A big challenge of inventory management is maintaining the right amount of stock. Too little causes stock-outs, lost sales, and dissatisfied customers. Too much inventory uses up warehouse space, ties up money, and risks inventory loss from damage, theft, obsolescence, and spoilage/degradation.
Getting this right requires good demand forecasting which isn’t possible in many markets. When dealing with high demand uncertainty, you can either err on the side of too little or too much inventory. For some types of products such as apparel and electronics, there’s another option: delayed differentiation.
Delayed differentiation involves delaying the last steps of product manufacture until more information about its demand is known. For many businesses, this amounts to waiting until a customer places an order and then fulfilling it by quickly assembling the ordered product from a stockpile of base components.
When another customer orders a different product, again, it is fulfilled by assembling it from the same stockpile of base components. Rather than maintaining an inventory of every finished product (with its associated safety stock), you need only maintain a smaller inventory of the base components.
Here’s an example:
Suppose your product line was T-shirts, which are available in 100 different colours. You could keep an inventory of 100 types of T-shirts (each a different colour). Because of high demand uncertainty, you would be forced to keep a reasonable number (based on a best guess) of T-shirts of each colour in your inventory. Some colours would sell while many others wouldn’t. This leaves you with lots of unsold T-shirts. Sometimes you might get a huge T-shirt order of a specific colour that vastly exceeds what you have in stock, and a big sales opportunity is lost.
Alternatively, you could use delayed differentiation. This entails keeping an inventory of white T-shirts and three types of dyes, each a primary colour (red, green, and blue). When you receive an order, you use a machine that automatically produces the desired colour from the three primary colours. Then you dye the correct number of white T-shirts to the specified colour.
This strategy eliminates the risk of stock-outs and of over stocking. It allows you to buy in bulk from your suppliers and benefit from lower prices. If the demand for T-shirts in general is strong, there is no risk of inventory obsolescence should a certain colour become unfashionable. You also avoid trying to predict the fickle fashion tastes of your market. You can profitably offer a wider T-shirt selection than competitors who don’t use delayed differentiation.
For information on how to reduce inventory expenses through the use of our inventory software, please contact us.
