Originally appeared in Supply Chan Brains

Soaring customer demand has created unique challenges for procurement managers. Global supply chain shortages, a decreased labor force and increased prices have forced them to make tough decisions regarding the amount of inventory to hold while staying within the company’s budget. Their main task involves finding a balance between holding inventory and cutting costs without hampering the overall supply chain. By developing effective inventory management techniques, procurement professionals can tackle the issues from several unique angles.

Well-known issues of supply chain management often involve overstocking or understocking on items. When there’s too much stock, merchandise might sit on shelves for extended periods. The results are increased overhead storage costs and the possibility of products going obsolete, which incur disposal costs. On the other hand, purchasing too little inventory leads to not having enough product to complete orders or for employees to perform their tasks.

Additional factors may compound these supply chain issues. While procurement might theoretically purchase the right number of products, customer demand can fluctuate at any given moment, and lead to large inventories of an item that’s no longer popular. That generates additional procurement expense on top of lower sales volume. Inventory inaccuracies and inefficiencies can also lead to increased budgetary spending for the supply chain.

Key Tips for Saving on Procurement

Implementing effective inventory management practices involves analyzing the entire supply chain. Companies need to learn more about the overall processes to determine the strengths and weaknesses within each. Then they should target the operational gaps by employing the right management techniques while making processes more efficient.

Following are some key tips for getting ahead of the supply chain while seeking cost-savings in procurement.

Adopt the 80/20 rule. Also referred to as the Pareto Principle, this means that 80% of outcomes or consequences are the result of 20% of all causes. When applying this rule to procurement, the 80/20 rule focuses on the fact that 80% of sales or company profits come from just 20% of the procured items.

The rule helps procurement managers focus on those products that drive the most sales, instead of ordering a broad range of products that includes low-priority items with lower turnover rates. Prioritizing items that bring in the most return on investment can ensure that the company budget is focused on the right items while minimizing unnecessary purchases. This principle also allows them to tackle wasteful spending and eliminate obsolete products stored in warehouses.

Implement ABC techniques. ABC techniques also involves prioritizing inventory. Purchasing managers focus on categorizing items in three ways:

  • The A category comprises high-value items that create the most profits. Yet these items may sell more slowly.
  • The B category consists of items that are more moderate in value and sell at a moderate or slower pace.
  • The C category consists of low-value items that might also be cheaper to produce because they sell quickly.

Each product category plays an important part in maintaining company profits. By prioritizing products based on these categories, managers gain a greater understanding of which items to order at specific times, as well as how to effectively manage warehouse space to have the correct inventory levels for each category.

Using Demand Forecasting

Demand forecasting relies on data analysis to figure out current and future demand for products. It’s an important tactic used to better control cash flow and capital investments.

There are two methods to demand forecasting:

  • Qualitative forecasting uses expert opinions regarding current market conditions and potential demand to understand which products to invest in for the supply chain.
  • Quantitative forecasting uses previous sales history to predict future product demand.

Demand forecasting frees cash flow by preventing companies from investing it in products that won’t likely be selling soon. They can maximize profits and direct capital toward areas of the operation that will promote growth.

Procurement managers practicing effective purchasing techniques can gain greater levels of control over their supply chains. By ordering the right products in the right amounts, they create company stability even in times of economic uncertainty. They can predict which items will be in demand, categorize them based on value and turnover, and invest in those that will bring in continual revenue.