What Is Inventory Flow? (Comprehensive 2023 Guide)
In this article, we explore what inventory flow and its significance in inventory management. We will also walk you through our step-by-step process for optimizing it. Read on to learn more.
What Is Inventory Flow?
Inventory flow refers to the movement of goods within a company's supply chain. It encompasses the entire journey of a product: from the moment it is received as raw material to its transformation into a finished product and its final delivery to the customer.
Example: SunBrew Cafe sourced 50,000 pounds of coffee beans in July. By September, after roasting and packaging, 48,000 pounds were distributed to its coffee shops across the state for sale.
Why Is Inventory Flow Important?
Efficient inventory flow is essential for businesses. It offers several advantages, including:
Cost Reduction: Efficient inventory flow minimizes holding costs by reducing excess stock, saving on storage expenses.
The inventory flow process is the backbone of efficient supply chain management. Below are the six major phases:
This step involves the procurement of necessary materials or products from suppliers, ensuring a reliable and timely supply chain. It encompasses activities like supplier selection, negotiations, and creating purchase orders.
Receiving and Inspection
Upon the arrival of goods, a thorough check is performed to verify the quantity and quality. Inspections and quality checks help ensure that received inventory meets the company's standards and is suitable for use or sale.
Storage and Organization
Inventory is stored in designated areas or warehouses, where it's organized for easy access and retrieval. Proper storage practices include inventory categorization, labeling, and adherence to conditions like temperature and humidity requirements.
This step involves efficiently handling customer orders, which includes selecting items from inventory (picking), packaging them securely, and shipping them to meet customer demands while ensuring accuracy and timeliness.
Continuous tracking of inventory levels ensures that stock is always available to meet demand. It includes real-time updates on inventory status, adjustments for changes in stock, and maintaining records.
Optimization and Improvement
Businesses focus on ongoing optimization efforts to minimize holding costs, maximize resource utilization, and enhance overall efficiency. Techniques such as demand forecasting, reorder point optimization, and inventory level adjustments are employed to achieve these goals.
7-Step Inventory Flow Optimization Process
To optimize inventory flow for your business, consider implementing our simple 7-step process below:
Step 1: Forecast Demand Accurately
Begin by precisely predicting future demand using historical data and market trends.
Example: "Tech Gear Superstore" analyzes past data and predicts that they will sell 500 gaming laptops during the holiday season based on historical trends.
Step 2: Collaborate with Suppliers
Forge close collaborations with suppliers to ensure timely deliveries and reduce lead times.
Example: "Auto Parts World" collaborates with their primary supplier to reduce lead times from 10 days to 5 days, ensuring quicker access to critical car parts
Step 3: Implement Just-In-Time (JIT) Inventory
Deploy JIT inventory practices to minimize holding costs by ordering goods precisely when needed, reducing storage requirements.
Example: "The Baker’s Delight" orders just enough flour each day to bake 100 loaves of bread, eliminating the need for storing excess flour and saving on storage costs.
Step 4: Prioritize Inventory with ABC Analysis
Categorize inventory items into three groups based on importance, enabling prioritized management efforts.
Example: "Tool Zone Warehouse" classifies high-demand power drills as “A” items, medium-demand hand tools as “B” items, and low-demand accessories as “C” items to streamline inventory control.
Step 5: Calculate Optimal Order Quantity
Determine the optimal order quantity through EOQ calculations to minimize total inventory costs, including ordering and holding costs.
Example: "Office Essentials Ltd." calculates the Economic Order Quantity (EOQ) for printer paper and determines that ordering 1,000 reams at a time minimizes both ordering and holding costs.
Step 6: Continuously Monitor Inventory Levels
Keep a vigilant eye on inventory levels, spotting slow-moving items, overstocking, or understocking in real-time.
Example: "Tech Haven Electronics" uses a real-time inventory system and receives an alert when they have only 20 smartphones left in stock, prompting an immediate reorder.
Step 7: Adapt and Improve Inventory Strategies
Regularly adjust inventory strategies based on data insights and market changes, actively seeking opportunities for further optimization.
Example: "Fashion Forward Boutique" reviews monthly sales data and decides to discontinue items that have sold fewer than 5 units in the last three months, optimizing their inventory based on demand trends.
Let’s consider a hypothetical example. TechSupreme Electronics is facing challenges with their inventory management.
To maximize productivity and profitability, they applied our comprehensive inventory optimization strategy:
Step 1: Forecasting Demand Accurately
TechSupreme Electronics predicts they'll sell 1,200 gaming consoles during the holiday season, which is a 30% increase based on historical data.
Step 2: Collaborating with Suppliers
To ensure timely deliveries and reduce lead times, TechSupreme Electronics strengthens collaborations with their primary suppliers. Their lead time for gaming consoles decreases from 14 days to 7 days.
Step 3: Implementing Just-In-Time (JIT) Inventory
TechSupreme Electronics adopts JIT inventory practices for high-demand items like smartphones. For instance, they order 500 smartphones only when their stock drops to 50 units.
Step 4: Prioritizing Inventory with ABC Analysis
After conducting an ABC analysis, TechSupreme Electronics categorizes their inventory. High-demand items like laptops fall into the “A” category, while lower-demand accessories are classified as “C” items. They allocate more resources to manage “A” items effectively.
Step 5: Calculating Optimal Order Quantity
TechSupreme Electronics uses Economic Order Quantity (EOQ) calculations to determine that ordering 500 laptops at a time minimizes overall inventory costs.
Step 6: Continuously Monitoring Inventory Levels
TechSupreme Electronics installs real-time inventory tracking systems. They receive alerts when stock levels for accessories drop below 100 units, allowing them to restock promptly and avoid stockouts.
Step 7: Adapting and Improving Inventory Strategies
TechSupreme Electronics regularly reviews their inventory data and market trends. Based on their analysis, they decide to adjust the stock levels for specific gaming accessories, ensuring they meet customer demand effectively while minimizing waste.
We hope you now have a better understanding of what inventory flow is that you will be able to apply our 7-step inventory flow optimization framework to your business.