World Best Practice Inventory Management

In almost every endeavor is difficult to determine what constitutes 'best practice'. Businesses around the world spend millions of dollars in software and consulting services, and often do not know if they are 'best practice' or just somewhere in the package.

Many companies will say, 'because it does not matter as long as you continue to improve?' The stark reality is that the inventory requires the investment of cash. Entries must be purchased and stored, and this tie up cash. This working capital can be a significant burden for many businesses and if released can provide significant cash resources that can be used for other more productive purposes.

For many companies the key issue is the availability and as long as they have one thing when you need care little investment in cash. However, this approach will maximize ROI, and in almost all cases, can not be economically justified at any level. This is because the excess inventory investment that generates this approach offers little or no value to the company. The surplus is invested in stocks that moves or becomes obsolete.

World's best inventory management practice, claims that the 'management system' is not only optimized the inventory. This is where that best practice can be easily identified and readily made.

Each level of the scale of the world's best practice provides a greater degree of control and management, but it is only at Level 5 - Optimizing the management system is optimized. By reaching this level, companies can reduce their inventory investment, freeing up cash, and achieve their desired levels of availability.

The five levels for the world's best management practices inventory are:

Level 1 - Ad Hoc: purchases are made on an 'as needed' basis. At this level there is little supervision necessary because the inventory is expensed when purchased and used immediately. While this may seem to reduce the investment in money can not reduce the total cost in cash. This approach can be valid if the items are available 'instantly' and the cost of a 'stock out' is negligible.

Level 2 - Storage: Inventory is expensed when purchased and stored for use, but not strictly controlled. Similar to the first except that the elements are stored because of the cost of a warehouse out. This approach seems to solve a problem, but raises other two. First, total spending will increase when items are purchased in 'economic quantities. (See my free e-book '5 Myths of inventory reduction ") Secondly, without controls there is little opportunity for review and development.

Level 3 - Cap: Inventory is capitalized and subject to some level of control, manual or software based. This approach is by far the most popular as it appears to provide the required mix of availability and control. Unfortunately, most organizations to use their software only for counting and accounting. There is a strong dependence on human calculation of inventory requirements, but often little review of the results. The result is likely to be a good availability, but a more significant investment in inventory and high levels of obsolescence.

Level 4 - Optimization Software: Inventory is capitalized and stock levels are optimized based on a risk / reward algorithm. This is the basis of most of the software solutions. Most software packages include the ability to automatically adjust stock levels required based on the history of supply and demand. Very few companies actually use this function because they know they can not trust the results. This is not due to a software bug, but because the supply and demand may not represent typical use. (This is explained later in intelligent solutions book inventory).

Level 5 - Optimizing: inventory management minimizes the total investment in cash, without increased risk. It is best practice in the world. At this level, all factors that influence the actual investment asset are reviewed on a regular basis. This review is manageable, because it is limited to the 'vital few elements of which have a real impact on the level of investment. Inventory levels are adjusted to take account of changing needs and this minimizes the likelihood of obsolete inventory.

Any company that already has the necessary software for Level 3 can reach Level 5 - the world's best practice. What is needed is the know-how, development of policies, measures and communication of information to take a company to level 5, no more software. Once these fundamental issues are addressed you implement a true management system. Software only goes to level 4, is the management system that provides the bridge to level 5 .......