A recent survey by Argon & Co for the Australian Food & Grocery Council highlighted inventory optimisation as a priority for FMCG businesses.
Optimising inventory within the FMCG supply chain is a complex and critical task, with end-to-end inventory often extending to six months or more. This represents a significant amount of working capital tied up on the balance sheet, which incurs ongoing costs, especially with interest rates at record highs, rising material and logistics expenses, and the risk of obsolescence as customer demands shift rapidly and product lifecycles shorten.
To navigate these challenges, manufacturers can explore a range of strategies to optimise their inventory while remaining flexible. These strategies span product range, network, manufacturing, and technology. However, it’s crucial to take a holistic approach, considering overall business trade-offs rather than focusing solely on optimising one area.
Getting the basics right
A fundamental starting point for inventory optimisation is ensuring that your system accurately reflects your physical inventory – its quantity, location, and – for perishable items – best-before dates. This can be achieved by implementing robust procedures for goods receipting, put-away, and picking, all supported by barcode scanning and inventory management systems. Regular cycle counting and data reconciliation, particularly with third-party contract manufacturers and logistics providers, are key to maintaining accurate inventory records.
Product range and demand forecasting
High inventory levels are often driven by SKU proliferation, and treating all SKUs with equal importance. Optimising your product range by segmenting products based on revenue, margin, volume, or other relevant factors is a critical step. This segmentation allows for targeted inventory strategies – such as higher target service levels for top-performing or strategically important products and making smaller items to order only.
Safety stock levels should be tailored to the importance and variability of each SKU. High demand variability often necessitates higher inventory levels to maintain the same service levels. While reducing demand variability is challenging, it can be managed by increasing the volume sold and ranging of products and reducing the tail of products with intermittent demand. Enhancing demand forecasts is crucial and can be achieved by investing in strong demand planning capabilities – including skilled people, robust processes, and advanced planning systems. Leveraging external inputs such as retailer data, accurately capturing promotional plans, accounting for seasonal trends, and carefully planning for new product launches and end-of-life transitions can significantly improve forecast accuracy.
Network optimisation
The location of your inventory within the network plays a critical role in optimisation. Centralising inventory in one location and distributing it as late as possible can reduce the overall inventory required, as demand from different customers can be pooled. However, this must be balanced against the lead times to move inventory. A well-optimised network strategy considers both inventory pooling benefits and meeting customer demand in a timely manner.
Manufacturing and procurement optimisation
High inventory levels are often driven by manufacturing teams aiming to increase batch sizes to reduce changeovers and improve throughput without considering downstream impacts. This issue can be mitigated by using modelled scenarios to balance changeover costs against inventory carrying costs. Focused improvement projects aimed at reducing changeover times – such as implementing Single-Minute Exchange of Dies (SMED), providing specialised training, and standardising processes – can support reducing batch sizes.
From a procurement perspective, adopting a total cost of ownership (TCO) view is vital. While suppliers may offer price breaks for ordering larger quantities, this can lead to higher carrying costs and potential obsolescence. Vendor-managed inventory (VMI) agreements, where suppliers hold inventory on your behalf, can be beneficial but require careful management – particularly with binding forecasts.
Reducing lead times is another crucial strategy for lowering overall inventory levels. The longer your lead time, the more inventory you need to hold to mitigate risk. Shortening lead times through improved supplier relationships and streamlined manufacturing logistics can result in significant inventory reductions.
Supporting technology and planning processes
Technology and processes play a vital role in inventory optimisation. Enterprise Resource Planning (ERP) systems help track and manage inventory, while advanced planning systems (APS) drive better demand forecasting and supply planning. These systems, along with analytics tools, can support scenario planning and provide valuable insights for decision-making. Regular sales and operations planning (S&OP) processes are essential to align operational plans with service, cost, and cash objectives.
Conclusion
In conclusion, FMCG companies must regularly assess and optimise their inventory across several levers: product range, network, manufacturing, procurement, and technology. By integrating these strategies into a cohesive plan and supporting them with robust S&OP processes, businesses can ensure their inventory is working efficiently to meet customer needs and drive overall performance. Now is the time to review your inventory management practices to ensure they are aligned with your strategic goals and market demands.
About the author: Natalie Russell is managing principal at Argon & Co New Zealand.
