Back To Basic - What is Inventory Day
Warehouses are set up to serve as a buffer storage place, a place where inventory is temporarily stored. The inventory in the warehouse is like a cushion to offset the lead time required for inventory demand. A well-managed warehouse has just enough inventory to serve the market.
The consequences of having not enough inventory are serious, you run out of stock, which not only means lost sales but your consumers will buy competitors' products, i.e. feeding your competitors.
The consequences of having too much inventory are equally serious, you waste your warehouse space on keeping things which are not needed(you are paying for space even if it is not your warehouse), you could have used the cash to purchase something immediately useful, which result in increased revenue. There is a huge opportunity cost and people tend to forget, there is a cost of cash. Yes, cash has a cost, so you must use it wisely.
But how much inventory is just enough?
To answer the question, you need to know "Inventory Day" – the number of days the inventory will last until new inventory is supplied. For example, you have 100 cartons of a soft drink, and on average you deliver 20 cartons in a day, hence your inventory day for this item is 5 days. As such, each item may have different inventory day.
If the lead time of ordering this item is also 5 days, that means you need to order 100 cartons every 5 days. But because the world is not perfect, to avoid out of stock, a buffer is usually added for any unforeseen situations such as accidents, a sudden surge of demand or supplier themselves are out of stock (rare but not uncommon). If you add too much buffer, you end up having too much stock.
In the case of a sudden increase in demand, it could be due to many reasons, the common reasons are promotion, seasonal and weather. A good warehouse management system can provide all the required data to feed a demand forecasting & planning tool - a tool you should consider investing when your business gets bigger. However, a strong implementation team for your warehouse management system can use the data provided by the WMS to perform some calculations to get your through the first few miles before you invest in the demand forecasting & planning tool, i.e. you can use the saved money to invest in growing your business, buy more products, upgrade your warehouse management system, get a bigger warehouse, deploy robotics warehouse management, use an electronic proof of delivery system and deploy a mobile CRM(Customer Relationship Management), until the point when the tool becomes a necessity.
The calculation can get fairly complicated, for example, 15 items are supplied from the same supplier, but the minimum order quantities are ranging from less than 1 day to 50 inventory days, so how are you going to order these items? If this is important to you, engage a team which can advise you on this.
Inventory Day is vital to your business.
Click here to read What Is Warehouse Management System? Part 1.
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