Achieving Supply Chain Excellence Through Inventory Strategies

Can accurate inventory management significantly impact your bottom line? Discover how mastering the essentials of warehousing can turn your logistical nightmares into streamlined operations. In our latest episode of the Chain Reaction Podcast, we promise to equip you with the knowledge to tackle common challenges such as data entry mistakes, theft, inaccurate forecasting, and stock-taking errors. Learn the importance of regular audits and physical stock checks, and how automated inventory systems can revolutionize your warehouse efficiency.

Safety first! Managing different types of cargo isn't just about storage; it's about safeguarding your inventory and ensuring the integrity of your products. This episode dives deep into the complexities of handling everything from flammable materials to bulk grains. We'll cover the procedures for transferring goods, the necessity of accurate weighing and quality checks, and the measures needed to prevent theft and discrepancies. Whether you're dealing with dry bulk cargo like minerals and construction materials or liquid bulk like crude oil and chemicals, we've got the insights you need to keep your operations secure.

Strategic inventory management is not just an operational task, but a vital component of supply chain efficiency. We'll break down various types of inventory, including cycle stock, anticipation inventory, hedge inventory, and decoupling inventory, and explain how each plays a role in smooth operations, cost efficiency, and risk mitigation. Don't miss how these strategies contribute to customer satisfaction and overall supply chain success. Plus, stay tuned for our Newsround segment for a global supply chain overview. Be sure to subscribe to the Chain Reaction podcast so you never miss an episode.

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Transcript

Tony Hines: 0:03

Hello, tony Hines, here You're listening to the Chain Reaction Podcast, all about supply chain advantage. I'm going to talk today about storage and inventory, two important aspects of making sure our supply chain strategies work and that we maintain our operations at the same time, so we're both effective and efficient. So stick around, stay tuned, find out more Training Reaction. Well, it's all about the warehouse today. We're going to talk about the warehouse, but more specifically, not about the warehouse itself, but about why warehouses are necessary and what we store in them, which is inventory. And we'll talk a little bit about the layout of warehouses and how that makes it efficient to get things. But we'll also talk about the inventory and the inventory management, and that's our focus for today.

Tony Hines: 1:01

So I'm sure you've been in a warehouse and you've gone to get some stock at some time or other and it hasn't been there and that might be because it's not been delivered, not been recorded correctly, been moved without recording. So let's run through quickly some of the things that can happen. We can have data entry mistakes so the transaction is not recorded properly and that means that you're going to have discrepancies. So if you don't record what's been received or what's been shipped out, that'll lead to a discrepancy, and there are many challenges like this facing those that work in the warehouse. There can be theft, of course, and pilferage, both internal and external. Theft causes what we call shrinkage and that's why the goods are no longer there. Employees may be responsible for taking inventory, leading to discrepancies, or someone else who had access to the store.

Tony Hines: 1:53

There can be inaccurate forecasting. Poor demand forecasting can result in overstocks or understocks and that will change the inventory levels. And it may be when you get understocks or overstocks. Suppose you get an overstock and the normal holding place to store that stock is filled. That means you have to find somewhere else and when you do you might move the stock to another bay and if it's not recorded again properly or you forget about it, that stock can be lost forever, especially if you've got a big warehouse, so an accurate forecast can lead to that sort of problem. There can be lost forever, especially if you've got a big warehouse, so an accurate forecast can lead to that sort of problem.

Tony Hines: 2:27

There can be stock taking errors of course We've all been on stock takes, I suppose where there's been a miscount. Maybe you had to go back and recheck stock as well because of miscounts and that can be an easy error and that will of course introduce discrepancies in the records. There can be supplier errors, of course vendors may ship the wrong quantity of items and it looks as if they were okay on receipt but actually there was a gaping hole in the boxes with the number of items that were in there, so the wrong quantity of items. Or maybe with the movement, the stock's been damaged. And so when you go to look for the stock, yeah, you find the stock, yeah, you find the stock and you find the item, but when you inspect it it's actually been damaged and that might have been on movement, on an internal move round in the warehouse, or it could have been damaged in transit and missed at the goods inwards point. And all those factors can lead to a mismatch between the record of inventory and the physical stock. And that's why we carry out regular audits in warehouses to check the stock against the record.

Tony Hines: 3:32

A physical stock take is essential. So you need a regular audit. It needs to be conducted frequently and you need to compare that actual inventory with the recorded data and if there are discrepancies that actual inventory with the recorded data and if there are discrepancies, you need to find out why. You need to get to the root cause of the discrepancy. Most warehouses these days have some form of automated system, either fully automated or partially automated, and they invest in these inventory management systems to automate processes like order fulfillment, replenishment and stock adjustments, and that reduces human error and should improve the accuracy. We also take great care to train people who work in warehouses so that they understand proper inventory handling, labeling and recording procedures, because we know that well-trained employees are likely to make fewer mistakes. We also communicate with suppliers to improve order accuracy, confirm quantities, product codes and delivery schedules to prevent any discrepancy before it happens. And instead of annual stock takes, we perform regular cycle counts for specific items or sections, and that can help catch those discrepancies sooner than we might otherwise. So cycle counting or a fortnightly or a monthly stock take depending on the value of the stock and depending on how quickly it moves could be important, but regular stock takes are necessary. When we investigate discrepancies, we do so using something called root cause analysis. We identify patterns, analyze causes and address any underlying issues and we bring those to the surface, and a combination of all these things can help reduce inventory discrepancy and improve the overall warehouse efficiency.

Tony Hines: 5:20

So what we've talked about so far are traditional warehouses, and we've talked about the way a traditional warehouses and we've talked about the way a traditional warehouse works. It holds inventory and it's often said that warehouses are transport at zero miles per hour, meaning that they're located for when they're needed. They don't move anywhere until that stock is called off through an order. Now there are other forms of warehousing, but we don't call them warehouses. We have different names for them Storage tanks for liquid product, and we have silos for grain storage. But both of those liquid tanks and silos are a form of warehouse. They're there to hold inventory until it's required by a customer. And they're slightly different because liquid is a flow and the liquid flows in and it flows out, and it might be via a pipeline in the case of oil and oil products, or water and water products, or it may come in in bulk tankers and those bulk tanks may be left in a storage area until required.

Tony Hines: 6:27

And the other key thing about warehousing is safety. We have to hold the inventory safely so it's prevented from any damage. Or, in the case of flammable material, it has to be stored safely so it doesn't spark into fire. Safely, so it doesn't spark into fire With grain. We take the grain in, usually off a ship or a truck, and we drop it into a silo. Now the silo can be filled either by large cranes which hold suction tubes that suck it out of a ship and the ship hold, or it can be dropped into a yard area with the truck just tipping its load and it's taken on bends through the system into the silo and to the space that's been allocated for that particular grain.

Tony Hines: 7:17

So in either case, these are just different types of storage that we're talking about here, but similar problems arise because both the liquid and the grain could be stolen at some point, and it may be at the point of entry where some of the grain is not discharged when it's supposed to be. So if a truck or a ship, a ship arriving at a port, the grain gets hoovered out because effectively that's what happens out of the hold of the ship and into the silo. But supposing it all doesn't get hoovered out and some of it left and the ship goes off with some of the cargo, well, unusual you might say, but it's possible. Similarly that could happen with a truck. The truck comes in, it's weighed over a weigh bridge and guess what the weight looks? All right coming in, but it's weighed over a weighbridge. And guess what? The weight looks? All right coming in, but when it's discharged and onto the band into the silo, it's actually short. Now, unless you check it again at that point, that shortage, that discrepancy, won't come out until you try to sell on that grain and you suddenly find you can't fulfill an order because you're short by a few ton. How might that happen? You might say. Well, guess what ingenious. Some trucks coming in might already be carrying additional weight, which is not grain that they leave behind when they discharge the grain in the silo. And how could that happen? Well, I've actually seen it happen. I saw it happen were somebody took off weight off the truck and threw it into a dock area, a side of the silo, and the grain was discharged. So it can happen.

Tony Hines: 8:55

This is not fiction, usually, of course. The truck comes in, it goes over a weigh bridge and if it's an honest firm that you're dealing with, it's fairly straightforward the truck is weighed, the tear of the truck is taken off, so that means you know how much grain is actually on the truck. Then it's discharged into the hold of the silo or the ship or whatever. Usually the silo first and the hatch comes off, where the delivery is dropped and it goes into the bends which are moving and they deliver the grain to its location in a particular silo. And when that happens that's fine. The truck leaves empty and as it goes out of the delivery space it's weighed again empty, and the empty weight should match the ter of the truck. So that means that they've discharged all the grain. It's as simple as that. But those checks have to be made.

Tony Hines: 9:53

The other problem with grain, of course, or any material that's similar, is that sometimes the volume of grain on a truck delivery might differ from a sample that the driver gives at the entry point on test. So in other words, the truck load is substandard to the sample and you might say, well, how can that happen? Truckload is substandard to the sample, and you might say, well, how can that happen? And that happens when sometimes an unscrupulous driver simply hands the sample tin to the organization or switches the sample that's taken by the receiving business to their own sample and then you get different qualities so they can make a bit of extra money that way. But most reputable firms don't try to do stuff like that.

Tony Hines: 11:04

Now let's give a little more thought to the different types of cargo that come in. We have dry bulk cargo, which is grains such as wheat, corn, barley, rice and other agricultural products that we've just talked about. Then we might have minerals and ores, iron ore, coal, bauxite and similar raw materials. And then there's fertilisers, chemical compounds like potash and urea, or construction materials such as cement, sand and gravel. Other dry goods might include wood chips, salt and sugar. And we have liquid bulk cargo, which I've talked about a little bit Crude oil, the unrefined form of petroleum transported to refineries for processing, or refined products such as gasoline, diesel, jet fuel and others. And then there are chemicals, a wide range of industrial chemicals and fertilisers that come by ship or by road or by train. And then we have liquefied natural gas LNG, converted natural gas for long distance transport, and other liquids such as edible oils and alcohol. Bulk carriers designed for dry bulk cargo have large cargo holes and tankers handle liquid bulk cargo such as oil and chemicals, and both play a critical part in global trade.

Tony Hines: 12:14

In any of these types of products, safety first. Before loading, drivers have to have personal protective equipment that's suitable, including eye protection gloves and safety shoes, and there are different types of loading. Top loading is a hose connected to the manhole at the top of the truck trailer, common for various chemicals, and bottom loading. Chemicals enter the tank through valves and fittings underneath the trailer and it's safe for loading fuel products because it minimizes any agitation or vapor formation which could be dangerous. It's always important to inspect the truck to ensure the right product is carried, check the equipment and verify compatibility, connect hoses and valves depending on the loading type, start loading and make sure the connections are secure to prevent leaks during transit. You have to record the data accurately and also close any manholes and seal the top after loading. The unloading process is when it arrives at the destination. There's an inspection to verify the container's product and then it's offloaded using pumps, compressors or gravity transfer into another clean container.

Tony Hines: 13:25

If we take a look at dry bulk cargo inventory, discrepancies usually happen when a shortage is identified between the ordered amount and the delivery amount, and these are called shortage claims. They arise when the quantity of cargo discharged is less than that declared on the bill of lading. Ship receivers often allege shortages and that can lead to disputes. There might be ship and shore differences, discrepancies between the vessels figure and the shore figure, which occur during the discharge, and these differences can impact the recorded cargo quantity. There's also the possibility of draft survey accuracy. Draft surveys help estimate cargo weight, but variations can lead to discrepancies. Ensuring precise measurement procedures is critical to this particular problem.

Tony Hines: 14:16

With liquid bulk cargo, again, there can be shortage claims. Similar to dry bulk, liquid bulk cargo can face shortage claims if the received weight is less than the declared bill of lading. There's cargo contamination and that can occur when foreign substances mix with the cargo, affecting quality and the value. So proper sampling practices and tank preparation are critical. Cargo contamination can also happen with dry cargo products as well, so that's another possible source of discrepancy. Cargo weight discrepancies rely on measurements being accurate to prevent disputes between the supplier and the customer. There's also a possibility of introducing contamination through tank coating compatibility. So if there's a particular tank that's using a particular coating and that interferes with the chemical makeup of the liquid being carried, that can be problematic and it does happen and it leads to disputes which lead to legal claims.

Tony Hines: 15:19

Managing inventory, of course, is both operational and strategic. It's operational because it's about the inflow, the management and the outflow of an asset, and it's strategic for almost the same reason, and it can make a big difference to profitability, to cost and to customer service. So those are three key strategic reasons to look after inventory. We can think about inventory as operational in the sense that it refers to the materials or the goods that we use in our day-to-day operations, in production, distribution and to fulfill customer orders, and the purpose of that inventory is to keep the flow smooth so that you don't get peaks and troughs and there's an uninterrupted production and order fulfillment is timely. It's about being able to meet demand. It supports the daily operations by having products consistently available and, of course, it reduces lead time. Cycle stock is a type of operational inventory that minimises delays and the three classifications that we have on our balance sheets, of course, is raw materials, work in progress and finished goods waiting to be shipped out.

Tony Hines: 16:33

Now, when we think about strategic inventory, it's part of our long-term plan, our strategy. We're not thinking about the immediate sales, but we're thinking about mitigating risk, so avoiding or managing or mitigating supply chain disruptions and any crisis that might occur. So that's why we hold stock. It's also about customer satisfaction. We want to ensure that product availability serves our customers and we don't want to stock out, particularly if we've got leading lines that we supply regularly to returning customers. It's also cost efficient because it means we can buy in bulk and get those discounts and we can also hedge against price inflation. And we can smooth the operation, lower the cost and, of course, at the same time increase or maintain profitability. And we're also able to react to our customers changing demand. If we hold inventory we're market responsive and we can adapt quickly to market trends and changes.

Tony Hines: 17:37

We also talk about holding safety stock, anticipation inventory, hedge inventory and decoupling inventory. So all in all, inventory is necessary to serve customers, to maintain operations, to maintain the smooth flow of goods and services to our customers, to keep costs lower than they would otherwise be, to make our supply chains more resilient, mitigate risk and add value for everybody. Now let's just offer some further explanation on anticipation inventory, hedge inventory, decoupling inventory, and we'll also talk about cycle stock. So in addition to safety stock that we've referred to, anticipation inventory is specifically for predictable, often seasonal, demand spikes. So if there's a peak season coming along, as there often is in retail, people refer to peak season. Then they anticipate what's required by the customers or what's going to be required by the customers through forecasts, and they decide to hold additional stock to avoid any disruptions during the peak season, to meet customers needs efficiently. Then we have hedge inventory. Hedge inventory acts as a buffer against price fluctuations and any supply disruptions. Usually the supply disruption occurs and prices rocket. So if we can hedge our inventories in some way by buying forward, that's what we'll do. It helps stabilise the cost and ensures continuity of supply even when the markets are very uncertain.

Tony Hines: 19:11

Decoupling inventory allows different production stages to operate independently. By reducing lead times and minimizing downtime, it enhances operational efficiency and ensures timely delivery of product Cycle inventory is to support daily operations by maintaining a steady product supply. It facilitates the uninterrupted processes and consistent service delivery. So each of these types of inventory has a specific strategic function to perform, as I've explained. So I'm going to talk about six strategies that can improve inventory turnover without compromising your stock availability.

Tony Hines: 19:50

The first thing, of course, is to know your product lifecycle, understand where each item stands in its lifecycle from introduction to decline, because you don't want to be ordering inventory for a product that's declining in sales or you'll be left holding too much inventory. So adjust inventory levels accordingly to match to both immediate demand fluctuations and strategically to manage decline or indeed the introduction of a new product as it takes off, because if it's taking off and you haven't ordered enough inventory, then you'll be short, you won't be able to fulfil the customer's needs and no doubt somebody else will be able to step in and do so One of your competitors. You also need accurate demand forecasts Because they help in preventing overstocking or indeed stockouts where you run out of stock. So, yes, use the historical data, look at the market trends and use predictive analytics. Now, the only problem, of course, with any forecasting and any forecasting models that companies use is that the history is assumed to be continued into the present and into the future, and of course, that's not always so. So you have to do this with some sensitivity, to understand what could happen if the historical data doesn't represent what's currently happening in the market on importance, demand and profitability.

Tony Hines: 21:19

This is the application of Pareto's optimization concept when we talk about ABC analysis optimizing the A stock, the high value stock, which might only be a smaller quantity than lots of the other inventory that you hold, but it's strategically important because that's where most of the value for your organisation is contained. So those would be A items, that's the 80-20 rule 80% of the value coming from that 20% of inventory, and then B items, which might be 30% of inventory, representing 10% of value, and, of course, the final 50% of the inventory representing the remaining 10% of value, the C items Also. You can have optimal reorder points and reorder quantities and this can be done automatically. But the danger of doing things automatically is that you don't actually look at other things that surround that decision. So you have to make sure that your AI system if that's what's managing the reorder quantities actually takes account in its algorithm to understand what's happening in the marketplace and balance lead times, safety, stock and demand variability so you can reorder smarter. You can redistribute excess inventory, use excess stock in creative ways Bundles, promotions to move it on and prevent any dead stock by reallocating it to areas with higher demand. So if there's a particular location where the product is falling in demand the actual finished item is falling in demand shift the stock for that finished item elsewhere where demand is holding up. So move it around your distribution points. And the final thing is to leverage automation. Use inventory management software to track performance and gain real-time visibility into stock levels, sales and trends. Optimizing inventory requires a strategic approach and it's tailored to you and your business. So make sure it's not just a generic solution that you're offering.

Tony Hines: 23:53

Now we can think a little bit about warehouse layouts and why they're laid out in a particular shape or design, and that's to make them efficient. Efficient warehouse design is critical to optimize storage, streamline our operations and ensure that supply is seamless. We can consider four types and, broadly speaking, they fall into a process layout, product layout, a fixed position layout and a hybrid. When we talk about process layouts, it's grouping similar activities or processes together, for example, all packing stations in an area while receiving storage elsewhere. They're suitable for businesses with diverse product lines and enhanced specialised handling, for example perishable goods or hazardous materials. And it's efficient when it's flexible and adaptable and it's used in industries such as food processing, chemical manufacture or assembly lines. And then there's the product layout, and the product layout arranges workstations in a linear flow, each station performing a task in sequence, and the order is to reflect that movement through. So it's a flow-through system. It's ideal for high-volume, repetitive production. It minimizes material handling and the distance and time it takes to travel through the line. It's efficient in automotive assembly lines, electronic manufacturing and mass production scenarios. It means that the fixed position layout, the products remain in a single area and the workers move around. It's common in construction, shipbuilding and large scale projects and it requires careful planning and coordination, often used in construction, automotive, aircraft assembly, that type of thing. The hybrid layout works best when you combine those different elements together to balance flexibility and specialization and it's customizable based on the product mix and the workflow. Most warehouses benefit from some form of hybrid because it gives them flexibility.

Tony Hines: 26:02

Another way to think about warehousing is people talk about U-shaped, where on one side you've got the goods coming in. It's kind of semi-circular flow. The storage area is in the middle of the? U and the outflow is on the other side, so you move around the u-shape in and out. So that's another proposition. The shipping and receiving zones are at opposite ends with the storage, as we said, in the middle. Then there's the L-shaped layout. Combines elements of both the U and the I shaped. It offers flexibility based on available space and workflow needs.

Tony Hines: 26:40

The I shaped is a long, straight design. Shipping and receiving zones are at opposite ends, with storage in the middle. Shipping and receiving zones are at opposite ends with storage in the middle and then in some organizations, in some places, they have the corner warehouse and the corner warehouse has an inflow on one side of the corner and now flow on another side of the same corner and the storage is behind there. So lots of variations, lots of different, but the one thing certain in warehouse it needs to be designed, it needs to be customised to what you actually do in your organisation and you need to think it out very carefully, and that's why we get design specialists in to lay out the warehouse. It's about efficiency, time, distance, safety, convenience and flexibility time, distance, safety, convenience and flexibility. So there we are Lots of things to think about.

Tony Hines: 27:34

When we think about inventory, it's not just about operations, it's about our strategies. It's about our supply chain strategies, what we want to achieve, and inventory is a very important part of our thinking when it comes to having successful supply chain strategies. So I'm going to leave it there. You might want to pick up any episodes that you've missed and drop by the website and subscribe on your favorite platform so that you don't miss an episode of the Chain Reaction podcast, all about supply chain advantage. I'm Tony Hines, I'm signing off and I'll see you in the next podcast, but just before I go, don't forget to tune in to the Newsrounder for all things impacting global supply chains in the week, on Saturday at 12 noon. Bye for now, thank you.