How to address inventory management challenges to ensure the performance of your procurement strategy?

Inventory management optimisation
August 8th, 2023
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Inventory management challenges occur from the order to the delivery of products. If left unchecked, they can be detrimental to the business. On the other hand, when inventory management is optimised, it becomes a real asset in the development of a sustainable and effective procurement strategy. The procurement manager can then better make decisions and control costs, especially regarding long tail spend.

What is effective inventory management in a company?

Any company that stores goods in a warehouse, whether raw materials for production or finished goods for direct sales, must deal with the challenges of inventory management.

Inventory management: Definition

Inventory management is the set of actions that a company puts in place in order to procure, store and then dispose of goods. As well as optimising this process, these actions must meet the needs of the market while controlling the costs and the money spent by the company.

For this to be successful, the procurement manager must therefore find the right balance between having enough stock and a moderate quantity of stock:

  • A sufficient quantity makes it possible to avoid stock-outs and therefore fulfil all orders;
  • A moderate quantity prevents overstocking, reduces related costs and the possible depreciation of the goods.

The risks of under-stocking

Stock-outs are a business risk which should not be taken lightly. By not forecasting demand, a company runs three major risks:

  1. Customer dissatisfaction;
  2. Poor brand image;
  3. Reduced turnover.

When consumers are disappointed with their experience with a company, they tend to give this company bad publicity and move on to the competition. With so many offers on the market, customers are often spoilt for choice. It is therefore important, if not essential, to guarantee a good supply of stocks.

The risks of over-stocking

On the other hand, stocking too much for fear of running out of stock is not an effective strategy. As well as being unnecessary, over-stocking has several significant costs:

  • Storage costs (costs of renting premises, storage, handling, personnel);
  • Insurance costs;
  • Depreciation costs;
  • Costs related to the loss of perishable products.

Implementing an optimised inventory management system enables businesses to find the right balance in terms of the quantities stored. Management software that provides real-time data on the stock level is a great help and ensures efficient monitoring. Staff are informed when the control point has been reached and can therefore know when to place an order.

As well as under-stocking and over-stocking, other problems can occur, such as the loss or theft of items. With regular inventories, the situation can be quickly identified and solved.

How does inventory management improve the company’s efficiency?

By controlling stocks, the procurement manager has a direct impact on the company’s financial performance.

Efficiently managing inventory leads to many benefits for companies:

  • Better planning of orders according to the seasonality of products;
  • Increased stock turnover, improved cash flow and secure working capital;
  • Time savings and fewer errors;
  • Improved customer satisfaction and company image;
  • Reduced costs and higher turnover;
  • Better visibility of trends (identification of very popular versus less popular products);
  • More strategic decision-making;
  • Increased competitiveness;
  • Real-time inventory;
  • Optimisation of storage space, making it more cost-effective.

To take this a step further, automated inventory management is an ideal solution.

How do inventory management challenges affect the procurement strategy?

Properly managed stock is vital for the company. Managing stocks is a key task for procurement managers who need to adapt their processes accordingly. As mentioned above, controlling stock levels has a direct impact on the health of the company. The challenges of stock management are therefore of paramount importance.

There is no single threshold at which a new product order must be placed. In fact, each product follows a specific path. For example, some products sell better than others, so they need to be restocked earlier.

On the other hand, certain periods are more favourable for sales (beginning of the financial year for companies, Christmas for private customers, etc.). It is therefore important to have a precise view of the inflow and outflow of stocks at different times of the year in order to forecast demand.

Inventory tracking platforms allow analysis of this data, which is useful for managing stock, making purchases, and making better decisions. More broadly, technology is part of a sustainable Supply Chain approach.

In order to adopt and maintain a successful procurement strategy, inventory managers need to consider three issues:

  1. How often the optimal stock level is reviewed for each item;
  2. When restocking from a supplier is required;
  3. The optimum quantity to order.

Inventory management challenges for long tail spend

Although it represents only about 5% of the procurement budget, long tail spend represents significant hidden costs, particularly because the cost of ownership sometimes exceeds the purchase price. And despite lower prices, it still accounts for half of the purchasing segments. Managing long tail spend from start to finish can quickly become costly. The General Services Manager will quickly point this out when monitoring costs and the budget.

This makes long tail spend a category to monitor carefully and precisely. However, the fact that it is difficult to understand and control makes the challenges of inventory management particularly important for this type of purchases.

To learn more, you can download our "Long tail spend: 6 levers to optimise your strategy" white paper.