5 Things to Teach Your Competitors about Inventory
Inventory management has come a long way. In today’s fast paced, Internet-connected world, customers are not willing to wait for a product to be “made to order,” and then shipped in six to eight weeks. They expect it much sooner. This creates the need to stock the product in the warehouse so it is available for immediate shipment when an order is taken. When one firm offers rapid delivery by carrying stock, competitors are generally forced to do the same. And so goes the path of improvement for both businesses and consumers. You want your business to be the one in the lead. Here are five lessons you can teach your competitors about inventory.
Lesson 1 – Keep Fill Rates as High as Possible
If stock is depleted from the warehouse, and a customer’s order cannot be filled within a reasonable or requested amount of time, the customer will often cancel the order and then re-order from a competitor that has stock available.
Lesson 2 – Preventing Attrition is Critical
Once a customer switches to a competitor, it may be much harder to get future orders from that inconvenienced customer. You don’t want to lose the repeat customers that you worked so hard to build up over time.
Lesson 3 – Increased Order Cycle Time Increases Shipping and Fulfillment Costs
For customers who are willing to wait out the backorder fulfillment process, shipping and fulfillment costs will be higher, especially if the order requires partial shipments as stock becomes available. Delayed shipment notices may need to be sent to customers, and the liability for unearned cash prepayments with backorders must be tracked. The cost of filling separate backorders may exceed the profit of the original order, and the only remaining argument for filling the backorder will be to prevent customer attrition.
Lesson 4 – Inventory Turnover is Important
Inventory turnover measures the performance of your investment in your inventory. Carrying too much stock in the warehouse puts a burden on an organization’s cash flow, which can easily outweigh benefits that may be offered for “ordering in bulk” in excess of near-future demand. Carrying too much stock on hand also increases the risks of theft, damage, and obsolescence to inventory on hand during long-term storage.
Lesson 5 – Accurately Forecasting Demand is Critical
Obviously, forecasting is vital for keeping your inventory investment as low as
possible without negatively impacting fill rates. The ability to forecast customer demand accurately is advantageous for obvious reasons:
- It improves customer satisfaction.
- Shipping and fulfillment costs are reduced when orders can be shipped complete at once.
- Inventory quantity on hand is more level, which controls costs and reduces the risks associated with carrying excessive inventory quantities.
Demand forecasts developed within the inventory system must be generally consistent with planning numbers generated by the marketing and other departments. However, your ERP system must use inventory forecast methods that are proven most useful with inventory systems, rather than forecasts generated by marketing or budgeting departments. It is important that inventory forecasts be made by SKU, by warehouse location, and by time unit. Merchandising managers may perform SKU forecasting based on demand history, and market managers may perform forecasting based solely on the predicted sales curve of catalogs. If the marketing department is planning an unusually big promotion and expects to sell three million units of an otherwise unpopular product, and the merchandising department forecasts project a total demand of only one million units, senior management must reconcile these very different visions of the future. While you may influence your customers with pricing, catalogs, and promotions, customers ultimately will order what, where, and when they desire.
The heart of an organization’s forecasting success is knowing how customers will order. The best way to control inventory to your advantage is through an ERP system that plans for future actions of your customer base.