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Are you an SMB? Here is why your forecasting results may not be up to snuff

Inventory planning is especially important to small-to-midsize businesses (SMBs). Nobody wants to tie up more working capital in inventory than necessary, but SMBs typically have a higher cost of capital, so it’s more expensive to fund excess stock. And if a company is growing rapidly, capital may not only be costly but may even require selling valuable equity.

Yet for many SMBs, inventory complexity is getting worse. Today even smaller companies may face proliferating product portfolios, sell across multiple channels, or manage a multi-echelon distribution network. If you are one of those, read on.

As complexity grows, so do the challenges of managing inventory. Home grown spreadsheets and low cost solutions start to hit a wall. Manual interventions and fire-fighting ensues. Companies and employees can work hard to overcome the challenge, but often in vain if systems aren’t up to the job. We have seen hundreds of companies start with this approach, but as their business complexity grew, couldn’t get beyond their system limitations to deal with increased demand volatility and poor forecast accuracy.

As an Internet retailer planning manager described at a forum last year, “My team invested a colossal effort for a small payoff. There was a lack of trust in our systems, which meant a long time spent evaluating each SKU independently and excessive data manipulation. The symptoms were apparent in our KPIs and workload: late nights and long weekends, low inventory turnover, and growth of unhealthy inventory.”

Good inventory planning or “inventory optimization” can make a big difference, either as a standalone solution or as part of a new supply chain planning system. A survey by Supply Chain Insights showed that firms using modern supply chain planning software are more pleased with their performance by almost 2 to 1 over those using legacy tools. They’re getting more accurate inventory predictions, making inventory decisions more effectively, and realizing a higher return on investment. The net result is a positive impact on cash flow.

However, better inventory planning is not strictly about cutting stock across the board. Typically, the result is less inventory for certain items and more inventory for others, based on target fill rates or service levels. A good approach balances these variables, since inventory amount and location shape both service levels and cash flow.

Interestingly, we have seen many cases where executives often decide to pursue both, once the results make it clear that improved service can be achieved while also freeing up working capital. That's because creating an optimized inventory mix can generate a step change improvement in service levels. The resulting impact in incremental revenue and margin contribution can be significantly larger than working capital savings alone.