Do you remember Hypercolor, the clothes that changed color with body heat? I do, and not just because of the novelty value. Initial demand for the clothes was so high that the company worked tirelessly to meet it. Then they overproduced, struggled to sell, and went bankrupt.
It’s a scenario we see time and again. Why? In large part, it’s because many companies don’t pay the right kind of attention to their inventory.
There’s a lingering belief that inventory is somehow unpredictable and behaves independently of the rest of the business. But it’s not true. If you incorporate inventory directly into sales and planning operations, and optimize it at every opportunity, you’ll have a strong grasp of your stock levels, save money and improve customer service.
Mastering the balance between low inventory and high performance is a challenge, but it’s one that needs to be met. If you’re new to the idea of inventory optimization, here’s some advice to help you reach your goal.
1. Base inventory on desired customer service levels
Don’t set your inventory levels by how much you can produce. It’s not a viable option. Instead, determine exactly what you want your customer service levels to be. Then set your inventory targets by that standard. That will allow you to deliver the right product at the right time, which leads to both satisfied customers and an ideal level of stock in your inventory.
2. Be flexible
Avoid absolutes when specifying your inventory targets. Instead, use what is known as ‘days of cover’ (or ‘days of inventory’ or ‘stock cover’). What this will do is create a flexible and automatic link between inventories and demand forecasts, ensuring that inventory levels throughout the supply chain are driven by demand. If demand increases, stock increases. If demand decreases, inventory is adjusted accordingly.
3. Use actual inventory levels
I’m always surprised at how many businesses start by just assuming their inventory levels are correct. Or that they have no inventory at all. Modeling only works if you have the right data to begin with. You need to know how much stock you have, which of it is slow-moving and which of it flies off the shelves. Close the gap between model and reality, and you’ll take a huge step towards optimizing your inventory.
The company that produced Hypercolor clothes knew when people wanted their product, but they were caught completely off guard when demand decreased. They set their customer service levels at making “too much product in too short a period of time” instead of adopting a more sustainable model (such as limited distribution). They burned too bright too fast, and had a lot of unsold inventory to show for it.
The company is still in business, so it seems they’ve learned from the past. We can do the same. Pay the right kind of attention to your inventory now. It’s key to creating a sustainable business. Receive more tips for optimizing your inventory today.