INTELLIGENT ALLOCATION OF SAFETY STOCK FOR INVENTORY OPTIMIZATION

MANAGING INVENTORY OFTEN REQUIRES UNDERSTANDING WHICH DRIVERS ARE THE MOST IMPORTANT IN THE BRAND’S SUPPLY CHAIN AND ALLEVIATING THEM TO IMPROVE OVERALL PERFORMANCE.

- MANISH SRIVASTAVA, NIKHAR SHARMA & ANAND BIHARI

In a perfect world, companies would precisely know the demand for every product across channels and would be able to allocate inventory accordingly. However, reality tells a different story when you factor in economic conditions and consumer preferences.

Every manufacturing organisation/retailer has been battling inventory woes. You either go overboard with the stock that eats into your margin or play catch-up. Then there are sale seasons, channel partner promotions, and competitor strategies where it gets difficult to predict how much to sell. One of the metrics widely used to measure the efficiency of a business in managing its inventory is Days of Inventory on Hand (DOH), also known as Days Sales of Inventory or Days of Inventory on Hand. This accounting ratio measures a company’s days to sell its average inventory balance. It also estimates the number of days the average inventory balance will be sufficient.

KEY DRIVERS OF DOH

Technology has enabled and changed purchasing habits. Convenience and cost are no longer the only forces impacting purchasing decisions. Consumers are not at the mercy of retailers. They can access what they want, where, and when they want it. This behaviour has fragmented the market into smaller segments. Sales units are moving from bulk shipments to increasingly more customized offerings, including a wider variety of products, with smaller quantities of orders at a higher frequency in turnover. Thus, broadening purchase options, consumer perception, hyperlocal delivery, reduced order cycle times, seasonal sales, and shorter shelf lives are compelling FMCG companies to constantly look for ways to drive and optimize DOH to enhance supply chain efficiencies.

CHALLENGES OF A HIGHER DOH