Maintaining optimal inventory amounts in a warehouse or at your business is essential to increase turnover. Too little inventory can lead to shortages, while too much stock can be costly. However, a delicate balance between the two can be challenging to master. Discussed below are tips to reduce inventory shortages in the warehouse.
Manage lead times
Lead time is the period between the purchase of an item and the time of delivery by the supplier. Optimizing inventory should include accounting for lead time and should minimize the time it takes for an item to get from the supplier to the buyer. So it is essential to understand lead times, but it is also important to work towards shortening them.
Moving stock quickly from supplier to buyer allows warehouses to meet demands better and improve efficiency. It also shortens the time between the purchase of stock and generating revenue. Shorter lead times also lead to less inventory in the warehouse. It also eliminates the need to hold merchandise. Essentially, managing lead times allows warehouses to maintain adequate stock levels and avoid shortages before they happen.
Another way to reduce inventory shortages is by forecasting demand. This involves looking at sales trends and data to help determine the amount of inventory to buy. This ensures that enough stock is purchased to satisfy demand.
Adequately forecasting demand minimizes the chance of running low on stock or purchasing more than what can be sold. Analyzing sales data also helps businesses make better decisions based on the success and pitfalls throughout the year. However, it is best to assess demand regularly to get more accurate information. For example, looking at the year’s stock data may not consider factors like seasonal demand, interruptions in the supply chain, inventory surplus or shortage, etc. Short-term forecasting is generally more reliable.
Determine reorder points
Reorder point is the inventory level needed to prevent stock shortages. Even with short lead times and accurate demand forecasting, it is impossible to predict inventory needs fully. Therefore, having a cut-off point where inventory must be reordered provides a safety net to ensure order fulfillment without having more than needed.
Reorder point formula
The reorder point can be calculated in a few ways. A simple formula to use is:
Lead time demand + safety stock.
Lead time demand
Lead time demand is calculated by multiplying the lead time by the average daily sales. For example, if a supplier has a five-day lead time and there are 200 daily sales, then the lead time demand would be as follows:
Five days lead time x 200 daily sales = 1000 lead time demand.
Safety stock is the number of units warehouses keep to avoid running out of the product. It accounts for unforeseen scenarios such as catastrophic weather, changes in demand, shortage of raw materials, etc.
Safety stock is calculated by looking at usage (items sold) and lead time (in days). The formula is as follows:
[Maximum daily usage x max lead time] – [Average daily usage x average lead time]
For example, if a supplier has a maximum daily usage of 25, average daily usage of 21, a maximum lead time of 23, and an average lead time of 18, then the safety stock amount would be:
[25 x 23] – [21 x 18] = 197 safety stock units.
Calculating the reorder point
Using the information above, the reorder point calculation would be:
1000 lead time demand + 197 units of safety stock = 1,197 reorder point
Therefore, the business would need to place a new order with the supplier once the stock hits 1,197 units.
Production often gets overlooked when reducing stock shortages. However, production is crucial to ensuring stock availability. For example, a business selling an item that goes through three levels for production must have the parts necessary to get through the first level before moving on to the next. One missing item can cause rifts in the production flow and affect productivity. Scheduling production helps to identify and prevent these issues before they affect inventory.
Manage and automate inventory
Inventory management has steadily moved towards automation. Warehouse inventory management software allows products and information to be tracked more quickly and effectively while reducing the chance of human error during the tracking process. This improves accuracy and will enable warehouses to stay on top of inventory replenishment.
Look for warehouse management software for SMBs if your operation is a small to medium-sized business and you need a tool for keeping inventory organized and optimized.
The software system allows for easy tracking that provides a clear overview of what is in stock, what is booked, and when replenishments are expected. It also shows where items have been placed in the warehouse and will send notifications when inventory falls below the reorder points.
The system also makes for easy management of multiple warehouses under one simple cloud-based system. Automate inventory tracking, estimate costs and lead time, simplify production planning, and more.
Evaluate inventory practices frequently
Evaluations are crucial to improving efficiency and productivity in a warehouse. In addition to forecasting demand, looking at sales trends and data can provide insight into successful inventory practices and areas of improvement. This can further identify and mitigate factors causing potential stock shortages.