When most business owners think about inventory, they envision complex spreadsheets full of numbers and percentages. But the truth is, effective inventory management isn’t just math—it’s strategy.
In episode 16 of Secret Life of Inventory, we sat down with inventory management veteran Jon Schreibfeder, President of Effective Inventory Management, Inc., to uncover the strategic thinking behind successful inventory operations. With over four decades of experience helping everyone from Fortune 500 companies to family-run shops, Jon shares insights that challenge conventional wisdom about how inventory really works.
The biggest misconception about effective inventory management
“The biggest misconception, especially among distributors, manufacturers, and retailers, is inventory will take care of itself,” Jon explains. Too many business owners believe that buying the right software package means they can set it and forget it. But Jon warns that’s not how it works.
Inventory is critical to every business, but unlike a squeaky wheel, it doesn’t immediately scream for attention when something’s wrong. Good inventory management boils down to having a deliberate plan to ensure you have the right quantity of the right item, in the right location, at the right time.
Why most businesses struggle with stock-outs
Jon explains that the number one reason products go out of stock is that businesses aren’t reordering at the right time. It sounds simple, but most organizations wait until there’s nothing left (or just a couple units) before placing their next order. Then, customers are left waiting while the business waits for supplier lead times.
Effective inventory management relies on proper demand forecasting, which can be challenging because more than 75% of the products that most organizations stock have sporadic usage. This means they’re not sold or used regularly. The only real exception is mass market retailers, where everything moves constantly.
The problem is that most businesses try to forecast sporadic items using traditional methods. If you sell six pieces twice a year, that’s not the same as selling one piece per month, despite what your forecasting software might suggest.
The hidden costs of poor lead time management
Most systems maintain average lead times by looking at previous stock receipts. This is a mistake, Jon explains. Instead, you should use what Jon calls “anticipated lead time”: how long you expect the next replenishment shipment to take.
This anticipated lead time includes four critical factors:
- Time to create and place the order
- Vendor fulfillment time
- Transportation time
- “Dock to stock” time (inspection, repackaging, getting it shelf-ready)
When you set lead times equal to the longest normally anticipated time instead of using averages, those frustrating one, two, and three-day stock-outs disappear. You know the ones: “We’re out of stock, but it’s coming in next Tuesday.”
The art of getting rid of dead stock
Your inventory is not fine wine or antiques, so it won’t appreciate in value with age. And it’s not alive, so you don’t need to feel guilty about liquidating unneeded dead stock.
The key to effective inventory management is identifying obsolete stock before it becomes a major problem. For items with expiration dates, monitor them carefully and push stock rotation. For everything else, look for products that aren’t moving in your specific location and find them a better home, whether that’s within your company or outside it.
Don’t assume that because you can’t use something, no one else can. Post lists of surplus inventory online, and you’ll be surprised how many people respond with “I could use that.”
Measuring success: the KPIs that actually matter
When it comes to measuring success, Jon keeps it simple with just a few critical metrics:
- Service Level: The percentage of customer requests you can fill completely from stock inventory. This is your most important measurement.
- Inventory Turnover: The number of times you have the opportunity to turn a profit from every dollar invested in inventory. Every business has a turnover potential, and the goal should be reaching yours, not being “average.”
- Turn-Earn Index: Your turnover times your gross margin. This shows whether you need higher turnover (if margins are low) or if you can be happy with lower turns (if profitability is high).
Achieving effective inventory management
Effective inventory management combines good software, proper training, and best-practice policies and procedures. It’s not enough to buy a system and hope for the best, you need strategy, commitment, and the right approach for your specific situation.
Most of Jon’s clients hit their inventory goals within 6 to 9 months, but success depends on one critical factor: dedication to change. If you keep doing things the inefficient way, no amount of software or consulting will help.
Watch the full episode of Secret Life of Inventory with Jon to go deeper into the complete methodology behind effective inventory management, including real client success stories and specific techniques you can implement immediately.
0 Comments