Managing inventory can be a challenging task for many businesses. Inventory management impacts almost every aspect of your business, so it involves many complex challenges. Let’s try to understand some of the most common inventory challenges, and how efficient inventory management and accurate forecasting can help address them in an effective way.
Benefits of Inventory Forecasting
Most of the inventory is located in the warehouse, and it’s constantly changing and in motion. Inventory management in the warehouse is a labor-intensive and complex process that involves steps such as receiving, putaway, picking, packing and shipping. It can be challenging to perform each of these activities in an efficient manner.
Furthermore, simply managing the warehouse space itself is challenging. An effective combination of inventory management and forecasting helps your business optimize warehouse space, and the quantity of each product, based on accurate demand data.
Obsolete inventory is excess stock that a business is unable to use or sell due to a lack of demand. It can have an adverse impact on a company’s overall financial health. It is estimated that as much as 20% to 30% of business inventory is obsolete at any given time and most or all of this inventory can be written off as losses. This is significant and could be a real gamechanger for a struggling organization.
Obsolete inventory is often a self-induced problem. The main reasons for this include inaccurate forecasting, outdated inventory management systems, poor product quality or design, faulty purchasing or inaccurate lead times. In short, if a business is using incomplete or inaccurate inventory data for forecasts, they are more likely to be rough estimates rather than accurate projections. While having small amounts of obsolete inventory is unavoidable, an accurate inventory management system that produces accurate forecasts can help to reduce it and avoid write-offs.
High Inventory Carrying Costs
Inventory carrying costs include the costs of keeping products stored at a warehouse, distribution center or shop floor. They also include labor, transportation, handling, insurance, taxes, product repair or replacement, shrinkage and depreciation. These costs usually represent 20% to 30% of the total inventory value, and this number increases the longer products are held. Carrying costs are one of the biggest inventory challenges businesses face, and tie up a lot of cash causing companies to miss out on opportunity costs.
Investing in a modern inventory management system is the most effective way to reduce inventory carrying costs, because it helps companies produce and store the optimal amount of inventory. Inventory tracking improves real-time visibility and enables purchasing, operations and other supply chain staff to become more efficient and make better decisions. Businesses can establish more consistent receiving, putaway and fulfillment processes and enable their staff to trace every item in their inventory.
An inventory write-down is an accounting process that’s triggered when inventory decreases in value, but does not lose its value completely. When the fair-market value of inventory drops below its book value, a journal entry is made and an inventory write-down reduces the value of the ending inventory for the reporting period. This has implications for both the income statement and balance sheet.
You can use a few strategies to reduce writedowns, such as not ordering excess inventory, regularly reviewing order frequency, and tracking trends in demand and sales. The most effective step a business can take is to implement an inventory management system that can automate many of these processes and provide reliable forecasts, helping it to plan and execute more precise inventory purchases.