Inventory Management is essential for the effectiveness of your downstream supply chain. Inventory Management is much more than just inventory and stock quantities coming in and going out of your warehouse. It includes the processes relating to the ordering, storing, and profiting from goods travelling down the supply chain from the supplier to customer. Imagine if one of the processes in this system is not working effectively, it can completely disrupt the whole downstream supply chain resulting in delayed orders, stockouts and unhappy customers. It is therefore essential to ensure that you have optimised your Inventory Management processes. In this blog, we’ll examine 4 different inventory optimisation tips and how they can benefit your Oil and Gas business.
How does Inventory Management impact the downstream supply chain?
Inventory Management refers to the management of material stock on a quantity and value basis. This includes the process of planning, entry and documentation of the movement of product and finished goods. If each of these processes is integrated and working efficiently, they can:
Positively impact customer experience – Inventory Management positively impacts sales channels and customer service. Through optimised inventory-related processes, you can reduce the delivery lead times and ensure that customers can have their orders fulfilled efficiently and effectively on time.
Improve cash flow – your cash flow is largely dependent on your inventory. You spend cash to buy a product, and that inventory is then turned back into cash when it sells. If your inventory is not managed correctly, your cash flow could be compromised, resulting in fewer sales and orders fulfilled.
Avoid shrinkage – through optimising your Inventory Management processes, you can avoid product and inventory shrinkage due to human error, loss, damage or theft.
Optimise fulfilment – optimisation ensures that the process of receiving goods, processing and delivering orders to customers, is efficient and effective. Orders are picked, distributed and transported with ease.
Avoid deadstock – Inventory Management systems allow you to track, manage and trace stock that may be close to expiry. This enhanced visibility ensures that you can sell that stock before it expires, this guarantees that you are not sitting with large quantities of deadstock in your warehouse.
There is no doubt that an optimised Inventory Management system has many different benefits to the downstream supply chain, but how do you create an optimised Inventory Management system?
Top 4 tips on how to optimise your Inventory Management
There are several different ways in which you can optimise Inventory Management. These include choosing the right Inventory Management strategy or model, identifying Inventory Management techniques, examining your inventory-related costs and implementing an innovative Inventory Management software solution.
1. Develop an Inventory Management Strategy/Model
There are different types of Inventory Management strategy/models that Oil and Gas companies can use to optimise their systems. We examine two of these examples below.
Vendor Management Inventory (VMI) systems
This system focuses on bridging the gap between supply chain planning and execution, as well as viewing the supply chain from an end customer first position. This is done by giving you, as the supplier/vendor, more control over your customer’s inventory. This system allows you to monitor, plan and control inventory for your customers, to build stronger customer relations, enhance operational efficiency, and save on operational costs.
Consignment Inventory (CI)
In this supply chain management strategy, the product is stored on your customer’s property but you, as the business, retain legal ownership of the product, and your customer is not required to pay for the goods until after they have been sold. This approach rules out the need to coordinate shipments of inventory to the warehouse, saves in storage costs, reduces and eliminates stockout.
Many customers choose the strategy or model that best suits their business needs and requirements. With this said, businesses are turning to CI systems as the preferred approach, primarily due to the operational benefits associated with this system and the impact this has on customer service levels.
2. Identify and use suitable Inventory Management techniques
There are several Inventory Management techniques that businesses utilise to assist with the optimisation of their supply chain. These techniques specifically look at the different ways that inventory can be calculated and ordered. These include:
Economic order quantity
Economic Order Quantity, or EOQ, is a calculation for the ideal order quantity a company needs to purchase for its inventory, using a formula with a set of variables like total costs of production, demand rate, holding costs, storage costs etc. This assists business in minimising costs for buying, delivering and storing products.
Minimum order quantity
Minimum Order Quantity, or MOQ, refers to the minimum amount that can be ordered from a supplier. For example, if you have an MOQ of 100 units or R100, your customers must be able to purchase at least 100 units or spend R100 to be able to buy from you. This technique is beneficial in ensuring that you are making a healthy profit margin and keeping a stable cash flow.
ABC analysis
This inventory categorisation technique splits subjects into three categories to identify items that have a substantial impact on overall inventory cost.
- Category A – serves as your most valuable products that contribute the most to overall profit.
- Category B – is the products that fall somewhere in between the most and least valuable.
- Category C – is for the small transactions that are vital for overall profit but do not matter much individually to the company altogether.
Just-in-time Inventory Management
Just-in-time (JIT) Inventory Management is a technique that arranges raw material orders from suppliers in direct connection with production schedules. Companies receive inventory on an as-needed basis instead of ordering too much and risking dead stock. This technique is used to increase efficiency, reduce costs and decrease waste by receiving goods only as they are needed.
Safety stock inventory
The safety stock inventory technique is when extra inventory is ordered beyond expected demand. This is specifically used to prevent stockouts typically caused by incorrect forecasting or unforeseen changes in customer demand.
FIFO and LIFO
FIFO and LIFO are methods used to determine the cost of inventory. FIFO, or First in, First out, assumes the older inventory is sold first. FIFO is a great way to keep inventory fresh. LIFO, or Last-in, First-out, assumes the newer inventory is typically sold first. LIFO helps prevent inventory from going bad.
Many businesses may choose to implement a number of these techniques depending on their specific Inventory Management needs and requirements.
3. Factor in Your Inventory Management Costs
There are several substantial costs associated with the procurement, storage and management of inventory that businesses need to calculate. These costs will provide more visibility and insight into the business and will enable the identification of any problem areas and cost-saving opportunities. There are three inventory costs that you need to consider, these include:
Ordering
This refers to the cost of acquisition and the inbound logistics related to the cost of procuring inventory. This consists of the time spent finding suppliers and expediting orders, the clerical cost of preparing purchase orders, transportation costs, as well as costs relating to the receiving, unloading, inspection and transfer of products.
Holding
This includes the cost of storing physical inventory, such as building and facility maintenance-related costs. Costs included are storage and warehousing, rent, electricity, security, insurance against theft, loss or damage, etc.
Shortage
These are the costs incurred when a business runs out of stock. This includes costs related to time lost when raw materials are not available, idle employees who are not able to do their jobs, filling backorders through expedited shipping etc. The biggest cost of all is the impact on customer satisfaction and service levels when there is a shortage.
By examining Inventory Management costs, you will have the visibility needed to reduce costs and identify opportunities to improve productivity and efficiency.
4. Implement an Innovative Inventory Management Software Solution
Digital transformation in the Oil and Gas industry has come a long way in recent years. Many innovative software solutions have been developed to ensure the effectiveness and efficiency of the downstream supply chain, including the development of Inventory Management software solutions. These software solutions aim to make the process of Inventory Management as efficient and straightforward as possible, can factor in or integrate the elements mentioned in the tips above. Through the implementation of an Inventory Management software solution, you can enhance productivity and profitability by:
Accessing real-time data
With this software, you can access real-time data related to inventory stock, storage and control. This enables you to respond to customer orders accurately and efficiently as well as proactively adapt to any challenges or problems that may arise. This provides more visibility over the downstream supply chain, enabling you to manage and identify any potential issues before they happen and reduce unnecessary operational costs while facilitating business flexibility and agility.
Through dynamic planning and forecasting
This software solution aims to automate data-driven planning processes for consensus demand and supply forecasts, to support sales and operations, point of sale, supply planning and inventory optimisation. These capabilities aim to assist in eliminating out-of-stock situations by implementing reorder point automation, reducing oversized deliveries/returns and long-term distribution costs. This ultimately saves on costs, positively impacts customers relationships and enhances profitability.
Enhancing the purchasing of inventory
From the real-time data and analytics provided by the Inventory Management software, you can make data-driven decisions related to the purchasing of inventory. Inventory Management software improves the accuracy and management of inventory levels by providing you with the information needed to order the right amount of inventory to fulfill customer orders. This reduces deadstock and saves on storage costs needed for excess stock.
Implementing a cloud-based solution
Many Inventory Management software solutions are cloud-based. This type of solution allows for more accuracy, traceability and insight into stock levels. It provides instant stock level updates, allows for a reduction in human error, automates supply chain processes relating to customers’ orders, ensures that all information is safe and secure, and allows for quick and effective reporting to measure performance.
Conclusion
Inventory Management software solutions have become a popular tool used by large and small businesses to optimise their transport and distribution processes. This is primarily due to the benefits relating to enhanced accuracy of inventory levels, operational cost savings, improved productivity and profitability. By optimising your Inventory Management processes, you can give your business a competitive edge, but you need to choose the right solution for your business’s specific needs.
Adapt IT Energy is an expert advisor and thought leader with years of experience in the Oil and Gas industry, who provides state of the art flagship software solutions to transform businesses. Let Adapt IT help you optimise your Inventory Management systems and move your business forward, with a downstream supply chain solution that is fit for purpose.