The American Productivity & Quality Center (APQC) puts out an annual Supply Chain Management Priorities and Challenges report. In 2023, the report shows that 62% of organizations missed their targets for the year and nearly 80% of organizations fell short of their competitors. It’s why an overwhelming number of businesses said implementing advanced analytics to improve their supply chain management was at the top of their priorities.
Knowing your inventory position is crucial to right-sizing your supply chain and maintaining optimal inventory levels. Your inventory positioning strategy needs to account for every item in your supply chain, including the stock in your warehouse, incoming orders, and current fulfillment needs.
Importance of Understanding Inventory Position
Inventory accuracy is key to avoid tying up excess capital in holding costs or dealing with stockouts and unhappy customers. A firm grasp on your SKUs and inventory costs helps you make more informed decisions about how to spend your money wisely and maximize your operational efficiency.
Efficient operations and cash management require monitoring your inventory position, meaning you can:
- Make purchasing decisions with real-time data
- Optimize working capital by maintaining appropriate stock levels
- Improve cash flow by reducing excess inventory
- Enhance customer satisfaction through better product availability
- Reduce carrying costs and warehouse expenses
The Components of Inventory Position
For any business, no matter the size, you need to understand the various components that make up your inventory position.
Current Inventory Levels
At its most basic level, this includes the physical inventory housed within warehouses and storage facilities – the tangible goods that can be counted and verified at any given moment. However, the full scope of current inventory extends far beyond what’s simply sitting on warehouse shelves.
Effective inventory management must also account for incoming inventory and outgoing stock— goods that are moving between locations but haven’t yet reached their final destination. This typically represents a significant portion of a company’s total inventory levels, particularly for businesses operating across multiple locations or international borders.
This gets particularly complex for manufacturing environments where you have to manage raw materials and work-in-process.
Excess Inventory and Its Implications
When inventory levels exceed optimal levels, the immediate impact is felt in escalating carrying costs. Storage space, insurance premiums, and utilities all contribute to an increasing financial burden that impacts your bottom line. It impacts warehouse management where you may be tying up valuable storage space.
And, the potential for getting stuck with SKUs that aren’t selling or are no longer in demand in a shifting market can result in dead stock. In many cases, the result is deep discounts to move excess stock, which hurts the bottom line.
Obsolete Inventory: Identifying the Problem
Obsolete inventory is a continuing problem for many businesses and it’s challenging to avoid. Changing customer behavior, economic forces beyond your control, and the passage of time can render items obsolete.
You need a strategy to identify slow-moving inventory, track product lifecycle stages, and keep a close eye on consumer trends.
Finished Products vs. Raw Materials
Finished products, ready for immediate sale to customers, typically carry higher costs and complexities in their management. These items often require more sophisticated storage solutions to maintain their market-ready condition and frequently come with higher carrying costs due to their increased value and more specific storage requirements.
On the other hand, raw materials typically offer more flexibility in storage and management. These materials generally come with lower per-unit storage costs and can often be maintained in more stable, standardized conditions. While raw materials are subject to supplier lead times and availability, they often present opportunities for cost savings through bulk purchasing agreements.
Like everything else in your supply chain, maintaining the proper balance is key.
Factors Influencing Inventory Position
Let’s take a look at some of the key factors that impact inventory position.
Customer Demand and Its Variability
Forecasting customer demand is perhaps the most crucial factor in maintaining optimal inventory position. Success requires a sophisticated approach to data analysis, combining historical insights with predictive modeling to anticipate future needs.
Companies that excel in this area can have a significant competitive advantage by staying one step ahead of market shifts while minimizing the risks associated with both stockouts and excess inventory.
Supply Chain Disruptions and Their Impact
While wholesale supply chain disruptions are (hopefully) behind us, spot disruptions are here to stay. Global unrest, economic instability, extreme weather events, and potential labor shortages do not appear to be going away. These disruptions can range from minor inconveniences to major operational challenges that require immediate attention and strategic repositioning.
Successful businesses manage their inventory position carefully and create contingency plans that account for various types of disruptions. This approach requires a delicate balance between maintaining sufficient safety stock and avoiding excessive inventory carrying costs.
You need accurate, real-time data to manage this balance properly.
Seasonal Trends and Patterns in Demand
While generally predictable, seasonal trends are a challenge in inventory management. What happens if last year’s hot item is no longer selling? What happens if a severe weather event occurs during your peak season? There’s a lot that can impact your inventory position and cause fluctuations that impact customer demand and incoming inventory.
You’ll need to keep a close eye on historical sales patterns and seasonal impact along with constant attention to your inventory position.
Keep Positioning Your Inventory Through Digital Transformation
Digital transformation is essential to produce the visibility and control you need to optimize your inventory position. Leveraging tools like IoT sensors, artificial intelligence, and inventory management software are key to success.
These systems provide the insights you need and make sense of the data you gather.
Surgere engineers and deploys solutions for your supply chain challenges, leveraging IoT technology and blend tagging, hardware, and software to deliver real-time intelligence for better decision-making. Connect with one of our supply chain management experts today.
Frequently Asked Questions — FAQs
What is the formula for inventory position?
The inventory position formula is calculated as:
On-hand inventory + On-order inventory – Backorders – Reserved inventory.
What is an inventory position?
Inventory position represents the total amount of inventory a company has available, including current stock, incoming orders, and committed items, to meet customer demand.
What is the role of the inventory?
The role of inventory is to make sure you have the products you need ready to go when your customers want them.
