Does your company frequently encounter high and low periods of customer demand, ones where that demand suddenly, and quite unexpectedly, rises and then declines gradually, or worse, disappears overnight? One minute you’re struggling to keep up with the opportunities in front of you, and the next you’re left with an excess amount of product on your shelves.
Granted, keeping inventory on your shelves during moderate demand periods is expensive. However, it comes with operating in a market where customer demand is periodic in nature. Running a min-max inventory strategy ensures that you maintain minimum and maximum counts of finished goods so that you’re capable of supporting customers when that demand curve goes back in your favour.
Unfortunately, you’re not certain if min-max is the right strategy and this opinion is further strengthened during those aforementioned periods of non-existent customer demand. So, is min-max the right strategy for your company and your customers? Actually, yes it is. Instead of bemoaning the expenses your company incurs during lulls in customer demand, you should instead focus on all those sales you would miss out on if you didn’t have inventory.
Min-Max is Best Used in Markets with Periodic Demand
Like all inventory and warehouse management strategies, there are both benefits and drawbacks to running min-max. Once you understand what these benefits and drawbacks are, you’ll better understand why you’re most likely running the best solution for your customers and your company. However, in order to better understand these benefits, you must first understand the expenses your company covers when managing all the inventory in your warehouse.
A Simple Summary of Inventory Costs
So, what are some of the many costs included in managing your warehouse? First, there’s the cost of inventory obsolescence, costs that are defined by products that are no longer in demand by customers and raw materials and semi-finished inventory that is no longer needed. Second, there are the costs of damage. In most cases, damage is so severe that your company has no other recourse but to scrap that inventory or try to rework or repair it in order to recoup some profit.
Third, there’s the cost of financing. You borrow money in order to put products on your shelves and are only able to pay back what you borrowed when your customer pays for their purchases. Fourth, there are freight costs to ship material and goods from your vendors to your warehouse and from your warehouse to your customer base. Your costs of freight must always be included in your assessment of inventory costs.
Additional costs are summarised by the costs of electricity, rent, inventory counting, storage and handling costs, and most importantly, lost business due to out-of-stock (OOS) situations, ones that all but guarantee your customers will purchase from your competitors.
The Benefits of Min-Max Supply Chain Strategies
Most companies are well aware of these aforementioned costs with the exception of the last one. They fail to recognise that losing revenue because inventory isn’t available to sell is a direct cost of warehouse management. This is ultimately why min-max is so important when operating in markets defined by periodic customer demand.
Without maintaining a minimum inventory count of product on your shelves, you’re never able to capture those sales when your customers’ demand suddenly spikes upwards. In order to better drive this point home, here are just some of the direct consequences of not having inventory ready, or more importantly, encountering an inventory stock out during peaks of high customer demand.
First, you can lose the sale and lose the profit that comes with it. This is the first cost of not having inventory. Second, if you lose enough of these sales with enough customers, simply because you don’t have inventory, then you’ll lose more than just the profit on individual sales, you’ll lose customers. Finally, when you lose enough of these customers, you’ll begin to see your market share decline. For some companies, this is an immediate consequence. For others, it’s more gradual. Ultimately, it is much more difficult to get back into a customer’s good graces when you’ve let them down that when you first won their business. However, what happens if you decide not to lose that sale?
The Costs of Replenishing Inventory After Encountering a Stock Out
If you’ve decided you can’t afford to lose the sale, then you’ll need to replenish that inventory as quickly as possible. The first step involves calling your supplier and asking for an expedited shipment. This could mean paying your vendor a surcharge. At the very least, it means you’ll have to cover the cost of a rush shipment of parts into your warehouse.
The second step includes paying your warehouse employees overtime to receive, inspect and repackage the order. The final step includes rushing that shipment out to your customer, which almost always means covering a rush fee on your own freight account. If your company manufacturers those parts, then you may incur additional overtime in order to convert that raw material into a finished good. Both of these outcomes is a direct cost of not maintaining minimum inventory. Either you lose a sale, lose a customer and lose profit, or you incur additional costs by hurrying products or materials from your vendor into your warehouse and out to your client.
There will always be costs to having product sit on your shelves during periods where customer demand is sluggish and plodding along. However, when you assess the costs of reducing counts during period of high demand, those costs suddenly become much more imposing. Instead of focusing too much on your costs of inventory during sluggish demand, focus instead on amalgamating your costs when customers suddenly start calling and you’ve nothing to sell them.