Inventory Management Skills

2 min read

Inventory management balances availability against working capital, storage, risk and obsolescence.

The formulas are useful, but the skill is knowing which assumptions and policies fit each item.

Inventory objectives

Inventory can exist because of:

  • demand/supply timing;
  • uncertainty;
  • batch sizes;
  • lead time;
  • seasonality;
  • decoupling;
  • service requirement.

Ask why inventory exists before trying to reduce it.

ABC analysis

ABC segmentation often groups items by annual consumption value.

You can improve it by adding:

  • criticality;
  • demand variability;
  • lead time;
  • margin.

Policy should differ by segment.

Safety stock

Safety stock protects against uncertainty.

Relevant inputs:

  • demand variability;
  • lead time;
  • service target;
  • review frequency.

A safety-stock formula is only as good as the data and assumptions.

Reorder points

A basic concept:

Reorder point = expected lead-time demand + safety stock.

Check whether lead time is stable and whether demand is intermittent.

EOQ context

Economic Order Quantity balances ordering and holding cost under simplified assumptions.

It can be useful conceptually, but real constraints such as MOQ, shelf life, capacity and variability may dominate.

Service levels

Higher service usually requires more inventory, all else equal.

The right target depends on:

  • customer importance;
  • substitution;
  • lead time;
  • product criticality;
  • cost.

Turns and days of supply

These measures help show inventory efficiency, but averages can hide SKU-level problems.

Obsolescence

Drivers include:

  • forecast bias;
  • product change;
  • MOQ;
  • buying behavior;
  • slow demand;
  • poor master data.

Prevention matters more than write-off analysis.

Cycle count

Cycle counting improves accuracy when discrepancies lead to root-cause work.

Project

Build a policy project:

  • segment 100 SKUs;
  • calculate demand variability;
  • assign policy;
  • estimate reorder/safety stock;
  • identify excess;
  • test service scenarios.

Inventory expertise means understanding why the stock level is appropriate, not simply knowing the formulas.

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