Why inventory management is crucial in mitigating risk 

One often forgotten aspect of efficient supply chain management is effective stockholding and order flow, referenced here as inventory management. A failure to exercise control can have enormous risk consequences for security and contractual liabilities. TT Club’s Josh Finch delves into the details of controlling inventory properly and avoiding such damage.

The importance of systematic organisation is paramount. Theft risks concerning goods and cargo tend to escalate in environments characterised by confusion or disorganisation. The reason inventory management is so central for maintaining security is that it defines the very system by which organisation is maintained.

Inventory management is an aspect of the supply chain that runs quietly in the background, until something goes wrong. Unfortunately, small issues can turn into large and costly errors if they are not quickly observed and rectified. Such issues may simply manifest as errors in order processing but they also create the conditions for overt threats to security.

Warehouses are often managed using a combination of systems, including a warehouse management system (WMS), an order management system (OMS) and a transportation management system (TMS). Where they exist in concert, there exists between each system an electronic data interface (EDI) that facilitates communication between the systems and ensures that actions taken in one system are recorded in the others.

Where stockholding is managed by a third party, the central stockholding database is often managed by the owners of the stock using enterprise software (ERP). This adds a further dimension of data management across yet another data interface which must coordinate communication between disparate organisations.

Often when errors emerge it is due to miscommunication between the systems described above. Each is highly complex and fulfils a specific function. The TMS manages the movement of cargo in the wider supply chain. Once cargo enters a warehouse, the WMS tracks the movement of stock around the warehouse. The OMS manages orders from customers and, as such, often sits between the WMS and the ERP database. It is necessary to ensure that each system contains accurate data and that each system is communicating accurate information to the others. Where systems miscommunicate, the potential for errors exists. Where different businesses or internal departments are responsible for managing the data stored in the different systems, it may be some time before discrepancies are uncovered, resulting in ongoing and costly errors.

Traceability  

The ultimate goal of managing this data is to provide full traceability of goods as they move through the supply chain. A well-designed system should systemically mirror all physical movements of goods. When auditing the security of a particular item as it moves through the supply chain, it is prudent to focus attention on circumstances where traceability breaks down. This may occur when a user fails to adhere to the correct process.

For example, an inbound stock process may dictate that each pallet of stock should be scanned into the system. Contrary to this process, a rushed operative may decide to unload a container and move all the pallets it contains into a storage location without scanning. The goods will likely be added to the system eventually, either by scanning or back receiving the goods in bulk, but, regardless, a gap in traceability has been introduced.

There are also circumstances where a lack of traceability forms standard operating procedure. This may result from a failure to adequately map physical procedures systemically, but it may also result from limitations of the systems themselves. For instance, some systems may prohibit storing ‘picked’ stock in warehouse locations, resulting in traceability breakdowns.

Regardless, stock that is not traceable is at risk. It may be stolen or may simply go missing and it is very difficult to determine where the process has broken down.

It is important that supply chain operators responsible for management stockholding be aware, and seek to maximise traceability throughout the entire journey of a particular item of stock.

Best practice vs commercial reality

Stockholding requires constant tending to maintain accuracy and full traceability. Physical inventory cycle counts should take place at regular intervals so that each warehouse location is audited multiple times per year. Full stock counts, whereby the entire stockholding is counted in full, should take place at least once per year. In order to do so accurately, it may be necessary to stop all order processing, as well as inbound and outbound movements of stock. It may be beneficial to involve an outside auditor to observe the stock count and certify the results.

The best practice described above is costly, and the reality is that inventory management practices are often a result of commercial decisions taken by actors far removed from the reality of managing the security of the warehouse. As inventory management is an opaque aspect of the supply chain, commercial managers may fail to anticipate the importance of the agreements they make in this regard. While customers within the supply chain may hesitate to invest in stockholding management, supply chain businesses should not underestimate the cost of failure.

Security culture  

Where businesses are seeking to improve the culture of security at their sites, few aspects of site management impact on security culture to the same degree as inventory management.

Well-defined stock control procedures help ensure that the stockholding is maintained in an orderly state and that opportunities for theft are minimised. Furthermore, it is essential that warehouse operations enforce procedures that are in place to maintain traceability of goods throughout their supply chain journey, even when those procedures are time consuming.

Ensuring that procedures are followed is important, but it is equally important to respond appropriately when things don’t go according to plan. All discrepancies should undergo thorough investigation. Such discrepancies may be the result of theft or operator error, but it is important to be mindful also of discrepancies in data held by the various IT systems. Systemic discrepancies can be difficult to uncover but they can be very costly if left unaddressed.

Summary  

Inventory management is vital for supply chain security, ensuring organisation and reducing theft risks. It relies on systems like WMS, OMS, TMS and ERP for accurate data communication. Traceability throughout the supply chain is crucial for uncovering discrepancies promptly. Best practices include regular audits and strict procedures, but commercial decisions often prioritise cost over security.

However, the consequences of inadequate inventory management can be severe, extending beyond the cost of cargo loss and theft, and risks negatively impacting commercial relationships. It plays a key role in fostering a security culture within supply chain operations by enforcing procedures, maintaining traceability and responding to discrepancies effectively.

Overall, prioritising effective inventory management is essential for both security and efficiency in supply chain operations.

This article is sponsored by TT Club.