Using Analytics to Effectively Manage Inventory

TIBCO-Using Analytics to Effectively Manage Inventory
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It comes as no surprise that managing inventory is one of the biggest challenges manufacturers face.

Having too many goods on hand causes a decrease in inventory turnover as well as in profitability, according to an article in Manufacturing Business Technology. Low inventory turnovers typically mean a company is holding too much inventory compared to its sales. However, if goods are out of stock, a company will be faced with backorders, lost sales and very unhappy customers.

“So, what gives?” asks Bob Vormittag, author of the article.

What gives is that manufacturers have to effectively manage their inventories to improve customer service as well as profits, he says.

Analytics and business intelligence (BI) tools are key to manufacturers’ processes—particularly inventory management.

“BI tools take the guesswork out of when to buy and how much product businesses should stock by providing comprehensive analytics reports that present inventory data in an easy-to-read format so manufacturers can drill down and identify problem areas that require further investigation,” Vormittag notes.

The author points out four problems organizations have to deal with when it comes to managing their inventories and he offers tips on how to apply BI to overcome them.

Too Much Inventory

Although excess inventory negatively affects the profits of all manufacturers, it affects certain types, such as food manufacturers, more than others. That is because the inventories of food companies all have expiration dates, so they have to ensure that they don’t inadvertently ship foods that have expired, Vormittag says.

“Companies with excess inventory should consider gross margin return on inventory (GMROI) analytics to review inventory decisions from a return on investment perspective,” he notes. “GMROI is used to make decisions about inventory levels and gross margin from the department level all the way down to individual stock-keeping units.”

This data gives manufacturers insight into the best and worst sellers among their products, enabling them to better determine which products they should carry or even which vendors they should use, according to Vormittag.

“Inventory optimization is a powerful analytic tool that is critical for wholesale distributors, as it helps set inventory targets that allow them to better predict and balance supply and demand variability,” he says.

Out-of-Stock Items

In addition to causing back orders and lost sales, being out of products can also result in dissatisfied customers and loss of future business.

So, when it comes to managing inventories effectively, it’s critical that manufacturers understand how important it is to determine when to refill products from outside vendors, Vormittag notes.

One way to do that is with fill rate reports that provide warehouse managers with easy-to-read charts showing the proportion of customer orders satisfied from stock on hand.

“Fill rate is essential to the order management process and is inherently customer service driven,” he says. “It’s the percent of your orders that are shipped in full on the first shipment as a percentage of the total quantity ordered.”

Users can then look at the fill rate analytics and drill down the report by customer to see which products the customer purchased, and identify the product that was out of stock.

Inaccurate Knowledge of Inventory Stock

Sometimes, the on-hand number of a product noted in the computer system doesn’t match up with what’s actually on the warehouse shelf. Because of that warehouse managers don’t always have accurate counts of what is in stock.

Vormittag says using analytics, warehouse managers can automatically schedule when the physical product counting should happen. If this is done on a frequent or ongoing basis, managers can more quickly catch errors and avoid dissatisfied customers.

Additionally, BI tools can improve the accuracy of the stock by automatically posting customer purchase orders and product deliveries from vendors, he says.

Problems Finding Items in the Warehouse

To make it easier to find products in their warehouses, manufacturers should design and organize their warehouses with logical sequences to bring people to where they need to go to easily locate items, Vormittag says.

To that end, analytics give managers insight into the available spaces in their warehouses so they can effectively plan for incoming shipments as well as determine if they need to downsize or expand their warehouses.

“The bottom line is knowledge is power,” Vormittag says. “Analytics presents that knowledge in easy-to-digest reports that provide a summary of both product and vendor performance, enabling users to make smart and informed business decisions.”

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