Optimizing Inventory? Go Beyond Your Supply Chain
When excess inventory is sitting in a warehouse tying up working capital, leadership is left to react to the problem instead of proactively mitigating it. More often than not, organizations turn to their supply chain function to reduce inventory and answer for the sins of others. Inventory, one of the largest components of working capital, often represents a huge cash outlay.
The critical task, that is often overlooked is monitoring and optimizing inventory. To truly address the root cause of inventory creep, organizations need to work with other functional groups (marketing, sales, finance) not traditionally associated with inventory management and hold them to account.
First, let us examine the marketing function. Inventory cannot exist without the decision, typically made in marketing or merchandising, to carry an SKU and/or new products. Most companies lack the necessary tollgate rigor when introducing new SKUs, and rarely is there a closed loop that holds marketing or merchandising accountable for failed SKU introductions.
In addition to implementing tollgates as SKUs are introduced, we also recommend regularly reviewing the SKU portfolio, as we frequently encounter the 80/20 rule, where 20% of the SKUs bring in 80% of revenue. Typically, this is due to marketing failing to manage a product through its entire lifecycle.
The SKU is typically promoted throughout its development, growth and maturity, and then forgotten during its decline. Culling low performing SKUs is one of the best ways to optimize inventory levels, but this needs to be a decision made by marketing, not solely by the supply chain function.