For a more efficient inventory setup, consider these best practices:

• Develop a well-organized floor layout. The warehouse must be ordered logically.
• Use clear signs and labels. Relevant labeling expedites delivery. Label racks, containers, and items clearly.
• Apply cycle counting.  Cycle counting involves numbering tiny pieces across cycles.
• Using inventory optimization software helps you identify the least-cost service level based on your targeted stockout risk with minimal inventory carrying cost.
• Use warehouse management systems. Inventory control systems and Warehouse management systems streamline item tracking and decrease human error.

Rule of Thumb

Safety stock levels, reorder points, lead times, and order quantity directly influence the service vs. cost relationship. Every day, the ERP system makes purchase order suggestions and manufacturing orders based on these drivers.  Ensuring that these inputs are understood and optimized will generate better returns on inventory assets.  Organizations that are able to do so will see improvements in service and reductions in inventory costs.  Unfortunately, the specific inventory policy being utilized is often unclear to many management teams.  In absence of a clearly defined and communicated policy,  planners are forced to develop their own unique approaches.  These self-developed approaches are most often a combination of simple rules of thumb and institutional knowledge. Inventory executives are simply ill equipped to shape inventory according to the changing needs and priorities of the business.  Inventory costs balloon and service performance suffers when unable to answer questions such as: “What is my current reorder point and reorder quantity policy, what level of service and inventory cost will this policy yield in the future, and how will performance and costs be influenced by specific changes to the policy.”  Rule of thumb approaches don’t answer these questions.  In fact, they ignore the critical role of of demand and supply uncertainty.  This results in excess inventory for predictable items and more frequent stock outs on less predictable items.

SKU Proliferation

Whether ordering a commonly demanded, inexpensive item of an expensive intermittently demanded item, today’s customers expect high customer service levels.  This means 100% of what is ordered must be shipped from stock or within a few days.  Quoting a delivery time of more than few days may result in a cancelled order and/or violation of service level agreement costing thousands and jeopardizing customer relationships. To remain competitive, companies often must maintain a very large catalog of items all with potentially different demand patterns and volumes.  Thousands of parts potentially stocked at dozens of locations means planners don’t have the bandwidth to proactively review inventory drivers.  This results in outdated reorder points, order quantities, min/max levels, and safety stocks that trigger replenishment at the wrong time for the wrong amount ensuring poor allocation of inventory investments and low planner productivity