Inventory Management Paradigm Shift: 4 Effective Ways to Reduce Inventory

April 13, 2023
Effective Inventory Management Tips

The past few years have been a roller coaster ride for businesses, with natural disasters, political unrests, and pandemics wreaking havoc on supply chain management. The disruptions caused by these crises have exposed the limitations of traditional inventory management practices and the need for a paradigm shift in this field.

In the wake of the COVID-19 pandemic, businesses were forced to manage demand surges and supply chain disruptions, leading to stockpiling and excess inventories. As per research published in the Journal of Risk and Financial Management in 2023, conducted on Finnish publicly traded companies, inventories grew by 65% between 2020 and 2022. The week-long Suez Canal blockage in 2021 caused significant supply chain disruptions and affected almost 12% of the global trade, resulting in inventory imbalances. Most recently, the geopolitical crisis in Ukraine has created an inflationary impact and a shift in trade patterns. The ever-evolving demand patterns have caused a ripple effect on the transportation networks further impacting the global supply chains and highlighting the need for new inventory management strategies.

The Impact of Crises on Inventory Management

Over the last years, inventory management and specifically inventory reduction activities have gained increased importance in global supply chains, as supply chains seek to increase efficiency and attempt to improve customer service levels. Proper inventory management has become a top priority for supply chains and is crucial for any business, especially during times of crisis. Without appropriate planning and processes in place, businesses can suffer from several negative impacts. For example, a CNBC report in 2022 revealed that certain companies are overstocked by almost 30% due to the supply chain crises, leading them to offer significant discounts on their products. A drop in demand during a crisis can result in a high overstock of inventory, leaving businesses with excess goods that they cannot sell. Additionally, competitors may drop their prices to boost sales, leading to a price war and a decrease in the overall value of the business.

Crises can cause a reduction in cash flow and profits due to a decrease in investments. Businesses may have to cut back on spending and investments to stay afloat, which can further impact their bottom line. Cash flow can also be affected when cash is tied up in stocks and assets, leaving businesses with limited liquidity and hindering their ability to respond to changing market conditions.

In addition to the negative impacts of poor inventory management during crises, businesses are also facing increasing inventory capital costs due to banks raising interest rates. The recent financial market turmoil is leading to increased costs of inventory capital, making the transportation of inventory even more expensive. To mitigate the impact of rising inventory capital costs and ensure long-term sustainability, businesses need to reconsider their inventory management practices and focus on new-age inventory reduction strategies. However, reducing excess inventory in a VUCA world where the demand patterns are unpredictable requires supply chain managers to adopt strategies that suit the modern-day business landscape.

4 Effective Inventory Reduction Strategies for the Modern-World

The supply chain industry is well-aware of the traditional ways to reduce their inventory including ABC analysis, XYZ analysis, Economic Order Quantity (EOQ) model, Just-in-Time (JIT) inventory management, among others. However, the volatilities and consumer demands are evolving rapidly and unpredictably. To maximize supply chain performance, it is key to continually achieve a profitable balance among responsiveness, service levels, risks, and cost. These factors are largely driven by how a company manages supply and demand, as well as where and how it deploys inventory. To build more resilient supply chains, businesses need a strong strategic vision to deploy new inventory contingency tactics.

Here are some strategies that are proving to be useful in reducing excess inventory effectively:

1. Improving Supply Chain Collaboration

Effective collaboration between sales, procurement, and supply chain departments is crucial in today's complex business environment to ensure dependable and foreseeable operations. The synchronization of workflows based on established procedures enables organizations to obtain a clear view of supply and demand, leading to better decision-making and increased operational efficiency. Through the availability of a unified and accurate set of data, businesses can avoid inventory overstocking, thereby reducing storage costs, freeing tied up capital and preventing inventory from turning obsolete.

Assigning specific responsibilities to individual or multiple users or groups within the organization further optimizes its operations and ensures everyone is aligned with the same objectives. Overall, the collaboration between sales, procurement, and supply chain organizations can help to optimize inventory levels, reduce capital costs, and improve the organization's bottom line.  

2. Simulation-Based Forecasting

Simulation-based forecasting enables companies to create hypothetical scenarios to predict the future demand for their products. This approach helps in inventory reduction by enabling companies to make more accurate predictions of future demand for their products, identify potential supply chain disruptions, and optimize their inventory management strategies. By doing so, companies can reduce inventory holding costs, avoid stockouts, and maintain a high level of customer service. Simulation-based forecasting is especially useful in times of uncertainty, such as during the disruptions caused by the global crises, as it enables companies to increase their agility and make more informed decisions about inventory management.

3. Digitalization of Supply Chains

A digital supply chain can help businesses improve their planning and forecasting cycles, leading to quicker reaction time. With the help of advanced analytics and machine learning, companies can better predict demand and optimize inventory levels, leading to lower inventory holding costs and improved customer service levels. This can also help in identifying potential supply chain disruptions in advance and taking proactive measures to mitigate them.

Furthermore, implementing automation in the digital supply chain enables companies to reduce manual error-prone processes and improve efficiency. Automation can help in streamlining various processes such as inventory management, order processing, and shipment tracking, thereby reducing the risk of errors and delays. This provides businesses with a competitive edge, enabling them to be more agile and responsive to the changes in the market.

4. Gaining End-To-End Visibility with Supply Chain Control Tower

An incredible volume of data is generated at a very high speed within supply chains today. This makes it increasingly necessary to analyze, understand and effectively gain insights from this data using intelligent models and tools. A supply chain control tower enables real-time monitoring and decision-making based on supply and demand dynamics, which can help organizations optimize inventory levels and reduce costs. It can provide alerts in real-time, allowing users to identify potential issues and take corrective actions promptly. It can also provide root cause analysis capabilities, allowing users to understand the underlying issues that lead to inventory imbalances. These capabilities empower businesses to better identify anomalies and investigate issues.  

Additionally, control towers can help facilitate constructive interaction between stakeholders, enabling better communication and coordination across the entire supply chain. Organizations can gain end-to-end visibility into their supply chains, allowing for better tracking of inventory levels, demand patterns, and supplier performance leading to improved efficiency, reduced costs, and better inventory management.

Closing Thoughts

The inventory management paradigm shift is no longer a distant possibility, but a pressing reality. Businesses can embrace this new paradigm shift by replacing their traditional inventory reduction approach with a data-driven approach by adopting advanced technologies to steer through the VUCA world. That's where AIO Platform comes in.

The AIO SCCC is a cutting-edge supply chain management software-based product that empowers businesses with effective supply chain segmentation, powerful analytics for identifying performance gaps, and intelligent execution of modern-day strategies. What sets it apart is its use of near-real-time operational data and strategic information from the supply chain and the ecosystem. This enables the AIO SCCC to provide forward-looking transparency, intelligent diagnostics, and recommendations for reliable execution of actions, enhancing your overall supply chain performance.

To know more about aioneer’s AIO SCCC, please book a demo with our product experts.

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