Best Practices for Effective Inventory & Supply Chain Management

Managing inventory and complex supply chains has always been a challenge for manufacturing companies. But in recent years, businesses have faced unprecedented challenges. As supply chains have continued to grow more complex, business leaders have had to navigate all kinds of disruption.

These challenges have underscored the pivotal role effective inventory and supply chain management plays in the success of a manufacturing business. Managing these areas is a core competency for manufacturing businesses — a discipline central to their continued success.

The complexity of modern supply networks, combined with the constant pressure to optimize working capital, creates a delicate balancing act between maintaining adequate stock and avoiding excess inventory. And the latter has a serious impact on your efforts to build your company’s value.

In this overview, we’ll share our observations on what we see as best practices for striking this balance. At James Moore, our manufacturing team advises a wide range of manufacturing businesses. We’ll outline some of the strategies they’re putting in place to optimize their inventory and supply chain management.

Understanding the True Cost of Inventory

One of the key issues many manufacturers fail to grasp in inventory management is recognizing and managing the true cost of holding inventory. While maintaining sufficient inventory is essential for operations, many companies underestimate the financial impact of excess inventory.

Your goal should be to keep inventory low since each dollar of inventory represents cash sitting idle on shelves. But the issue isn’t limited to the fact the funds you used to purchase the inventory are now tied up. That excess inventory sitting around your warehouse may incur carrying costs of between 20% and 30% of its value. This means a seemingly modest $100,000 in excess inventory can result in $20,000 to $30,000 in additional costs.

What exactly are these carrying costs? Often, they’re subtle and aren’t captured in your cost of goods sold (COGS), leading to margin dilution. You may account for some of the carrying costs, such as the use of a line of credit to finance inventory, but others are often missed. The labor costs associated with managing inventory – from regular counting to physical movement within facilities – add up over time. There are also opportunity costs; by having your cash tied up in idle inventory, you limit your business’s ability to invest elsewhere.

The temptation to pursue volume discounts through bulk purchasing often exacerbates these issues. While the unit price reduction might appear attractive on paper, the associated carrying costs and interest charges frequently outweigh any savings.

Mastering Quantity Management Through Forecasting

Understanding the costs associated with your inventory helps you build a stronger understanding of your business’s cost base. Once you understand that, your next step should be to embrace better inventory management through forecasting the level of inventory you should maintain.

Accurate forecasting is the heart of effective inventory quantity management. While many manufacturers rely on gut feel or simple historical averages, successful organizations develop sophisticated forecasting models that incorporate both historical data and customer input. This forecasting foundation, when combined with a detailed bill of materials for every product you manufacture, enables precise planning of material requirements and timing.

This sounds straightforward, but many companies encounter issues with this task. Some manufacturers struggle with fragmented systems, in which forecasting exists in isolation from procurement decisions. Bills of materials frequently reside in disconnected spreadsheets rather than integrated ERP systems, leading to outdated information and misaligned purchasing decisions.

The result is a series of operational challenges that compound to create major headaches: late deliveries when materials aren’t ordered in time, rush orders at premium prices to meet unexpected demand, or excessive inventory that takes months or years to consume.

Building Inventory & Supply Chain Management on a Firm Technological Foundation

The solution to the challenges outlined above requires a comprehensive approach to quantity management and cost tracking. Adopting — and truly understanding how to leverage — a sophisticated ERP system that incorporates all elements of production cost is key to success. Data on material, labor and overhead costs must flow seamlessly between systems, ensuring that changes in material costs automatically trigger reviews of pricing and production decisions.

Modern ERP systems typically provide the integrated environment necessary to connect forecasting, purchasing and financial decisions. However, simply having these systems isn’t enough. They must be properly configured, maintained and understood by everyone who uses them across your organization.

Many manufacturers struggle with systems that, while capable, are not properly utilized. Regular system maintenance, ongoing staff training and careful attention to data quality are essential for success. Organizations must also ensure that workflows between departments are properly integrated.

At James Moore, our new manufacturing dashboard solution helps manufacturing leaders connect all of these dots in one centralized platform. Our tool unifies data across manufacturing businesses, automating reporting and helping leaders identify issues, dig deeper into root causes and develop the insights they need to strengthen their businesses. (Interested in learning more? Get in touch with us today for a demo.)

Building Resilient Supply Chains Through Strategic Partnerships

Effective supply chain management extends far beyond simple vendor relationships. The most successful manufacturers develop deep partnerships with key suppliers, creating mutual understanding and aligned incentives. This approach requires transparency about business plans and forecasts, enabling suppliers to better anticipate and meet needs while managing their own operations more effectively.

However, this approach must be balanced against the risks of over-concentration. Even the strongest supplier relationship can be disrupted by external factors beyond either party’s control. Organizations must regularly assess their supply chain risks and maintain alternative supplier relationships where feasible. This is particularly challenging in specialized industries like medical device manufacturing, where your options may be more limited.

The financial aspects of supply chain management require equal attention. Successful organizations carefully balance payment terms, minimum order quantities and inventory ownership timing to optimize working capital. This demands a sophisticated understanding of both company and supplier needs to create arrangements that benefit both parties while maintaining operational flexibility. Every so often, test the market; talk to other suppliers and see if there are better options out there with superior quality, pricing or terms.

Related: 3 Ways to Improve Supply Chain Management

Streamline Your Inventory & Supply Chain Management with James Moore

Embracing more sophisticated approaches to inventory and supply chain management represents a significant opportunity for manufacturing companies to improve profitability and cash flow. Success requires moving beyond simple rules of thumb and rough estimates. Instead, work to develop a sophisticated understanding of inventory costs and quantity requirements, and invest in building strong relationships with key suppliers.

While implementing these practices requires significant effort and investment, the potential returns in terms of improved cash flow, reduced costs and enhanced profitability make it a worthwhile endeavor.

The manufacturing advisory team at James Moore brings a wealth of experience in helping manufacturers optimize their inventory and supply chain operations. Our experts work closely with manufacturing companies to implement best practices, enhance systems and processes, and develop strategies for sustainable improvement. We combine deep industry knowledge with cutting-edge technical expertise to deliver practical solutions that drive real results.

Ready to transform your inventory and supply chain management? Contact James Moore’s manufacturing team today to learn how we can help your organization reduce costs, improve cash flow, and build more resilient operations.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.