What is Strategic Inventory? [Comprehensive Guide for 2023]

In this article, we will cover what strategic inventory is and its importance. We will also provide a step-by-step process for strategic inventory management. Read on to learn more. 

What is Strategic Inventory?

Strategic inventory refers to the stock of goods or materials kept on hand as part of a business's long-term plan or strategy. It is not intended for immediate sale or use but is held to meet future demand, manage supply chain risks, or take advantage of future opportunities.

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Example: A clothing store keeps an extra 50 denim jackets in stock to mitigate the risk of supply chain disruptions. This strategic inventory ensures continuous availability without any delay in fulfilling customer orders.

Types of Strategic Inventory

Here are a few common types of strategic inventory:

1. Safety Stock:

Safety stock mitigates the effects of unexpected demand or supply shortages, prevents stockouts and maintains customer satisfaction. It provides consistent service amidst supply and demand uncertainties.

2. Anticipation Inventory:

This inventory caters to predictable, often seasonal, demand spikes to ensure the production process remains uninterrupted and customer needs are met during peak seasons.

3. Hedge Inventory:

Hedge inventory protects against price fluctuations and supply disruptions. It aids in price stabilization and ensures supply continuity amidst market uncertainties.

4. Decoupling Inventory:

Decoupling inventory allows production stages to operate independently, reducing lead times and downtime. It enhances operational efficiency and timely product delivery.

5. Cycle Stock:

Cycle stock supports daily operations, ensuring a steady product supply. It facilitates uninterrupted operations and consistent service delivery.

Importance of Strategic Inventory

Strategic inventory is important for a number of reasons. Some of the most common reasons include:

1. Risk Mitigation:

Strategic inventory guards against unexpected supply chain disruptions to ensure business continuity and prevent revenue losses. It acts as a buffer during supply shortages and crises.

2. Customer Satisfaction:

A well-maintained inventory ensures product availability to enhance customer experience and build loyalty. It effectively prevents stockouts, ensuring prompt deliveries.

3. Cost Efficiency:

Strategic inventory helps in controlling costs to enable bulk purchasing and volume discounts. It acts as a hedge against market price fluctuations.

4. Operational Efficiency:

Decoupling inventory boosts production efficiency and reduces lead times. It ensures that production schedules are met and customer demands are addressed quickly.

5. Market Responsiveness:

A strategic inventory ensures swift adaptation to market changes and trends. It also provides a competitive edge and enhances market agility.

8 Step Strategic Inventory Process

Strategic inventory management is crucial for businesses to ensure that they have the right amount of stock at the right time. simple 8 step process to manage strategic inventory:

Step 1. Demand Forecasting

Forecasting is essential to predict the quantity of products required to meet customer demand. Accurate forecasts aid in making informed decisions on ordering and stocking inventory.

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Example: Based on historical sales data, a clothing store anticipates selling 500 pairs of jeans monthly. The store analyzes past trends and considers factors like seasonality and upcoming fashion events.

Step 2. Safety Stock Calculation

This step involves determining the optimal level of safety stock to handle unexpected demand spikes or supply delays. It serves as a buffer to mitigate stockouts and maintain customer service levels.

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Example: An electronics retailer maintains a safety stock of 50 units of a popular smartphone model to cater to unexpected demand or supply delays, ensuring availability even during unforeseen circumstances.

Step 3. Supplier Relationships

Building and maintaining relationships with suppliers ensures a steady, reliable supply of inventory. Good relationships can lead to favorable terms, quality assurance, and timely deliveries.

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Example: A toy store maintains strong ties with its supplier, ensuring a consistent supply of 200 action figures per month, and securing priority during the holiday season rush.

Step 4. Order Quantities

Determine the optimal order quantities to minimize costs associated with ordering, holding, and stockouts. This involves a balanced approach to avoid overstocking or understocking.

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Example: A bookstore calculates that ordering 100 copies of a new novel each month minimizes both holding and ordering costs while meeting customer demand.

Step 5. Inventory Turnover Ratio

Analyze the frequency at which the inventory is sold and replaced. A higher turnover ratio indicates efficient inventory management and sales processes.

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Example: A grocery store aims for a high turnover ratio with an average of 1000 cartons of milk sold monthly. It ensures fresh stock and minimizes wastage.

Step 6. Technology Integration

Incorporating technology solutions for real-time tracking, data analysis, and automation. This enhances the efficiency, accuracy, and speed of inventory management.

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Example: A gadget shop uses an inventory management system to track the sales of 150 smartwatches monthly which automates reordering when stock levels hit 20 units.

Step 7. Continuous Review

Regularly review inventory levels, demand forecasts, and supplier performance. Adapt the strategy as needed to optimize inventory management.

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Example: After reviewing data, a cosmetic store adjusted its inventory levels by holding 300 units of best-selling lipstick to match the observed increase in demand.

Step 8. Disaster Preparedness

Prepare for unforeseen challenges like natural disasters, supplier failures, or abrupt market changes. This involves contingency planning and risk management strategies.

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Example: A hardware store keeps an additional stock of 100 snow shovels in anticipation of a harsh winter, ensuring supply despite transportation disruptions due to severe weather.

Case Study Example

Let's apply this strategic inventory management framework to a company named "TrendyWear Fashions," a boutique clothing retailer.

Step 1. Demand Forecasting

TrendyWear Fashions analyzes past sales data to estimate selling 300 denim jackets, 400 dresses, and 250 pairs of sneakers monthly. Last fall, TrendyWear sold 450 denim jackets due to cooler weather which aids in preparing inventory for the upcoming season.

Step 2. Safety Stock Calculation

The boutique keeps a safety stock of 30 denim jackets, 50 dresses, and 20 pairs of sneakers to handle unexpected demand. This preparedness was validated during a flash sale when the demand for dresses surged, yet TrendyWear was able to meet the demand without facing stockouts.

Step 3. Supplier Relationships

TrendyWear maintains strong ties with "Glam Fabrics" and "Sneaker World" for a steady supply of quality inventory. This partnership ensures a consistent supply of 300 dresses and 200 pairs of sneakers each month with priority delivery during peak seasons.

Step 4. Order Quantities

TrendyWear orders optimal quantities to balance holding and ordering costs, ordering 300 denim jackets monthly. They found this number to be cost-effective while meeting the anticipated customer demand based on previous sales data.

Step 5. Inventory Turnover Ratio

With an average of 400 dresses sold monthly, TrendyWear ensures a quick inventory turnover, maximizes sales, and reduces holding costs. This rapid turnover ensures that the collection stays fresh and aligns with the latest fashion trends.

Step 6. Technology Integration

TrendyWear uses a modern inventory management system to track real-time sales of 250 pairs of sneakers monthly and automate reordering when the stock level reaches 30 units. This technology ensures that popular sneaker designs are always in stock and available to customers.

Step 7. Continuous Review

Every quarter, TrendyWear reviews its inventory levels and sales data. After noticing a 20% increase in sneaker sales, they adjusted the stock levels to hold an additional 50 pairs to match the rising demand.

Step 8. Disaster Preparedness

TrendyWear keeps an additional stock of 50 denim jackets to prepare for potential transportation disruptions during severe weather conditions. This preparation proved crucial when a winter storm delayed shipments, yet TrendyWear continued meeting customer demands seamlessly.

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We hope that you now have a better understanding of what strategic inventory is, its significance, and how to implement our strategic inventory management process.