At its core, inventory management sounds straightforward enough: order products, store them somewhere, sell them to your customers and restock them as needed. Peel back the layers though and you’ll see that inventory management is anything but simple.
In fact, it can be downright daunting in a selling environment where consumers and business customers alike have come to expect accurate, expedient deliveries within a day or two—sometimes less.
These expectations have put new hurdles in front of shippers that have to manage e-commerce and omni-channel sales across multiple channels; meet their customers’ growing demands for a better buying experience; and manage rising transportation costs. Some tackle the problem by leasing new warehouse space, stocking up on inventory, and then positioning those goods in close proximity to their customers. Not only do these strategies cost money, but they also work against the basic philosophies of maintaining lean inventory reserves in order to save capital and utilize less real estate.
To help solve their inventory pain points, companies are using systems that are either offered as standalone solutions or integrated into enterprise resource planning (ERP) platforms. These systems help shippers fully or partially automate activities like demand forecasting, order placement, stockout alerts, goods tracking and replenishment.
By incorporating tools like barcode scanning, inventory optimization (i.e., maintaining the right quantities of every SKU), stock notifications, returns handling, and multi-warehouse management, the software gives companies better control of their inventory management processes while also saving on labor and reducing inventory needs.
The problem is that a lot of companies are still using spreadsheets, clipboards, phone calls, e-mail and other manual processes to order, track, and maintain inventory. “Over the last 12 months, I haven’t seen any greater levels of adoption of inventory management applications,” says Ian Hobkirk, president at Boston-based Commonwealth Supply Chain Advisors. “In fact, it can be the hardest lever to push in supply chain. Despite that, there are some trends that are pushing companies closer to needing to adopt these systems.”
For one, as companies grow their e-commerce channels, there’s an increased need to operate in a multi-distribution center environment. Take the shipper that has a single DC situated near a port city, for example. Selling to a wholesale channel for most of its existence, that company was never forced to pay much attention to outbound transportation. And because it produced its goods in the Far East and shipped them into the Port of Los Angeles (to minimize inbound costs), it also had little need for a centrally-located DC.
As that company’s e-commerce channel began to grow, its inventory management needs became more complex. “Suddenly, the company has a vested interest in having inventory positioned closer to its customers versus its sources of supply,” Hobkirk explains. “That’s driving companies to relocate that single DC to be more centrally located or to open a second or even a third DC that would enable it to offer two-day ground/parcel service across as much of the country as possible.”
Once the shipper makes that move, its inventory management processes have to adapt accordingly. “When it makes the leap to multiple DCs, the company suddenly needs a much more sophisticated inventory management approach,” Hobkirk points out. For example, bringing in products from the Far East and storing them under one roof is no longer an option. Companies must decide what to put where—and in what quantities—in order to meet customer demand.
“If it has an East Coast DC to supply, will those products be shipped from the West Coast DC or will they come directly from a supplier? And, will the shipper stock all of its SKUs across both DCs, or will it use a hub-and-spoke system with a master stocking DC?” Hobkirk asks. “These are complicated questions that have to be answered, and that are being driven by the rise of e-commerce.”
Reflecting on some of the inventory-related conversations he has had recently with shippers, Hobkirk says that the tariffs and trade wars have played a key role in many companies’ inventory approaches this year. “Everyone is struggling with the tariffs and the implications of the trade war,” he says. “It has companies revisiting their inventory strategies, in some cases.”
For example, before the most recent round of tariffs went into effect, Hobkirk says many companies were scrambling to get more inventory into the United States—just in case. As they wait to see what happens on the political front, those companies are now “potentially scaling back their levels of inventory (temporarily), and hoping things will change,” says Hobkirk.
These outside factors underscore the importance of taking a formulaic approach to managing inventory, Hobkirk continues, so that when something happens (e.g., inventory carrying costs increase due to a new or increased tariff), you can pivot quickly to offset the problem. “It’s about taking somewhat of a scientific approach to how you respond to these issues,” says Hobkirk, “versus just operating by gut feel. It’s just impossible to predict what’s going to happen, but at least if you take a rules-based formulaic approach to procurement, you can make better decisions about how to respond to them.”
For decades, the pendulum has swung back and forth between centralized and decentralized inventory strategies. For example, shippers would start to centralize their operations, only to realize that they were putting too much space between themselves and their customers. To offset this problem, the same companies began building out multi-echelon inventory strategies. When shippers found themselves with inventory that was too far spread out and difficult to forecast, they retreated back to a centralized approach.
“That has been going on for years, and it tends to shift about every seven years or so,” says Dwight Klappich, research vice president at Gartner. Most recently, he has seen a move to “extreme decentralization” of inventory, where companies rely on very distributed networks in smaller facilities, all of which are situated close to their end customers. Klappich says two different forces are at work here: the well documented “Amazon effect,” and a generation that wants its orders right now.
“There’s an entire generation that at a minimum feels like it should be able to get everything by tomorrow at the latest,” says Klappich. “These customers aren’t going to accept seven-day to 14-day lead times; they expect to be able to get orders the next day and even same-day, for the really important stuff.”
To provide that level of service, shippers are using more distributed networks that typically lead to new inventory management challenges. “It affects network design and pushes companies to rethink how they organize inventory across these distributed networks,” says Klappich. “It also affects how inventory is managed on a day-to-day basis.”
For instance, rather than pulling inventory from a single location, a company can more easily buffer uncertainty by spreading inventory out across the distributed network. But there are also challenges associated with this scenario. “If shippers aren’t careful,” Klappich warns, “they could see their inventory levels go up just because they have distributed across a larger number of locations.”
Klappich says a number of software vendors have stepped in to help shippers navigate these complexities, with companies like DSI Global, Innovapptive and RFgen offering solutions that can be added to an existing ERP and used to create a mobile, flexible experience for the user. “It’s a resurgence of what we used to refer to as the ‘data collection marketplace,’” says Klappich. “Vendors are targeting very small facilities with mobile application development platforms that are focused on supply chain.”
Calling inventory management a “persistent problem” for shippers across most industries right now, Norm Saenz, managing director at supply chain consultancy St. Onge Co., expects the tariff situation to continue having an impact on how companies procure, stock and replenish products—at least in the near term.
“Right now, companies are buying a lot of inventory for fear of not getting the inventory they need, so their inventories on-hand are growing,” says Saenz. Some of those products are being closely tracked with software and other methods, but others are not. The latter can get costly pretty quickly, says Saenz, and particularly for retailers who are already grappling with high return rates on e-commerce sales.
“There seems to be an influx of inventory hitting a lot of warehouses right now, with many of them running out of physical space to store everything,” says Saenz, who adds that solutions like bar coding scanners and inventory management solutions can help shippers alleviate some of these pain points.
“The lowest level of technology companies should have is a simple warehouse inventory tracking system,” says Saenz, who adds that having the right racking in place also helps. For example, invest in denser storage racks to manage a higher number of the same SKU, versus spreading those products across 30 pallets throughout the facility. “Knowing where everything is at any point is really important for managing both the capacity of your building and the labor in your facility.”