Supply Chain Planning: Look Before you Leap

When a business chooses to move into a larger warehouse, it often assumes that the expanded space will naturally accommodate increased inventory needs. However, this assumption can lead to the same capacity issues if inventory management practices are not adjusted.

Businesses operating in capacity-constrained environments are accustomed to managing inventory within tight limits. The reality of such an environment means there is never “too much” inventory; the building simply won’t allow it. This results in the practice of filling the warehouse as best as possible. However, moving to a new, spacious warehouse shifts this paradigm. You can no longer manage inventory by simply filling the available space; you need to adopt a different approach.

A leading practice for inventory management involves leveraging a statistical approach to set safety stock. Historical sales variability, lead time, and service level targets should be used to determine safety stock, with service levels tailored by product class (A, B, C, D). This refined, precise approach ensures each SKU is managed optimally, avoiding the pitfalls of a blanket policy.

Moreover, adjusting reorder points and quantities can help reduce the average amount of inventory on hand. For example, ordering every four weeks instead of six can significantly lower the average cycle stock.

If you’re investing your capital in physical infrastructure, it’s crucial to honor that investment by managing your inventory properly. Start small and iterate: focus on a subset of significant SKUs and test right-sizing safety stock or increasing order frequency. Evaluate the manageability and impact on key metrics. If improvements are observed, plan how to scale them. Determine if technology is needed or if current tools suffice.

Just as a bigger kitchen won’t make you a better chef, investing in a larger warehouse without refining inventory practices will leave you with the same challenges, just on a larger scale. Optimize your inventory management to truly benefit from the expanded space and ensure long-term success.