Common Challenges in Inventory Management

We are now onto day 3 of my Introduction to Inventory Management.  Today we will talk about four common challenges in inventory management. Feel free to email me at [email protected] or message me on LinkedIn, Facebook, or Instagram with any questions.

1. Overstocking

Challenge: Overstocking occurs when a business holds more inventory than necessary. This can lead to increased storage costs, tied-up capital, and the risk of inventory becoming obsolete.

One of the companies I worked with in the past had a major issue with overstocking. They had finished goods sitting in their warehouse that amounted to 8-10 years’ worth of inventory based on demand, despite these goods having only a 3-year shelf life. Without proper forecasting or production direction, the plant was converting all available raw materials into finished goods. This not only consumed valuable warehouse space but also tied up more capital due to the added costs of labor. Overstocking often leads to either discarding inventory or selling it at deep discounts, resulting in financial losses.

Tips to Overcome:

• Implement Just-In-Time (JIT) Inventory: Adopt JIT to reduce excess inventory and storage costs. This strategy, discussed in my previous blog post, involves receiving goods only when needed in the production process.

• Utilize Inventory Management Software: Utilize software equipped with predictive analytics to accurately forecast demand and maintain optimal stock levels. Frequently, existing software already possesses the necessary tools, however, they are often underutilized. I collaborate with companies to enhance the usage of their current software capabilities without the added cost and time to implement a new ERP system.

• Regular Audits: Conduct regular inventory audits to ensure alignment with current demand and adjust purchase orders accordingly. As I have mentioned before, “junk in equals junk out” regarding inventory management. Regular audits are essential to account for human error and maintain accurate system information.

2. Stockouts

Challenge: Stockouts occur when inventory levels fall to zero, leading to missed sales opportunities, dissatisfied customers, and potential loss of business.

Stockouts are often not accounted for in the costs or losses of a business, even though they can lead to significant missed revenue opportunities and customer dissatisfaction. Lost sales in business not only reduce the revenue for that moment in time, but they can have lasting impacts on the business related to:

1. Loss of customers due to dissatisfaction

2. Damage to the brand or business’s reputation

3. Loss of market share

4. Impact on long-term growth

“It costs 5 times as much to attract a new customer than to keep an existing one.” – Harvard Business Review

Experiencing stockouts can significantly impact a business, potentially pushing it towards closure due to lost sales, decreased customer satisfaction, and diminished market reputation. Knowing that it costs more to acquire new customers than to retain them, keeping your current customers happy is essential to the business’s bottom line.

Tips to Overcome Stockouts:

• Set Reorder Points: Establish minimum stock levels for each product and automate reordering to ensure continuous availability.

• Diversify Suppliers: Maintain relationships with multiple suppliers to mitigate the risk of supply chain disruptions. In my 15 years working in the industry, this is the number one challenge I faced. Suppliers often have labor or supply issues, and suddenly you are stocked out and scrambling to find a replacement raw material. Having multiple suppliers minimizes this risk.

• Safety Stock: Keep a safety stock as a cushion to manage unexpected spikes in demand or supply delays. If you want more information on this, I elaborated further in yesterday’s blog post.

3. Inaccurate Inventory Tracking

Challenge: Inaccurate inventory tracking can result in discrepancies between actual stock and recorded stock, causing stockouts, overstocking, and misplaced items.

Whatever method you use to track the inventory in your business, you need to be consistent.  Inaccurate inventory drastically reduces the effectiveness of any other inventory management tools you use in your business.  I have had times where the warehouse loses entire pallets for days to weeks at a time.  You would think that it would be hard to lose one pallet, but it happens more often than you realize. No process is perfect, but there are ways to increase the accuracy in your inventory.

Tips to Overcome:

• Adopt a Barcode or RFID System: Implement barcode or RFID technology to enhance accuracy and efficiency in inventory tracking.  Most of the time, it is required by your customer to contain a barcode on your products for their warehousing needs. Using a barcode or RFID system helps to minimize human error when used correctly.  Scanning the barcodes eliminates fat fingering item numbers and automatically enters the information into the system.

• Regular Reconciliation: Perform frequent reconciliations between physical stock and recorded data to spot and correct discrepancies early. Set up an audit schedule for your inventory on a weekly or monthly basis to check a percentage of your inventory for accuracy.  Doing this on a regular basis helps catch errors in the system before they become a bigger problem.

• Employee Training: Ensure staff is well-trained in inventory management systems and procedures to minimize errors.  Cross train as much as possible as well as develop SOPs (Standard Operating Procedures) to ensure staff knows how to track the inventory and you minimize any gaps in skill set if someone is gone.

4. Supplier Issues

Challenge: Supplier-related issues, such as delays, quality problems, or contractual disagreements, can severely affect inventory levels and business operations.

In my experience, supplier issues have been a recurring challenge for every company I have encountered. These issues create a domino effect, disrupting various facets of the business operations. Often, problems with suppliers are closely linked with challenges in maintaining safety stock and avoiding stockouts. I have witnessed instances where entire product lines had to be discontinued due to the unreliability of suppliers, which underscores the critical importance of supplier reliability. Unreliable suppliers can jeopardize the continuity of product availability, leading to missed sales opportunities, customer dissatisfaction, and ultimately, significant business losses. Therefore, managing supplier relationships effectively and maintaining a diverse supplier base are paramount to mitigating these risks.

Tips to Overcome:

• Develop Strong Supplier Relationships: Foster good relationships with suppliers to improve communication, reliability, and problem-solving.  Help them understand that your success directly impacts their success.  They should have a vested interest in your success.  If they don’t, you should be looking for other suppliers that would be better partners.

• Supplier Performance Measurement: Regularly evaluate supplier performance and maintain a record to identify and address recurring issues.  Hold your suppliers accountable to their performance.  Communicate concerns in a timely manner and set agreed upon goals for your suppliers.

• Contingency Planning: Have backup plans and secondary suppliers in place to ensure the supply chain remains unbroken in case of unforeseen supplier issues.

• Set Clear Expectations: Ensure you take responsibility for your role in the procurement process. It's essential to establish and agree upon specifications for every raw material you purchase, along with predefined actions if the supplier fails to meet these criteria. In my experience, manufacturers who neglect this step often find themselves at the mercy of their suppliers, resulting in purchasing substandard materials that elevate production costs or generate waste, with little recourse to address these issues. 

By addressing these common challenges with proactive strategies, businesses can streamline their inventory management, reduce costs, and maintain better control over their stock levels. Remember, effective inventory management is a continuous process that requires regular assessment and adjustment.

Are you ready to take control of your inventory management and overcome these common challenges? Download our detailed guide today and discover practical strategies to streamline your operations and enhance your business efficiency. Visit our website for more tips and resources to transform your inventory management into a competitive advantage. Don't let inventory woes slow you down—act now and achieve seamless, efficient operations!