Monday, February 6, 2012

Best practices for Inventory Management

Vivian Cheung

Feb 7th 2012

Direct Tech is an e-commerce solution service provider that helps their customers with merchandise analysis assortment planning, product forecasting, inventory management and purchasing. They had published the 8 best practices for inventory management to give their potential customers an idea of what to expect from their service.[1]

The first advice they provided was to report demand by source. This is advice was also the solution to HP’s problem with hidden costs in inventory described in the Harvard Business Case Study, “Inventory Driven Costs”. In that case study, the author addressed that "the capital and physical costs of inventory-accounted for only about 10% of HP's inventory costs”. These hidden costs include: the component devaluation costs while holding excess parts; price protection costs that forces HP to reimburse its distributors the price difference when HP drops the market price of a product; product return costs which allows the distributer to simple return unsold goods to manufacturer for full refund; obsolete costs, which is the amount of money HP loses for unsold products when new models are introduced. All these hidden costs are caused by the mismatches between demand and supply leading to excess inventory. One of the recommendations given in the case study was to trace costs to the source, because it would suggest how different products‘s inventory need to be managed.

Other advices that were given include updating purchase order information, use audit reporting to flag missing data and be timely. Since all inventory demand prediction depends on the accuracy of the purchase order information, it is important to ensure that daily and weekly processes are in place to continually review and revalidate t the accuracy of the data. Since having accurate data is essential , it si also important to implement weekly reporting process to flag missing or inaccurate data before it interferes with buying decision. Everything needs to be done timely because one day can have significant financial impact on one’s business. In addition, Direct Tech also suggested to apply top-down forecasts at company or product category levels Vs bottom-up item level forecasts that will provide a better quality inventory needs reporting.


[1] "Tip Sheets - Inventory Planning, Demand Planning, Merchandise Planning / Purchasing | Direct Tech." Inventory Planning / Forecasting, Demand / Merchandise Planning | Direct Tech. Web. 06 Feb. 2012. .

1 comment:

  1. This is a wake up call for business owners who have the tendency to maintain large inventories of their products for extended periods of time. Those hidden costs you enumerated may not mean much at first glance, but these can add up in the long term. And in the long run, it will affect the company's base line.

    Ethan Mudgett


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