Are you aware that if your company has a solid pulse on the market, it can use that information to better manage its inventory of finished goods? This is ultimately why marketing is such an important aspect of inventory management. Marketing provides your company with essential insight into trends, demand volumes and seasonality patterns. All are important to managing inventory and reducing the costs of warehouse management. The difference is that some companies have a solid understanding of marketing’s role in this regards, while others are completely unaware. Which one is your company?
I’ve written many times about the issues pertaining to the gap between customer demand and a company’s inventory levels. The gap is present when companies seem unable to track their own fluctuating customer demand patterns. In essence, they aren’t in tune with their market, their customers’ order frequencies. Ultimately, they are unable to track the seasonal demand patterns of their customers. Now, these business cycles could occur monthly, quarterly and in some cases, semi-annually. Regardless of how long these cycles are, these companies are always behind what their market is telling them.
Instead of having a pulse on where their market is going, and where it’s been, they rely upon a reactionary model, one predicated on increasing and decreasing inventory levels according to the current market situation. While this may work for companies whose lead times on finished goods is minimal, it simply doesn’t work with long product to market lead times, ones where the company must be ahead of that all-important curve. This inability to anticipate market trends forces companies into the two main pitfalls of inventory management; high holding costs and lost sales.
High Inventory Matched to Low Demand:
Companies that find themselves mired with high inventory holding costs tend to become risk averse and develop a somewhat negative view of inventory. Their unwillingness to increase inventory levels to coincide with increased demand is matched only by their lack of market knowledge. When they do see an increase in customer demand, they tend to wait for signs that this new demand will remain consistent. Unfortunately, their inability to quantify that increase in customer demand is costly, and the time wasted waiting for the market to stabilize only exacerbates the issues. They’ll either ramp up inventory levels too late, or will avoid that decision altogether. Regardless of what they choose, they’ll invariably encounter the next inventory cost below.
Low Inventory Matched to High Demand
There are definite costs to losing sales because of inventory stock outs. This cost can easily be measured by lost gross profit on sales, lost market share and lost customers. Unfortunately, most companies focus solely on their costs to hold inventory without sales, rather than the cost of lost profit from low inventory. At a time when they need sales the most, these companies ignore the high costs of lost sales on their bottom line, simply because they don’t have a pulse on the market.
“So, what’s the solution?”
1. Use PLCM to Define Product’s Life-cycle: Product life-cycle management isn’t just theory. It is a practical tool and one your company can use to define your product’s current position in its market. Use PLCM to define your product’s longevity. This will help provide a long-term view of your product’s life within its market and give you a better view of the product’s overall growth patterns within various business cycles.
To learn more about the above, please go to the following post: Your Product's Exit Strategy and the Final Stage of Product Life-Cycle Management
2. Use Inventory Product Grading System: Your inventory has products that have high turnover rates, ones that have moderate turnover rates and ones that simply take too long to sell. Use an inventory product grading system to define your top-tier product lines, your mid-tier product lines and those product lines whose inventory turns aren’t nearly good enough. For instance, your top-tier product lines should include sales of products to five or more customers. Your mid-tier product offering should include sales to three to five customers. Any inventory that is only purchased by one customer should immediately have a contractual agreement on supply.
3. Sales Forecast Accuracy: It’s essential that your company use a multipronged approach to improving its sales forecast accuracy. However, don’t just concern yourself with how accurate your salespeople are in forecasting sales. It’s also important to define their accuracy in liquidating outdated and antiquated inventory. Set up a separate set of objectives, ones that clarify the importance of reducing inventory counts of outdated product lines.
Learn how to improve your sales forecast accuracy: How Do I Improve Our Sales Forecast Accuracy?
4. Track Lost Sales: The surest way to define the costs of low inventory counts is to proactively track the costs of lost sales. Measure this aspect in terms of lost gross profit and potential lost market share on those aforementioned top-tier and mid-tier product lines. Don’t just measure one cost of inventory; measure both.
5. Get to Know Your Market: You must know your market and use that information to better define your company’s various business cycles. Your salespeople must be in touch with customer demand. Your marketing department should have a pulse on the competition, the market’s progression, or lack thereof. Knowing your market is as much about knowing your company’s position in the market, as it is knowing where your customers, vendors and competitors fit in the big picture.
Most assume marketing merely involves promoting a company’s product & services, providing support to sales efforts, and coming up with a new brochure, catalog or website. However, marketing’s main role is to define the conditions within the market, to outline a way forward and to use strategies like market feasibility studies to define the market’s current and long-term growth patterns. However, as important as each of these functions are, they often pale in comparison to the insight marketing provides companies in terms of how best to manage inventory. Use the insight from your marketing efforts to define your various business cycles, your product’s short and long-term future and the future of your company in your market.
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