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Glossary

Inventory management – With advice to fewer stocks

Inventory management refers to the ability to manage inventory. In other words, a company must have the right stock levels so that the targeted service levels can be achieved and at the same time as little capital as possible is tied up in stock.

Achieving fewer stocks without reducing delivery performance requires differentiated parameters, lead times and service levels.

Volatility in terms of supply and demand must be taken into account. It is important to know that stock optimisation is an ongoing process that requires constant observation and adjustment. Accordingly, the aim of inventory optimisation is to cover fluctuating market requirements by controlling and planning the value creation processes. Inventory optimisation makes sense at any time, but varies from company to company. In order for inventories to be reduced in an economically sensible way, it is necessary to know which factors influence the inventories. As many companies have a large amount of capital tied up in their inventories, these sums are not available for investment. In these cases, a reduction in inventory can lead to a reduction in costs and at the same time to a release of capital. This alone shows that inventory optimisation always makes sense.

Inventory reduction in practice

Inventory levels should be analysed, controlled and subsequently optimised on a daily basis. In order to determine the optimum stock level, a sales forecast must be created – and this must be done daily for each item. This is done by calculating with existing data. The excess stock and superfluous orders are displayed. Shortages, on the other hand, can be recognised via the sales forecast. Optimised delivery ensures that delivery capability and customer service improve and sales increase sustainably. The dynamic safety stock, which is linked to factors such as service targets, sales risks, supplier risks and sales trends, is particularly important for inventory optimisation.

Achieving optimised inventories

When selecting warehouse management software and planning warehouses, the applicable guidelines must be observed.

What an item's stock consists of

The stock of a permanently stocked item follows a sawtooth profile: replenishment orders fill it up periodically, withdrawals deplete it step by step. The maximum stock is the sum of safety stock and replenishment quantity; the average stock is safety stock plus half the replenishment quantity (Gudehus 2012, ch. 16). Both figures are direct levers: smaller, more frequent replenishments lower the average stock — at the price of higher ordering and handling costs; the safety stock protects availability against demand and lead time fluctuations. The relationship between inventory, throughput and lead time is known as Little's Law.

Stock Time Maximum stock = safety stock + replenishment quantity Average = safety stock + ½ replenishment quantity Safety stock Replenishment Withdrawals
Inventory profile of a permanently stocked item — own illustration based on Gudehus (2012), ch. 16.

Stock determines space

Stock levels directly drive the storage space requirement — with fixed slot assignment via the maximum stock per item, with shared (free) slot assignment via the average stock of all items (Gudehus 2012, ch. 16). Inventory review therefore belongs at the start of every warehouse planning project: before any new build or expansion, it must be critically examined whether the stock levels are necessary and how far better inventory and replenishment control reduces the requirement (Gudehus 2012, section 16.8). A distinction is made between demand-pulled pull stocks and planned push stocks, such as seasonal or promotional goods.

Inventory Management in practice: Our services overview brings together the relevant planning and consulting approaches.

FAQ

Frequently asked questions

What does the stock of an item consist of?

The maximum stock is the sum of safety stock and replenishment quantity; on average, the stock is the safety stock plus half the replenishment quantity. These two figures are the central levers of inventory optimisation.

How can stocks be reduced without endangering availability?

Effective levers are smaller and more frequent replenishments, more reliable lead times, and planning that derives safety stocks per item from demand fluctuation and service requirements instead of setting them globally.

What does stock have to do with space requirements?

With fixed slot assignment, the maximum stock per item determines the space requirement; with shared slot assignment, the average stock of the assortment does. Inventory optimisation is therefore the first step of every warehouse planning project.

When is inventory optimisation particularly worthwhile?

Before every warehouse new build and expansion: only when it is clear which stocks are really needed is the actual capacity requirement of the warehouse known.