Basics of Effective Entrepreneurship
How does optimal stock management and effective inventory management compare?
Optimal inventory management is SKU inventory management that meets any criterion (rule) of optimality, i.e. the best fit rule. The criterion of optimality consciously or unconsciously selects the subject of management, for example, a specialist in inventory management. Consequently, the correctness or inaccuracy of the choice of inventory management criteria determines the optimality or nonoptimality of their management.
The criterion for optimizing the inventory management of an enterprise should best suit its marketing, production, logistical and financial situation and the highest economic goals of the enterprise.Indeed, if the goal of an enterprise is profit, it is strange when the management of assets of this enterprise, including stocks, is optimized not by the criterion of the optimal increase in the net profit of the enterprise, but by the criterion of, for example, the minimum stocks or the maximum possible stocks that can fit in stock.
Marketing, production, logistics and financial situation of an enterprise are factors related to consumers of an enterprise’s products, production, suppliers and consumers of an enterprise’s logistics service, its financial condition, which have a significant impact on the company’s inventory management. For example, if we are talking about an industrial enterprise producing finished products, works or services by a flow method, then the requirement of a 100% service level of production from a stock of material resources for all their SKUs is a factor associated with its production, significantly affecting the level of stocks of material resources. In this case, the criterion for optimizing the stock of material resources must meet this requirement.
Inventory management by SKU, firstly, should be optimal, and, secondly, should be effective. This means that, firstly, the algorithms for calculating inventory management parameters by SKU must correspond to the marketing, production and logistics situation according to SKU and the financial condition of the enterprise, and, secondly, contribute to an optimal increase in the company’s net profit.
Effective inventory management by SKU using algorithms for calculating inventory management parameters that do not comply with the marketing and production and logistics situation according to SKU is impossible. Inefficient inventory management using algorithms for calculating inventory management parameters that correspond to marketing and production and logistics situation according to SKU is possible. But more often in practice there is a non-optimal inefficient inventory management by SKU, for which measures are not even taken to optimize it, and even more so to ensure its effectiveness. This is due to the fact that despite the changing situation in the markets and modern managerial paradigms, business owners and top managers hired by them continue to think in the old manner in the style of “more market share, more sales, more production, more purchases, more stocks … and so on. e. ”as if in the modern world, the more, the better. Recall the bankruptcy of the largest automotive company General Motors in 2009. In today’s world, the more effective the better. And in order to achieve efficiency, you must first ensure that the situation is optimal.
In the practice of logistics managers and specialists who have the opportunity to increase their managerial competence through training, there is often not only an erroneous choice of the criterion for optimizing inventory management, but also a chaotic, unconscious change of them. In this case, chaos occurs in inventory management.
As an example, consider the situation with inventory management at the Olveys enterprise (Nizhnevartovsk, Russia). This is a trading company that provided food supply to retail stores, enterprises and organizations where Russian gas and oil are produced. The high incomes of the region’s buyers from the sale of oil and gas contribute to a high trading margin and a good net profit of Olweis. “Everything is good, but the stocks are a little worried” – this is how the head of the Commercial Department of this company began describing the situation with the inventory management problems. Then she continued: “My girls (about subordinates) plan the demand for SKU by calculating the average monthly sales volume for the last three months and issue orders to suppliers that we have in Ukraine (Sandora, Nemirov, Oleina and others), in Moscow and in other major cities European part of Russia. But they can’t guess the correct size of the order (and the moment of its issuance – author’s note) Therefore, there is often no claimed product when there is demand for it. And then the demand drops, and then all the ordered containers come together.