What is Supply Chain Management?

Supply Chain Management is the process of handling the whole production flow, from sourcing of the raw components to the delivery of the final goods to the consumer. A supply chain company forms a network or “links”, as they’re called, to easily monitor the movement of the product till they reach its users.

The biggest benefit of supply chain management is the freedom it allows the manufacturing companies to cut extra costs and ensure faster delivery. One of the key elements in this process is maintaining tight control over the internal inventories, especially the residual inventory.

What is Residual Inventory?

Residual Inventory is the leftover stock in a company’s warehouse which could not be sold due to lack of demand among other reasons. This residual inventory can turn into a huge liability for a company, manufacturer, or retailer if retained for over three months. Hence, it is important to have a ‘safety stock’ in the right quantities.

Why is it necessary to minimize residual inventory?

A non-perishable goods-based business may find it profitable to manufacture and save up stock to fulfill any backorders. However, if the stock is not supplied for any reason, the costs will soon start adding up, making the residual inventory an expensive deadweight. Hence, the costs of transportation & storage, over-investment in stock and minimal cash flow make it essential to minimize residual inventory.

There are multiple steps and methods to reduce and control the excess inventory based on the specific type of business. Some common steps involved are:

• Maintain a precise supply forecast of your stock with an improved analysis method.

• Reduce manufacturing lot sizes by monitoring the manufacturing leads and order sizes.

• Review suppliers’ lead and delivery times regularly.

• Eliminate obsolete inventory periodically.

Minimizing residual inventory in supply chain management is crucial for a smooth cash flow and to make more room for profit rather than wasteful investments.