3 Solutions to Solving the Inventory Management Challenge

The problem of balancing the right level of inventory - at the right location, at the right cost - is as old as trade itself. But modern pressures such as globalization, e-commerce, and relationships between global trading partners, have created a big inventory management challenge. Today, inventory is often divided among many parties, business units, and technology systems. Keeping track of all inventory from one system to another can be extraordinarily difficult.

Inventory Management Challenge part 1: Keeping Track of Inventory in Real-Time

The first inventory management challenge: how much inventory is available for sale, and where is it located? This question is not so easy to answer. Many factors come into play when calculating how much inventory is present in warehouses.

Knowing how much inventory is present is crucial to your business. You do not want to risk distressed inventory or overselling products (see challenge 2). Therefore, having real-time insight into inventory levels is an important first step. It might just mean the difference between selling your products and your competitor getting the sale.

In many situations, however, inventory management consists of spreadsheets of some kind in which inventory levels and locations are updated manually. Even though this might work for smaller companies, when multiple warehouses are involved – that might even be connected to multiple sales channels – working with spreadsheets becomes an impossible task.

Solution 1: A central system registering inventory mutations

The first solution is to have real-time insight into inventory levels by establishing real-time connections between locations where inventory is stored (warehouses) and locations where inventory is sold (sales channels).

This means that connections need to be established between inventory endpoints such as warehouse management systems and Sales Channel endpoints such as POS systems and webshops. With these connections, an inventory management system will accurately register:

On-hand inventory: all inventory that is physically present in warehouses
Allocated inventory: reserved inventory that is assigned to orders or is in transit, and therefore can’t be sold
Virtual inventory: inventory that is physically present and available for sale (On-hand inventory – Allocated inventory = Virtual inventory)

With these three numbers, it becomes easy which products are available for sale and when new inventory should be ordered.

Inventory Management Challenge part 2: Finding Balance

A second well-known inventory management challenge is distressed inventory. Distressed inventory consists of products that have passed the point where they can be sold for the normal price. Examples are fresh products that reach the expiry date and products that do not sell quick enough because they go out of season, or out of style. Distressed inventory will eventually turn into dead inventory once it cannot be sold anymore.

Either way, having a distressed inventory leads to a loss of revenue. Products end up being sold for a discount, getting thrown away or taking up valuable storage space.

In short, distressed inventory is the outcome of a mismatch between inventory levels and supply and demand.

‘’Most U.S.-based retailers have $1.43 worth of inventory for every $1 in sales.’’ Source: Capterra

Overselling

In addition to having a distressed inventory, there is the risk of not having enough inventory. It can be hard to know exactly how many products are available for sale. Items can be sold, yet still show up in inventory levels (for example because they have not been shipped yet). This leads to selling products that are already virtually sold, resulting in longer delivery times and disappointed customers. Manual calculation of these numbers is time- consuming and includes the risk of calculation mistakes.

Solution 2: Business Intelligence

The best way to avoid distressed inventory, or overselling, is to always have optimal inventory levels in place. However, as said, with manual calculation these numbers are nearly impossible to get right. Business Intelligence helps out. It enables the calculation of optimal inventory levels for each product based on statistics such as historical sales and current sales trends.

Inventory Calculation

Additionally, Business Intelligence tools allow for new inventory to be purchased before the inventory is empty and can be oversold. Inventory Management systems automatically create purchase orders for products that need restocking. It allows you to set fixed purchase levels for products, or use Business Intelligence capabilities to decide when new inventory should be purchased.

Recent research by BI survey has found that a majority of IT managers that already use Business Intelligence tools, see them as a means to deliver faster (64%) and provide more accurate information (56%) to decision-makers. This gives managers the insight they require to make better operational decisions (49%) – the kind of decisions that can ultimately drive down safety stock, reduce lost sales and minimize the costs and time related to inventory management.

Inventory Management Challenge part 3: Customers Expect Inventory Visibility

There is a growing trend in exploring products online:

’’88 percent of consumer pre-research their buys online before making a purchase either online or in-store’’ eCommerce Foundation

Customers look for different pieces of product information in their decision-making process, such as price and availability. In the digital age, they want to be sure that the product they are about to order is available and will be delivered to them within a certain timeframe, or is available for pick-up at a nearby store. Therefore, it is important that the inventory information they are looking for is available at all times.

Solution 3: Showing Product Availability Across Channels

Showing how many products are available for sale in your channels can only be done when sales channels (POS, webshops, marketplaces) and the inventory are connected. An inventory management system will do just that. It keeps track of orders across channels and mutates the inventory in real-time. This means that the inventory management system has to be connected to all Sales Channels (Online and offline).

In-Store Inventory

There are multiple ways to show how many items are available in sales channels. The first is by showing the exact amount of products that are physically present. This might be a good strategy when showing brick-and-mortar store inventory, as customers want to be sure the product they are looking for will not be sold out once they reach the store.

Showing customers what you have in stock, and where you have it, is a tactic that has proven to increase sales.

Research by Forrester has found that in-store inventory visibility has lead to retailers seeing a 38% increase in customer acquisition and store traffic, a 43% customer retention increase and 41% have seen a positive impact on in-store revenue after enabling inventory visibility.

Delivery times

Another possibility is showing product delivery times which can be provided through the inventory management system. These may include standard delivery times provided by the fulfillment party, by the manufacturer who drop ships the product or could be based on the average delivery times.

Want to know more?

Want to know how an Inventory Management system may help to overcome your inventory management challenge? We’d be happy to help you out. Drop us a line and we’ll be in touch.

You may also download our latest whitepaper: Solving Three Common Inventory Challenges, in which we have included even more statistics about inventory management challenges.

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