Having a lean inventory can have many benefits. Businesses with lean inventory spend less on warehouse space, have a lesser chance of accumulating dead stock, and not least have less capital tied up in their inventory. However, running a lean warehouse is not without challenges.
The challenges of over- and understock
Many businesses struggle with over or understock, or often both depending on the product line, location, time of the year, and so on. Overstock occurs when you have more supply than there is demand, whereas understock refers to having less supply than there is demand. Appropriate stock levels depend on sales volume, but also on your supplier’s lead time. Having three months’ worth of stock may, for example, be considered overstock if your supplier has a lead time of a week, whereas it may be considered understock if lead time is three months.
Both over- and understock can have big impacts on your bottom line. Not having enough stock to serve your customers may cause them to look elsewhere, causing a loss in revenue for your business. Overstock, on the other hand, takes up space in your warehouse and represents tied up capital. Factor in the rent you pay, the utilities required, and labor costs, and you will quickly realize the cost of overstock is greater than just the cost of the products themselves.
Overstock may also lead to deadstock, at which point products might either be sold at heavy discounts or scrapped depending on the type of products your business deals with. For all these reasons, the costs of overstock seriously impact your business’ bottom line, and are often the reason businesses decide they want to run a leaner warehouse.
Delivery in full, on time
Delivery in full, on time, or DIFOT, is a metric many businesses measure. It refers to the rate at which you deliver everything your customer ordered, within the timeframe they expect. A low DIFOT reflects poorly on your business and may cause your customers to lose faith in that you will deliver what they need on time. For many customers, be they other businesses or end users, receiving their products on time is important so that they can again complete their tasks on time. In fact, many businesses not only measure their own DIFOT but also that of their suppliers, so that they are sure to notice any poor performance. If your customers are not confident they can receive their products on time from your business, even though it is only one particular item out of a larger order, they may choose to take their business to one of your competitors.
Although a low DIFOT can reflect a disorganized warehouse team or issues with the postal service delivering your orders, most often a low DIFOT stems from understock. Understock is a major risk when running a lean warehouse, as any inability to recognize increased demand or even accurate levels of stock on hand may result in an error when determining appropriate stock levels.
Key metrics you must measure to successfully run a lean warehouse
In order to avoid having either over- or understock, or a mix of both, there are a number of metrics you can track. Each of these metrics provides useful information about your stock levels, and some draw on historical data in order to make predictions about appropriate stock levels.
- Stock on hand. This metric tells you how many pieces of each product you have on your shelf. While this metric in itself can tell you something about how much inventory you carry, it’s most useful when combined with historical data and when used to investigate poor DIFOT rates in the following metrics.
- Overstock. This metric combines data on your current stock on hand with historical sales trends. This metric is represented by the months it would take you to turn over all your current stock, although different businesses might define it in weeks depending on your sales cycle and lead time. By setting up a widget on a business intelligence (BI) dashboard, and defining what you consider overstock, you can easily track where your business is carrying too much inventory. You can then proceed to define an appropriate stock level and return any superfluous stock.
- Understock. Similar to overstock, this metric is defined by stock in months. By setting up a widget on a BI dashboard, you can easily see where your business is carrying too little inventory, and correct this before it becomes a problem. Constantly monitoring this metric will allow you to detect any understock due to recent increased demand. Importantly, with BI, monitoring your dashboard is done in minutes.
- Deadstock. This is an important metric for businesses looking to operate a lean warehouse. It is defined as no sales over a given period of time for items of which you do carry stock. Even when you can not make a profit, getting rid of dead stock frees up valuable space in your warehouse, and may even mean you can downsize and save money.
- DIFOT. Delivery in full on time is a metric that not only tells you how you are performing, but also gives the opportunity to uncover problems in your warehouse. Through dynamic reports in BI, as opposed to static traditional reporting, you can click in to discover whether there are any product types, specific items, or locations that are driving a poor overall DIFOT. This way you may uncover incorrect inventory level data, where your ERP system says you have a certain item, but it is not on the shelf, or orders that have somehow fallen through the cracks.
Business intelligence for lean inventory management
Businesses who use BI, are much more likely to succeed in running a lean warehouse, without losing profits. This is due to the dynamic and accessible nature of good BI solutions, where a user can gain actionable insights regardless of level of technical experience. Setting up a dashboard or creating reports can be done in minutes, and can be clicked through in order to answer any additional queries the user may have. This way data is always accessible, often on mobile devices such as phones or tablets in addition to your laptop. By removing the barriers to data and reporting access, which is often still done through the business’ IT department, warehouse managers and any other relevant employees make data-driven decisions.
However, choosing a BI solution is not as easy as picking one that looks good. You should think about the specific pain points you want to solve and ensure the vendors you consider deliver a proof of concept for those pain points. But before you get so far, you should also consider a solution that can demonstrate success with other businesses of your size and industry, often evident through case studies and success stories on their websites. Lastly, don’t forget to look at reviews from the vendor’s current users. Nothing can predict the way in which your business will experience the BI solution like the experiences of its current customers.
Anne Louise Thorbecke is the digital marketing coordinator at Phocas Software. Phocas business intelligence software helps wholesale distributors, manufacturers, and retailers discover opportunities to increase sales, reduce costs and gain better visibility into their business. Next to her work at Phocas, Anne Louise is undertaking a degree in psychology, and takes a keen interest in how technological and human intelligence can cooperate to improve our lives.
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