Your online retail business has become successful enough that you’re considering opening a few brick-and-mortar stores in select urban markets. This presents a challenge. You need to order the right amount of merchandise to meet both in-store and online customer demand. Lean inventory management can help.
What is lean inventory management?
Lean inventory management is a system designed to track and manage a business’s stock of unsold goods. Lean inventory management is used to minimize excess inventory by streamlining the entire process of creating or buying a product, shipping it, storing it, and delivering it to a customer. A lean inventory management system emphasizes cutting costs, reducing inventory waste, and seeking ways to promote continuous improvement in inventory management.
Lean inventory management relies on information technology such as inventory management software and bar codes, QR codes, and stock-keeping units (SKUs) to track each product. This allows a business owner to closely monitor inventory in real time and to maintain a balance between product orders from suppliers and sales to customers. This helps business owners avoid understocking or overstocking.
In contrast with lean inventory management, traditional inventory management typically involves more manual work in ordering and tracking goods and forecasting customer demand. Because it relies less on technology, it is more time-consuming, inefficient, and prone to human error. It also tends to over- or undershoot actual customer demand because it lacks the rigor of forecasts that incorporate historical data.
Core principles of lean inventory management
Lean inventory management is defined by several core lean inventory principles, including:
The value of your product reflects what your customers are willing to pay for it. How customers perceive your product’s qualities influences the price they will pay. Businesses can use lean inventory management to help track valuable and less valuable products.
The value stream is a list of the steps required for producing, acquiring, and selling a product while delivering value to the customer. The value stream for retailers can begin with ordering finished merchandise from suppliers before moving it into inventory. It ends with a sale to a retail customer. Lean inventory management focuses on finding ways to use technology to cut costs and make continuous improvement, eliminate inefficiencies, and upgrade customer service anywhere in the value stream.
The pace of a product’s movement through the value stream is known as flow. Lean inventory management calls for analysis of each step in the value stream to improve efficiency by removing what business analysts call sources of friction in managing inventory. These include delays by suppliers, cumbersome order processes, error-prone manual inventory tracking, and technical glitches.
Pull refers to a strategy of letting customer demand for a product determine when a business owner orders from suppliers. A pull strategy involves restocking inventory only at the rate customers are buying the goods.
The last of the lean inventory principles simply means a business must continue to analyze production, inventory, and customer demand to improve cost efficiency, customer satisfaction, and profitability. Lean inventory management processes call for setting rigorous standards for ordering, production, and inventory turnaround.
Benefits of lean inventory management
Consistent lean inventory management practices can yield a number of benefits:
- Waste reduction: Holding unsold goods costs money, and getting rid of them can erode profits and eat up precious resources. Lean inventory management reduces the risk of overstocking goods that could leave you with deadstock.
- Smoother flow: An uninterrupted movement of goodsfrom supplier to warehouse to customer reduces inventory carrying costs, while increasing customer satisfaction.
- Inventory accuracy: Automation and tracking software improve the accuracy of your inventory count, narrowing any gap between the number of products ordered and the number counted in inventory.
- Product quality: Automated, real-time tracking helps alert business managers to product defects earlier, reducing the risk of customers receiving unsatisfactory goods.
- Better suppliers: You learn to work in tandem with suppliers and provide them with feedback about customer demand, so that just-in-time processes and other lean inventory management techniques work when ordering, producing, transporting, and inventorying products. You also can determine which suppliers best suit your needs, eliminating those that don’t meet shipping schedules or that deliver goods with high defect rates.
- Higher profitability: By lowering inventory costs and minimizing losses from obsolete or unsellable products, lean inventory management can increase your business’s profit margin.
Challenges of lean inventory management
Implementing a lean inventory management system yields a number of benefits, but like most upgrades to your business’s operations, obstacles may crop up:
- Time and coordination: Lean inventory management takes time to implement and requires concerted effort by everyone in the business to achieve optimal results.
- Risk of understocking: Because lean inventory management helps eliminate excess stock, you may find your business short of goods if customer orders come in faster than expected or suppliers don’t deliver on time. Risks include extra costs to find products from other suppliers or losing customers who take their business elsewhere.
- Supply or demand fluctuations: It’s difficult to get results from lean inventory management if customer demand or product supply fluctuates. Lean inventory management is most effective when supply and demand align with sales forecasts.
- Customization: Lean inventory management emphasizes product and process standardization. It may not work if customers want custom products.
How to implement a lean inventory management system
- Build strong supplier relationships
- Use information technology
- Keep some buffer stock
- Conduct regular inventory audits
To have the best chance of succeeding, consider implementing the following steps for effective lean inventory management:
1. Build strong supplier relationships
You depend on your suppliers to help you keep the right amount of inventory. Maintain key contacts who can oversee your orders and help in unexpected situations. Build long-term relationships that are mutually beneficial so suppliers can depend on your business for orders as much as you depend on them.
2. Use information technology
The most effective lean management systems make full use of inventory management software and bar code identification to track goods from production to customer delivery. These systems give your business real-time data on your supply chain and your stockrooms, avoiding costs of overstocking or understocking.
3. Keep some buffer stock
Even with lean inventory management, you need some inventory for a margin of safety in case of an unanticipated surge in customer demand or delays in production and supply delivery. Use your historical sales and supply-order data to forecast demand and decide how much buffer stock is appropriate.
4. Conduct regular inventory audits
An inventory audit checks for discrepancies between the inventory you record and the amount you actually have in stockrooms. Regular audits can help you find and fix the source of discrepancies.
Lean inventory management FAQ
How does demand forecasting play a role in lean inventory management?
Businesses can use lean inventory management to analyze customer demand for different products, form more accurate demand forecasts, and minimize the risk of understocking or overstocking.
How can technology support lean inventory management efforts?
Software allows you to automate the value stream, from supplier orders, to inventory tracking, to customer deliveries. It removes the guesswork and human error from inventory management.
Does implementing lean inventory management require changes to a store’s operations?
The most important change for implementing lean inventory management is to automate manual tasks and processes. This can produce improvement in managing inventory. But first, be sure your stockrooms are well organized by type, style, or price.