Inventory Management Maturity Model

Level 1 : Manual Inventory Management

• Manage incoming and outgoing inventory Excel or manual register
• No central system to see inventory across the enterprise
• Huge delay in processing of sales and inventory updates 
• No ERP system available, even billing might be done manually

Level 2: ERP Enables Inventory Management

• Near Real Time Data flow architecture across the ERP systems
• Single source of truth for inventory
• Day -1 update of inventory and updates

Level 3: Auto Replenishment Enables Inventory Management

• Automated replenishment of repeated orders
• Reduced Inventory holding cost without impacting forward cover
• Central and regional ARS enabled distribution system

Level 4: Planning and Forecast Driven Inventory Management

• Demand Forecasting system enabled Merchandising Planning
• Open to Buy enabled purchase order management
• Replenishment Optimisation based on product lifecycle
• Business Analytics driven by Day-1 data warehouse setup

Level 5: Actionable Insights Driven Inventory Management

• Contextual BI and actionable Insights driven operational decisions
• Near Real time perspective analytics to end user
• Track Inventory ageing and forward cover
• Optimised Push & Pull Strategy for profit centers driven inventory control
• Near real time to real time business analytics supported by OLTP systems

INVENTORY CONTROL AND PRODUCT LINE ANALYSIS

With increase in competition and customer demand, the product line has become infinite for Hypermarket retailers. Managing and analysing the SKUs (stock keeping Units / Items) have become a challenge. Few techniques can be used in analysis and classification of SKUs. We shall discuss the same in the below :


1. ABC Analysis
Methodology used in classifying the product range into 3 categories such as
-  'A' category products where tight inventory control is required because they contribute a lot to the profit of the organisation in terms of return on investment and sales. Regular perpetual inventory  checks are required to ensure minimal shrinkage. Reordering points are frequently amended to match the market demand
-  'B' category products are the ones with good inventory control deployed but there is no need for regular perpetual inventory checks. They contribute a good value to your sales as well
-  'C' category products are the ones with less inventory control and contribute a low percentage to sales. Retailers usually keep them in the product line due to customer requests or for clearance
This methodology uses Pareto's principle where in 20 % of the inventory contributes to 80% of the total sales value. It is also known as the 80-20 rule
Please do not confuse ABC analysis with Activity Based Accounting. These are two different terms and have their own importance in operations.


2. HML Analysis
Its a simple way to classify the products based on the selling price of the product i.e. 'H'igh value , 'M'edium value and 'L'ow value products. It helps in understanding what percentage of these stocks are held by us


3. VED Analysis
These are 'V'ital, 'E'ssential and 'D'esirable products that has to be maintained in our inventory. This is used in the field of pharmacy where inventory is based on the criticality of the drug and in spare parts store where criticality is based on the parts that ware out more often and needed on immediate basis for replacements


4. FSN Analysis
This methodology is used to identify the product sales i.e. 'F'ast moving, 'S'low moving and 'N'on moving. Please do not confuse this with ABC analysis. FSN analysis is based on the quantity of inventory flow for that particular product, it doesn't not evaluate the contribution of the product to sales value. It evaluates the contribution of the product to the sales quantity. In case of manufacturing the classification is based on consumption of the product


5. SOS Analysis
This is a simple way to monitor the seasonal products through the year lying in our inventory. They shift between 'S'easonal and 'O'ff-'S'easonal based on the seasonality. This is done to ensure the product is purchased and sold before the season expires or to ensure enough stock is kept on hand to facilitate sales during the beginning of the season. This method is critical with respect to seasonal fruits and vegetables


6. SDE Analysis
Methodology used by retailers in procurement side of the business operations.
- 'S'carcely available products are the ones which are imported and are not available locally. The supply does not meet the demand and it is difficult to procure due to its short supply. Hence extra caution and monitoring is required by the buyers to get the products on hand from the manufacturers
-  'D'iffult to procure products are those manufactured domestically but difficult to procure due to distance from supplier/manufacturer, short supply or less number of suppliers available in the market
-  'E'asy to acquire products are the ones that are locally available in plenty and the supply meets the demand


7. GOLF Analysis
This is the hybrid of SDE analysis where in procurement of inventory is classified based on :
-  'G'overnment supplied inventory
-  'O'rdinary available products which has supply meeting the demand, the product is easy to procure and is available within the country
-  'L'ocally available products from local vendors, these are usually perishable products with short shelf life procured locally within the state/city limits
-  'F'oreign source is required for the supply of the product

TYPES OF INVENTORY CONTROL SYSTEMS

Managing our inventory as a retailer is a humongous task. Inventory management grows more and more complicated with increase in sales volume and diversification of product assortments. In this post, we will discuss the various methods I have come across in retail industry for inventory control.

Types of Inventory Control systems :

- ABC
- Two Bin Method
- Three Bin Method
- Fixed Order Quantity
- Fixed Period Ordering
- Just In Time
- Vendor Managed Inventory

ABC Method :
This is one of the common methods used across retail industry and it is at times coupled with other methods for better control on inventory. This is more of an inventory classification technique where in products are classified based on the sales contribution and importance of the same in their assortment plan.
A- Category products will be the maximum grocers in sales and flagship products with higher margin. Usually top 20% of the products in the assortment contributing to 80% of the total sales are classified under A category where tight control on inventory is required to ensure no loss in sales. 20% of products contributing to 80% of sales is known as 80-20 Rule or Pareto principle
C-Category products are bottom of the line contributing less to sales. These items are marginally important for the business and are kept only for the sole purpose of customer requirement. This will also include Items that are nearing or hit obsolescence and need to discontinued from the product portfolio
B-Category products are important to the retailer but are less important compared to A Category products.

TWO BIN Method :
This is a simple method used usually in warehousing where in an item is stored in two locations or bins in a warehouse and the stock is replenished in the first bin from the second bin once the first bin is consumed completely. The required quantity to be filled in the second bin is placed for ordering.
The availability of stock in each bin is calculated based on reorder lead time to ensure enough stock is made available till the new stock arrives. The below flow diagram will explain the process

THREE BIN Method :

This is a common method followed in manufacturing where Kanban system is used.
It is similar to two bins system with a third bin at the suppliers' location. The supplier will not manufacture spare parts for the manufacturer until the reserve bin is emptied. Three bins each with a Kanban card tracking movement of inventory is available , one at manufacturing/ shop floor, one at the shop/back store, one with the supplier. Once the inventory in manufacturing/shop floor bin/display is consumed/sold, it is replenished with the complete bin from the back store/shop. Later the back store bin is sent to the supplier and replace with a complete bin from the supplier. Then the supplier will manufacture to fill the inventory in the third bin with him. This will act as a complete loop until manufacturing of the product is ceased.
The below flow diagram will explain the above process with respect to a retail scenario

 FIXED ORDER QUANTITY :

This method is used to avoid ordering mistakes and ensure regular replenishment of existing products. Only a fixed quantity can be ordered at one time for the item. This type of ordering is usually used in auto replenishment of goods where in auto reordering point is set in system and when the product's inventory level hits the reordering point or minimum stock levels, an order is placed to the maximum stocking capacity of the product. To use this method the retailer should know the minimum and maximum stocking capacity of the product based on space allocated and the sales trend. Below example will explain this scenario :

PRODUCT CODE	PRODUCT	MIN STOCK	MAX STOCK	STOCK ON HAND	RECOMMENDED ORDER QTY
3391891961066	ICE CUBE TRAY PINK	4	24	4	20

 In the above, the item has maximum stocking capacity of 24 and reorder point is set as 4, so when the inventory has hit 4 units, a purchase order is auto generated for 20 units to full fill the gap.

 FIXED PERIOD ORDERING :

In this system there is fixed time interval between every order placed for the item. For example a vendor will visit the store in person and check the inventory of the respective products and resupply the products based on the sales for the time duration. This kind of ordering is done in small format stores like pharmacies and grocery stores

JUST IN TIME :

The objective of JUST IN TIME method is to increase the inventory turnover and at the same time reduce the inventory holding cost. JIT inventory system also exposes the unwanted or the dead inventory held my the retailer/ manufacturer. This method is ideal for manufacturing organisation and it is not used in Retail industry in general. This will also involve usage of Kanban card to track inventory movement.

VENDOR MANAGED INVENTORY :

As the name explains, it involved SKUs managed directly by the supplier. Inventory is replenished based on the sales on regular intervals by the vendor. The retailer provides shop floor space and the vendor is charged a consignment rate on every product sold at the location. The ownership of the items from receiving to sales and inventory loss if any will be with the supplier.