As businesses grow, it becomes increasingly complex to manage inventory. Increased product volumes, several channels, increased order quantities and evolving customer needs make it challenging to ensure that the product is available and costs are kept low at all times.
Inaccuracies in inventory, stock outages and not knowing when to restock items can arise from manual inventory methods. With structured processes, technology and specialized expertise, this is where professional inventory management services can help a business overcome these challenges.
For businesses that do not want to manage every inventory activity in-house, outsourcing inventory management to a third-party logistics (3PL) provider can offer a flexible alternative.
What Are Inventory Management Services?
The services of inventory management include the process of managing and optimizing the inventory that a business holds, in order to ensure that the proper products are on hand at the correct time and in the right amount.
The inventory management services can vary and include:
- Real-time inventory tracking
- Demand forecasting
- Stock replenishment planning
- Inventory reporting and analytics
- Receiving and storage
- Order fulfilment coordination
- Returns management
The goal is to have the inventory available when needed without holding any excess inventory and without having storage costs or discrepancies in stock.
When Should a Business Outsource Inventory Management?
Not all businesses are suitable candidates for outsourcing. It becomes relevant when inventory operations begin to take up a lot of internal resources or become hard to manage consistently.
Outsourcing is appropriate for a business when:
Inventory Volume Is Growing
As a company keeps growing in the number of SKUs, locations and transactions, manual inventory management can become challenging.
Internal Resources Are Limited
Outsourcing can help the warehouse team concentrate on their core business operations if they are too busy with stock monitoring, warehouse coordination and inventory reporting.
Technology Investment Is Becoming a Challenge
Expensive and difficult to build internal WMS, inventory tracking, reporting and automation capabilities may be needed for the business.
Demand Is Fluctuating
Operations like seasonal enterprises, promotional events and fast-expanding ecommerce companies can need adaptable inventory and fulfilment capability.
The Business Is Expanding
Adding new cities, regions or sales channels can make inventory management and distribution more complex.
Outsourcing can shift a significant portion of the day-to-day operations management responsibilities to a specialist without giving up strategic control.
In-House vs Outsourced Inventory Management
Both models can work depending on business requirements.
| Factor | In-House Inventory Management | Outsourced Inventory Management |
|---|---|---|
Operational control | Direct | Shared with provider |
Infrastructure | Built and maintained internally | Provided by logistics partner |
Technology investment | Business-funded | Often included in provider capability |
Internal manpower | Higher requirement | Lower operational requirement |
Scalability | Requires internal expansion | Can provide greater flexibility |
Logistics expertise | Developed internally | Access to specialist expertise |
Management responsibility | Internal team | Shared through agreed processes |
In-house management can provide direct operational control, while outsourcing can provide infrastructure, expertise and technology without requiring the business to build every capability itself.
How Does a 3PL Manage Inventory?
A professional inventory management service provider will normally have a workflow that is organized:
1. Initial Assessment
The first assessment that a provider conducts is the business's inventory processes, warehouse configuration, sales trends, demand and operational needs.
This will assist in setting up the right operating model and uncovering current gaps in inventory management.
2. System Integration
The provider integrates their inventory or warehouse management solution into the existing systems within the business. With integration, inventory data can be seamlessly shared across relevant platforms while also minimizing reliance on siloed manual records.
3. Receiving and Inventory Tracking
All inventory received is identified, accepted and recorded prior to being placed in inventory storage. Tracking the movement of stock with barcode scanning, RFID and other technologies is another way of achieving greater visibility of inventory quantities, their location and movement.
4. Demand and Replenishment Management
The provider has access to inventory data, sales trends and demand patterns to assist with forecasting and replenishment. Reorder points and safety stock levels can be set as per the requirements of the business.
5. Fulfilment Coordination
Availability of inventory is linked with fulfilment, so when orders are placed, the products are available for picking, packing and dispatching.
6. Reporting and Analytics
Frequent reports can help you stay alert on stock levels, inventory, turnaround and slow or high performing products. These insights can support better purchasing and replenishment decisions.
What Technology Should an Inventory Management Provider Use?
The role of technology in inventory management is a critical one, especially for a provider with a vast inventory or located in multiple locations.
Warehouse Management System (WMS)
A WMS helps control warehouse operations including receiving, putaway, storage, picking and dispatch processes and also gives visibility of the inventory movements and locations.
Inventory Management Software
An inventory management system is used in a business to keep track of the inventory, availability and the movement of inventory at different store locations.
Barcode Systems
Barcodes can be used for receiving, picking, packing, shipping, returns and stocking products, cartons and locations.
RFID
Depending on the warehouse settings and needs, RFID can offer another way of identifying and tracking inventory.
Data from inventory can be used to determine of the pattern of demand, risks of inventory, stock slowdowns and replenishments.
The important question is not simply whether a provider uses advanced technology, but whether its technology integrates effectively with the business's systems and improves inventory visibility and control.
Why Are Service Level Agreements Important?
If inventory management is outsourced, it is important to have a Service Level Agreement (SLA) that outlines responsibilities and expectations.
An SLA should include measurable expectations for the service(s), including:
- Inventory accuracy
- Inventory update frequency
- Order processing timelines
- Receiving turnaround time
- Dispatch performance
- Reporting frequency
- Issue-resolution timelines
- Escalation procedures
A clear SLA helps to eliminate ambiguity from the SLA and defines a framework for measuring provider performance.
Inventory Accuracy KPIs to Track
Before outsourcing inventory management, businesses should set measurable KPIs.
- Inventory Accuracy: A measure of the accuracy of the stock against the system-stored stock.
- Order Accuracy: Checks to see if the right product and right number are delivered for each order.
- Stock Availability: Monitoring for the availability of required products at the time required.
- Inventory Turnover: Displays the frequency of repurchasing and selling inventory over a certain time span.
- Stockout Rate: The number of times products go out of stock when needed by customers or due to operations.
- Fulfilment Performance: Indicates the effectiveness of inventory management in meeting the demands for timely and accurate order fulfilment.
The actual KPIs to use will vary by business model, product category and scope of service.
Inventory Management Pricing Models
Outsourced inventory management doesn't have a one-size-fits-all approach. Commercial structures may vary depending on the provider and services needed.
Some of the common pricing elements may be:
Storage-Based Pricing
Charges can be based on the amount of space in the warehouse, the number of pallets, bins or inventory capacity used.
Transaction-Based Pricing
Costs can be associated with activities like receiving, picking, packing, dispatch or returns.
Order-Based Pricing
Some fulfillment operations charge depending upon the number of orders or shipments that are processed.
Value-Added Service Charges
Other tasks like kitting, special packaging, labelling or handling may be billed as extras.
Transportation Costs
The shipment characteristics, destination, carrier and service level are generally the factors affecting shipping and transportation.
When choosing a storage service, businesses need to consider more than just the storage rates. They should also look at the total cost of the service, including minimum charges and other fees.
Questions to Ask Before Hiring an Inventory Management Provider
Choosing the right provider isn't just about considering the price. Ask potential providers:
1. What inventory management technology do you use?
Be familiar with the WMS, inventory systems, barcode / RFID capabilities and reporting available.
2. Can your systems integrate with ours?
Ensure ERP, ecommerce order management systems and other tech are compatible.
3. How do you maintain inventory accuracy?
Inquire about cycle counts, physical audits, scan, discrepancies and reconciliation.
4. What KPIs and SLAs do you provide?
Have insight into how performance of providers will be assessed and communicated.
5. How scalable is your operation?
Decide if there is a capacity problem that will need to be addressed as SKUs order quantities and geographic reach expand.
6. What services are included in the commercial proposal?
Clarify storage, receiving, fulfilment, returns, value-added services and transportation charges.
7. What experience do you have with similar businesses?
A provider's experience in the industry can help them to recognize product-specific and operational challenges.
Which Industries Benefit Most From Outsourced Inventory Management?
For companies with complex inventory or products or where there's variable demand or heavy fulfil needs, outsourcing can be especially beneficial.
Ecommerce and D2C
Online ecommerce businesses typically stock huge SKU numbers, have large amounts of customer orders and returns, so inventory control and coordination of fulfilment are particularly critical.
Retail
Retail companies can have multiple stores, warehouses and sales channels which has to be managed.
Consumer Goods
Structured inventory tracking and restocking processes can be beneficial for businesses with a significant amount of products to track.
Manufacturing
Manufacturers might coordinate raw materials, components, finished items and production.
Pharmaceuticals and Temperature-Sensitive Products
It can be a requirement for these businesses to have controlled storage, traceability, process discipline as well as inventory management.
Businesses Experiencing Rapid Growth
The companies that are growing in new markets can outsource the logistics infrastructure so that they do not have to develop all the capabilities within their walls.
AAJ SCM's Inventory Management Capabilities
AAJ Supply Chain Management offers inventory management solutions that are based on technology-driven warehouse management.
The approach to inventory management it has takes real-time inventory tracking, demand forecasting, stock replenishment planning, fulfilment coordination and reporting and analytics. There are also examples of technology-driven inventory management with bar code scanning, RFID and IoT sensors and analytics for demand forecasting and replenishment.
These features provided by AAJ SCM can be beneficial for businesses considering outsourcing their inventory management, allowing for improved inventory visibility and organization throughout the warehouse.
Conclusion
As businesses face increasing inventory complexity, outsourcing inventory management can be useful in managing inventory without having to develop all the technology and operations in-house.
The ability of a competent 3PL inventory management service to assist with inventory tracking, forecasting, inventory replenishment, fulfilment coordination and analytics is a service that can be undertaken. Technology like WMS, the barcode and RFID system can help increase inventory visibility and accuracy.
But it is a matter of finding an outsourcing provider that has the appropriate infrastructure, technology, can be scalable, has experience in your industry and has clearly defined SLAs and KPIs.
For businesses evaluating inventory outsourcing, the key is to look beyond the basic question of who can store the products and instead ask:
Can the provider give us the visibility, accuracy, scalability and operational control required to manage inventory effectively?
