Introduction
In today’s competitive business landscape, small and medium enterprises (SMEs) face numerous challenges to establish and sustain their operations.One key aspect is supply chain management (SCM). A well-managed inventory and a streamlined supply chain not only ensures smooth operations but also contributes to customer satisfaction, cost control, and overall profitability. Here we explore the importance of inventory handling and supply chain management for small and medium entrepreneurs and provide some inventory handling techniques to optimize these crucial aspects.
Inventory handling and supply chain management
Supply chain management is the process of coordinating and managing all the activities involved in the flow of goods or services, from the sourcing of raw materials to the delivery of the final product. When we say supply chain management, we tend to think it involves only the supply side, but it also involves the end customer. Imagine a small bakery that produces and sells freshly baked goods. The bakery’s supply chain consists of several stages: the bakery needs to source ingredients such as flour, sugar, butter, and eggs for its products. SCM for the bakery involves identifying reliable suppliers, negotiating favorable pricing, and ensuring a consistent supply of high-quality ingredients. Once the ingredients are procured, the bakery begins the production process. SCM in this stage involves efficient production planning, ensuring that the right quantity of products are made at the right time to meet customer demand. It also includes managing the production schedule to minimize waste and optimize resource utilization. The bakery needs to manage its inventory of baked goods to avoid excess stock or stockouts. SCM techniques help determine the optimal inventory levels based on demand forecasts, sales trends, and production capacity. This ensures that the bakery has enough products to meet customer orders while minimizing waste and inventory holding costs. Then the bakery needs to deliver its products to customers promptly and efficiently. SCM at this stage involves optimizing the logistics process, selecting reliable delivery partners, and ensuring timely order fulfillment. It may include coordinating delivery schedules, managing transportation costs, and tracking shipments to ensure accurate and timely deliveries. SCM also encompasses customer service. The bakery needs to promptly address customer inquiries, provide accurate product information, and handle any complaints or issues. Effective supply chain management ensures that customer service is aligned with the bakery’s overall goals and values, contributing to customer satisfaction and loyalty. Finally, SCM involves continuous improvement to enhance overall efficiency and effectiveness. The bakery can analyze performance metrics, customer feedback, and market trends to identify areas for improvement. It may involve optimizing sourcing strategies, streamlining production processes, or implementing technology solutions to improve inventory management or order fulfillment.
Inventory handling is simply defined as the process of managing and controlling a company’s inventory or stock of goods. It takes a more significant portion of the supply chain management. In the above example, once the bakery gets its ingredients, it requires storage before production. From there, several other problems arise. They should decide what is the optimal level they should keep in the warehouse, how much they should order in one-time, balancing order cost and holding cost. These decisions have to be made to minimize operation costs and maximize profitability, thus the need for proper inventory handling practices. Inventory handling techniques encompass a range of practices aimed at effectively managing and controlling inventory. Especially for SMEs, it’s important to focus on inventory handling techniques that are practical, cost-effective, and suited to their specific needs. Here are some of the most suitable inventory management techniques for SMEs.
1. EOQ for SMEs(Economic Order Quantity)
An SME in the manufacturing sector can apply EOQ principles to optimize their raw material procurement. For instance, a small furniture workshop can calculate the optimal order quantity for wood, hardware, and upholstery materials. By minimizing ordering costs and holding costs, the SME can efficiently manage inventory levels and reduce unnecessary expenses.
To calculate the EOQ, you need to gather the following information:
Annual demand: Determine the total quantity of units your business requires in a year. This can be based on historical sales data or sales projections.
Ordering cost: Identify the cost associated with placing an order, such as administrative expenses, transportation costs, or setup costs.
Holding cost: Determine the cost of holding or storing one unit of inventory for a year. This may include warehousing expenses, insurance costs, and the opportunity cost of tying up capital in inventory.
Once you have these figures, you can use the following formula to calculate the EOQ:
EOQ = √ ((2 * Annual demand * Cost per order) / Annual holding cost per unit)
The quantity you get after using the above equation represents the optimal order size that minimizes the total cost of inventory management for your business.
This content was facilitated by CeFEnI/COSME and prepared by the University of Sri Jayawardenapura, Kotte
2. JIT Inventory for SMEs (Just In Time)
An example of JITinventory for an SME is a boutique clothing store that collaborates with local fashion designers. Instead of stocking large quantities of inventory, the store maintains a close relationships with designers and places orders based on customer demand. This approach minimizes excess stock, reduces storage costs, and ensures fresh and trendy clothing options for customers.
3. ABC Analysis for SMEs
SMEs can apply ABC analysis to categorize their inventory items based on value and sales contribution. For example, a small electronics retailer may classify high-value smartphones (Class A) as top priority items, medium-value accessories (Class B) as moderately important, and low-value cables or adapters (Class C) as less critical. This allows the retailer to focus on optimizing stock levels and ensuring the availability of high-demand items.
4. VMI for SMEs (Vendor-managed inventory)
An SME that operates an online cosmetics store can collaborate with beauty brands that offer VMI. The brands monitor inventory levels and proactively replenish stock based on real-time sales data. This ensures that the SME always has the latest beauty products in stock, reduces the risk of stockouts, and eliminates the need for extensive inventory management.
Effective inventory handling and supply chain management are crucial for the success of small and medium-sized enterprises these days because, in recent times, small businesses have been embracing e-commerce as a means to expand their customer base beyond the limitations of their physical stores. This digital shift enables them to sell their products globally and operate round-the-clock, without being restricted by traditional business hours. However, this transition can make inventory needs more unpredictable. Customers around the world buy products all the time. if they see something they like on a website and when they want to buy it and they see “out of stock”, nothing makes them angrier and more disappointed than that. Nowadays, Customers don’t wait, they just go to another store which is one click away. Efficient inventory handling ensures that SMEs have the right products available at the right time. By optimizing inventory levels, SMEs can reduce carrying costs, minimize the risk of stockouts, and enhance customer satisfaction. This leads to increased customer loyalty and positive word-of-mouth, fostering long-term relationships and attracting new customers.
In conclusion, investing in inventory handling and supply chain management is a strategic imperative for SMEs. By optimizing inventory levels, improving operational efficiency, reducing costs, mitigating risks, and gaining a competitive advantage, SMEs can thrive in today’s dynamic business landscape. Embracing these practices empowers SMEs to unlock their full potential and achieve long-term success.
