The three V’s of inventory - velocity, visibility and variability have a great impact on the inventory. Increase in velocity and visibility will reduce inventory. And decrease in variability reduces inventory.

Managing Supply Disruptions: The more the disruption on the supply side of the chain will result in more inventory as raw material, WIP and finished goods. These disruptions may emanate from various sources such as supplier themselves, natural calamities, strikes, government policies, regulatory restrictions, poor infrastructure etc. Mapping and analysing this forward part of the supply chain will reveal opportunities for improvement which will eventually help us to reduce inventory.

Accurate Forecasting: As everyone says forecasting is always wrong. Then why do we do the forecasting. Because having a wrong or less accurate forecasting is much better than having no forecast at all. Forecast error is normally described as Mean Absolute Deviation (MAD). It is obvious less forecast error means less inventory in safety stock. So organisations should periodically check whether they are using the right forecasting technique or not.

Managing Echelons and Nodes: The least possible amount of inventory in any system is a function of the number of echelons and nodes the company have in its network. So more the echelons and nodes leads to more inventory in the system. Hence introducing additional echelons and nodes should be done only after a thorough due diligence.

Benchmarking: Identify the best performing organisation in your industry and try to match their inventory best practices. This may not be a very easy task, but it is doable. The challenge will come from how to get the relevant data. 

Extend Pull: Quantify the degree of pull in your organisation. Take necessary steps to increase the pull towards the upstream, which will have a remarkable impact on your inventory. 

KPIs and Metrics: Identify, map and analyse the inventory touch points and then establish KPIs and metrics so that these points can be monitored, governed and controlled to get the desired results.

Efficient Material Handling: Slow material handling equipments over long distances, frequent breakdowns etc. will result in more inventory. 

Appropriate ABC Classification: Most of the organisations use the annual dollar usage as the criteria for inventory classification. But is this the right classification that fits your industry or your organisation?

Inventory Accounting and Auditing: Establish the methodology for inventory accounting, valuation and auditing. You may use different methodologies for different product families.