What State is Your Inventory In?

Being a planner or buyer is challenging and knowing what state your inventory is in for any item at any given time is crucial to your success.  If you over order, you may run into excess and obsolete issues.  If you do not order enough, you may not be able to fulfill as many customer orders as you need to.  In other words, the challenge for planners and buyers is to balance your ordering which you can only do if you know and understand your inventory state and position for every SKU.

What are the Three Inventory States?

There is very little room for a planner to make mistakes. A simple breakdown of inventory into one of the three states is an easy way for a planner to identify imbalance so they can take corrective action.  Every stocked item can be positioned as either overstocked, understocked, or balanced.  In an ideal world, 60-80% of you inventory is in a balanced state.  The remainder of which would be classified as overstocked or understocked.  Inventory in these two states should drive your workflow by calling out exceptions so you can take corrective action.

What defines the Three Inventory States?

Your traditional inventory "saw-tooth" diagram best illustrates the three inventory states, as seen above.  And, there are two key inventory parameters that define the saw-tooth diagram - safety stock and cycle stock.  The simplest inventory state to identify and the one that draws the most attention is the understocked position.  It is when an item is below the safety stock level or has no inventory, and is therefore in a (potential) stock out position.  Next, an item where the stock on hand is greater than the maximum inventory level (where maximum inventory = safety stock + [2 x cycle stock]) is considered to be in an overstocked position.  Lastly, an item where the on hand value falls within the cycle stock range is considered to be in balance.

How do you Manage your Inventory in these States?

Knowing these three states and being able to report your inventory in one of these three states is the first step towards building an actionable, exception-based workflow. There are varying degrees of urgency associated with each state depending upon the circumstance and tolerance.  Understocked items are the most important to action which requires you to place an order and, possibly, expedite it. Balanced items fall under typical ordering schedules where you are buying under normal circumstances taking into consideration forecast accuracy, lead times, PO minimums, containers, etc.. Overstocked items can drive exceptions requiring you to cancel or defer orders, and, in severe cases, throw promotions.

What should be your takeaway?

Most planners have too many items to manage. You want to, therefore, work and manage the exceptions.  Learning and applying these inventory states to drive your exceptions and workflow will not only help you reduce workload, but also focus your attention on items that need handling and review.  After all, there are only 18 action exceptions that can be derived from categorizing your inventory into these three states...can you figure them out?

​greg marmulak | founder | dash/APPLICATIONS
a software and inventory expert, greg has been living inventory optimization for the past 18 years, working with manufacturers, distributors, and retailers.

​https://www.dashapplications.com/about-us.html