For many businesses, stock availability is a critical element of delivering excellent customer service. Achieving high levels of stock availability without holding high levels of inventory is challenging – but it is possible. The secret is to optimise…
Many businesses fear stockouts – and rightly so. Ten years ago it might have been OK to ask your customer to wait a few weeks until you got their product in stock, but today you’re likely to lose that customer to another supplier if you aren’t able to deliver. After all, your competitor is just a click away.
Faced with the risk of stockouts, a damaged reputation and reduced profits, some businesses will resort to stocking high quantities of every SKU to meet demand. This is a very bad idea for three reasons:
- This will negatively impact your inventory turnover ratio.
- It will tie up working capital and increase carrying costs
- It will increase the risk of excess and obsolete inventory
Instead, you need to find ways to fulfil orders without maxing out on the stock. This is possible when you introduce inventory optimisation techniques to your inventory management practices. Inventory optimisation methods ensure supply and demand volatility is considered when setting your demand forecasts, stock levels and replenishment parameters.
- Improving Stock Availability With Inventory Optimisation
The first stage of inventory optimisation is to set accurate demand forecasts, so you only carry the products you need to meet demand. The next stage is to optimise your stock levels. There’s no point carrying high volumes of every item in your warehouse – this will be a drain on your working capital. Instead, you need to identify the most valuable inventory items for your business and prioritise those. One way to do this is to use an inventory classification model.
Interesting tit-bit – ABC analysis is a simple way to segment your stock based on its value to the business. The aim is to prioritise the availability of category ‘A’ products that have a good profit margin, versus ‘B’ that are less valuable and finally ‘C’ products.
For more sophisticated stocking policies you can turn to inventory planning software, that will analyse every SKU based on a number of variables, such as demand-type, demand volatility, pick a frequency and cost to sell (or profitability). It then recommends what to stock, based on these parameters. For example, it often makes no sense to carry large numbers of expensive items which have volatile demand, when investment in cheaper, fast-moving goods will help ensure stock availability and keep inventory turnover high.
- Use Service Levels To Measure Stock Availability
The next step to ensuring stock availability is to set target service levels. Service levels measure whether an inventory item was in stock when it was requested for delivery, leading to a completely fulfilled order e.g whether demand (or sales orders) could be met from the inventory on hand.
The target service level you set for each item in your warehouse should be based on its forecasted demand and demand type e.g if you have fast-moving products where demand is consistently high, then you might set a high service level of 98% or above. Whereas for slower moving products with intermittent demand you may set lower service levels, such as 90%.
Your service levels are therefore a measure of stock availability.
With your service levels set, you can then set your stocking rules, so you lower your inventory but still ensure availability. Monitoring your service level as an inventory management KPI helps you ensure you can completely fulfil every order and prevent stockouts.
- Review Your Stock Replenishment Rules
Inventory replenishment planning is also critical to ensuring stock availability without over-ordering. Determining your order frequencies, order quantities and safety stock levels to take account of demand and supply variables means you can reduce stock but still achieve high target service levels.
However, basic inventory replenishment processes (often managed in spreadsheets or used by ERP systems) are very one-dimensional. Reorder point calculations are based on a fixed order cycle or when the stock hits a certain trigger point. Reorder quantities are either the same amount every time or based on filling up to a min/max warehouse capacity.
The Economic Order Quantity methodology is more advanced, making carrying and ordering costs into account. But none of these methods considers supply and demand variables.
With Inventory Optimisation Software You Can Go One Step Further And Factor In:
- Demand forecasts – so you’re ordering to the demands of your customers
- Supplier lead times – so you’re taking account of supplier constraints, national holidays, festive season etc
- Cost-effective order quantities – so you’re weighing up the cost of carrying and opportunity costs against cheap bulk buys
- Safety stock levels – so you never end up out of stock
Stock Availability Is An Achievable Goal
Many stock availability issues are a result of not accounting for supply and demand volatility.
If you can stock the right goods in the right amounts to meet demand, you’ll maximise your stock turnover rate. As goods move quickly in and out of the warehouse you can keep cash flowing and prevent excess and obsolete stock. At the same time, you’ll have optimised stock levels that are set to ensure high service levels and stock availability targets.