Balancing Your Inventory, Customer Service and Profitability

The goal of effective inventory management is to “meet or exceed your customers’ expectations of product availability with the amount of each item that will maximize your net profitability.” In this session, Jon Schreibfeder explores how to achieve this goal. Learn how to determine customer expectations, decide what products to stock, ensure accurate replenishment lead times, and maximize profitability by buying high-quality products. View Jon’s presentation here.For detailed show notes, read below and use the timestamps to navigate the episode:[3:51] Improving your inventory management starts with turning your data into information. [6:13] Ranking is the process of classifying your data. The most common ranking method is to rank solely by cost of goods sold, but “best practice” is to factor in activity, profitability, and cost of goods sold. [10:30] Keeping an inventory is also about stocking products that your customers are asking for. To determine these products, look at usage in the last twelve months. [13:19] Jon argues that gross margin is a terrible metric for success. Gross margin does not factor in inventory. Jon recommends replacing or at least supplementing gross margin with adjusted margin, which factors for inventory carrying costs.[19:40] Based on US averages, it costs you somewhere between 14 and 26 cents for each dollar of inventory to carry your inventory. [25:13] Sometimes, unprofitable items can be bundled with profitable items. They may also be necessary for a service you provide. Other than these two cases, these items should be removed.[28:11] Your average forecast error should be under 25%. If it is above 25%, Jon suggests using a different methodology to forecast[34:34] Certain items in your inventory require more safety stock than others. This allows you to absorb unusually high sales of critical items. [37:58] For products with very consistent usage and lead times, you do not need to invest in safety stock. [44:03] A lot of your profits cannot be accurately forecasted. Most systems will try to calculate an average monthly usage from your data, but usage will fluctuate dramatically between months. [51:38] Your total inventory investment is not just your core inventory; you also need to budget for a speculative inventory, which will include new products.