Case study

How to level your inventory for a successful warehouse operation

Jun 9, 2023 | Pallet Racking, Uncategorized

How well do your inventory levels correspond with demand? Central to effective inventory management, quantity is a serious subject for any logistical operation handling sellable goods, because too much can burden the business with unnecessary expense, whilst too little can result in lost sales opportunities. Maintaining optimal inventory levels is the most efficient method if your operation is to avoid both of these costly situations.

Warehouse inventory management

What is meant by optimal Inventory Levels?

The term “inventory levels”refers to the volume of stock in your operational possession which is readily available. When ideally quantified to meet demand without excessive surplus units or the risk of running out, your inventory levels are optimal which means you are holding healthy quantities and minimising the risk of incurring unnecessary costs to the business.

Is my warehouse operation maintaining optimal inventory levels?

Optimal inventory levels will sit midway between too much and too little. You will know that you are operating at your most ideal inventory levels if all three indicators apply to your operation:

  • Demand is being met comfortably
  • There are no overstock issues
  • There are no understock issues

The necessary balance – Stock quantities are perfectly in line with customer demand.

Diagram - The balance Demand Inventory levels

What is inventory overstock?

Inventory overstocking is the motion of obtaining and holding excessive stock levels at one time, far more than required to meet demand.

What is inventory understock?

Inventory understock occurs when stock levels are too low to meet demand, resulting in product unavailability.

Understock or overstock – which one will do the most harm?

If we consider an understocked warehouse there’s much to miss out on in terms of sales because there is no stock to fulfil the demand. The warehouse is losing money instantly and working under pressure trying to obtain the stock which by the time the stock enters the warehouse, it could be too late.

An overstocked warehouse can fulfil demand, but changes in demand can lead to money being tied up in slow moving stock alongside missed sales due to lack of storage for new stock in high demand.

Neither of the above sound appealing and neither are a situation any warehouse wants to find itself in.

Let’stake a look at the implications of overstocks and understocks in more detail:

The implications of overstocking

When stock reaches “more than you need” levels, the warehouse operation can run into the following problems:

  • No room for new product lines – If your pallet racking system is fully occupied with surplus stock, where can pallets loaded with newer stock be placed? This could prevent high demand stock from being ordered, stored and available for purchase whilst the slow moving and less popular stock has free rein of primary space in your warehouse.
  • Money is deducted from where it is truly needed – Stock costs money and whilst that money is tied up in stock which still sits on the shelf, the money needed to buy newer stock is not available.
  • Customers are being driven away – If your stock availability is limited on the goods customers want due to too much availability of stock they don’t want, it will soon irritate your customers who will look for what they want and expect, elsewhere.
  • Business reputation begins to suffer – Word of mouth (WOM) is extremely powerful when it comes to business reputation. A business known for stocking items which are no longer desirable can quickly lose its appeal to existing and potential new customers.
  • A financial loss on the stock – Stock that sits for too long can become hard to sell and marking it down may be the only way to shift the stock and whilst this may clear they way for new stock, profits will suffer. This is even more damaging if the stock doesn’t sell at all and goes to waste having gone completely out of fashion or out of date.
  • Increased storage and handling costs – With too much slow-moving stock, your warehouse can suffer congestion, particularly in the storage areas. This can slow down the entire operation and cause delays in shipments which are unlikely to sit well with your customers. You could also find yourself spending money on storage reconfigurations simply to accommodate low demand stock.

Congested warehouse

The implications of understocking

The effects of understocking are centred on unavailability from which your operation is likely to encounter the following problems:

  • An incapacity to meet demand – The words “out of stock” is not something your customers want to hear when they look to purchase a specific item, however when you understock your inventory, it becomes highly likely that they will come across those words. The result? Customer dissatisfaction which develops into lost sales.
  • Inability to deliver on time – Another aspect that can hinder customer expectations is a delay in delivery due to lack of immediate stock. Whilst it may be in transit to your warehouse, extra time is required to process the delivery and prepare the goods for despatch to the customer, something that can be avoided when stock is readily available in the warehouse at the time of customer order.
  • Reduced profitability – Lack of stock will see orders being cancelled or not placed at all and with this comes financial instability. Unnecessary missed sales are damaging to profitability.
  • Unjustified storage costs – Space comes at a cost, and understocking will result in unutilised space and unoccupied warehouse shelving By wasting the opportunity to store inventory levels that will meet customer demand, the unutilised space becomes an unnecessary cost.
  • Business reputation becomes unsavoury – Once your business becomes known for its high levels of unavailability. Whilst customer levels will also dwindle as they look elsewhere for reliability, the greater difficulty will be reputational recovery.

Pallet racking with a little amount of inventory

Are overstocks and understocks completely preventable?

Unfortunately the operational warehouse crystal ball doesn’t exist so we can’t be precise about demand predictions and quantities, but with improved forecasting, preparation and a grasp on customer behaviour we can be close enough to significantly reduce the risk of oversocks and understocks:

Let go of apprehensions around availability – Feeling panicked about the idea of running out of stock will set the motion for: “I’ll order a few extra just to be in the safe side”. And whilst this may well prevent loss of sales due to unavailability, you can very easily end up with more stock than you know what to do with if those “few extra” is actually a quantity that is beyond reason and leaves no room for subsequent demand fulfilment.

Take time to understand your customers – Whilst you’re not expected to read minds, a good understanding of customer behaviour will help your ability to satisfy their everchanging needs and preferences. The evolvement of customer needs and expectations is continual and whatever they are moving onto next, you need to be stock ready, with what they need and when they need it.

Review supplier contracts – Supplier reliability can have great influence on what and how much inventory you have in your warehouse at one time. This is because delayed orders can leave your warehouse out of stock and contrary to that, incorrect deliveries can leave you with too much of something you don’t need and not enough of something you do need.

Be better prepared for changes in demand – Where there is fluctuation in demand, inventory levels must follow that pattern if new needs and preferences are to be met with sufficient availability. Whilst such changes are often unpredictable, by keeping a watchful eye on the market and its external environment, contributing factors may be spotted in advance which allows for inventory level adjustments to be carried out ahead of any anticipated changes in sales volume.

Introduce periodic stocktaking sessions – It may entail additional labour costs and can be time consuming, but a regular count of all stock in your warehouse is an effective way to keep accurate records so when it comes to stock ordering, you are working from reliable information, rather than guess work. With damage, theft and previous errors taken into account, the possibility of ordering too much or too little is minimised if you have reliable information on existing stock at hand. Full cycle stocktaking can be carried out manually on a yearly, six monthly, monthly or weekly basis, depending on the size of your operation and in addition, spot counts can be carried out in-between to minimise the risk of miscounts posed by human error.

Ensure reliable inventory forecasting – Accurate forecasting involves the analysis of current and past data, trends, movements and developments leading to crucial information which can be used to guide the stock replenishment processes. Providing the data gathered is reliable, it will indicate the demand-meeting quantities required. As forecasting is used to steer decisions made on quantities when ordering stock, inventory forecasting should be prioritised alongside other crucial activities. A reliable forecast is steered by historical data as far back as two years if possible and inclusive of sales, turnover, supply, demand, margins and profits. Current buying habits, economical changes, marketing activities are also important factors and then following this, your future goals will need to be considered.

Wide Aisle Racking System

How other elements of stock can benefit from optimal inventory levels

Having a good handle on your stock levels will have a positive effect on other elements under the stock and inventory umbrella:

  • Minimum stock – The sinking of stock levels below the minimum quantities required to function becomes far less likely.
  • Maximum stock – The task of ensuring the greatest amount of stock units required to ensure availability without overstocks becomes much easier and less daunting.
  • Emergency stock – In preparation for the unexpected, essential emergency stock levels becomes easier to maintain.
  • Seasonal stock – For stop-and-go demand your warehouse will be better prepared
  • Perishable stock – For stock with a limited shelf life, the risk of waste is minimised
  • Idle stock – There will be much less of this around to clogg up your warehouse.
  • Speculative stock – Brought in to meet the demands of anticipated sales, this is a high-risk stock group but can offer high rewards if inventory levels are optimal
  • Available stock – Not too much and not too little. Demand can be met and the warehouse doesn’t become overwhelmed by surplus units.

A loaded pallet being pulled by a manual pull and pump truck

Now for storing your optimal stock levels!

Perfecting your inventory levels is one thing, supporting them with the most ideal storage and handling solutions is another. That’s where we come in. At WSL we prioritise all aspects of your inventory including volume when designing the most effective storage solutions for your operation. By engaging in a comprehensive consultation, our Design Technicians who are committed to achieving the best possible operation for your warehouse will take the opportunity to understand your inventory and operational needs whilst assessing your space. Contact WSL today on 0113 2045350 or email sales@wslmail.co.uk to discuss your operational and inventory needs and lets get the process of designing your bespoke storage solution started!

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