There are many misconceptions about inventory planning. In this article, we tackle the two biggest mistakes supply chain managers make with inventory planning and how they can be avoided.
2 Inventory Planning Mistakes to Avoid
1. Lack of or Poor Performance Measures
Measuring the wrong metrics not only inhibits production and supply efficiency, but may also encourage wastage and increase delivery times. Some of the mistakes that inventory planning managers make when measuring performance include:
a) Altering forecast during the execution time frame
Most managers alter production and delivery forecasts when addressing supply chain performance. Forecasting without taking into consideration market supply and demand leads to inaccurate production and delivery times. Inaccurate forecasting usually results in higher or lower inventory supplies that are inconsistent with market demand.
b) Not measuring customer service or inventory turns
The long term success of any company depends on customer satisfaction. However, many inventory managers are more concerned about optimizing supply chain processes while taking little interest in fulfilling their customers’ wishes. Failure to meet customers’ needs can slow down inventory sales and affect the company’s bottom line.
c) Planning based on stale metrics
Today’s competitive business environment requires companies to be proactive in identifying and meeting the needs of their customers. Timing and providing the right offerings are crucial to retaining market share and cementing relationships with customers. Unsatisfied customers can easily switch to competitors.
Companies that make the above mistakes struggle to meet customer needs and maintain product quality. Apart from this, operations along the supply chain are affected, leading to higher production costs and lower revenues. Managers can take some measures to solve the above inventory planning mistakes. These include:
- Developing realistic forecast error measures
Managers should develop realistic measures on the amount of forecast errors that the company can tolerate without an SKU stock-out. The general industry practice is to leave an error margin of plus or minus 10, which is, on average, two days’ worth of inventory. The data used to measure is crucial to having an accurate forecast error.
- Track fill rate and inventory turns for all product lines
Fill rate for all product lines should be measured on a daily basis. On the other hand, inventory-turn measures should be recorded based on production and sales cycles. Tracking these metrics is important to get accurate data on future product planning.
Measuring helps to track performance and enables companies to know how to manage inventory optimally. Using inventory planning software can help in more accurate forecasting of various products in the supply chain.
2. Poor Inventory management practices
Companies have no excuse to put inventory management in the hands of unqualified employees. Some of the mistakes companies make with regards to inventory planning include:
a) Using unqualified employees to head inventory planning and management
Most companies move employees in different departments to head their inventory planning, only to realize poor output. Inventory management should be placed under qualified professionals who understand the dynamics in the supply chain and the relationship between production and supply in the company’s short and longer term inventory goals.
b) Decentralized inventory management
Decentralizing inventory management usually leads to wastage. Inventory management decisions should be assigned to a qualified manager. Companies that assign office clerks, warehouse managers, and other employees that do not have any inventory-management training to inventory related decisions usually lack clear goals and strategy.
c) Concentrating on buying over planning
Successful inventory control requires meticulous planning to identify cost-cutting and optimization opportunities. Companies that look at inventory planning from solely a “buying” stand point miss new cost cutting and revenue generation opportunities.
To solve the above inventory management problems, companies need to realize that inventory planning requires someone with professional skills and training. It is important to assign accountability for proper and successful inventory management. The employee in charge of making inventory planning decisions should have a clear strategy for achieving the company’s short and long term goals.