Inventory Management: Why it is the Heart of Every Supply Chain

## Why Inventory Management Determines Profit or Loss Inventory is tied-up capital. Every franc in storage is a franc not invested in innovation, marketing, or supplier negotiations. This may sound abstract but quickly becomes concrete: an SME with CHF 2 million in inventory and a cost of capital of 6% pays CHF 120,000 every year just for the goods to sit on the shelf. No revenue. No added value. At the same time, every missing screw and every sold-out product costs revenue – and in the worst case, the customer. Inventory management is, therefore, more than "knowing what's in stock". It is the discipline that balances **service levels, working capital, and delivery capability**. This is precisely why it is the heart of every functioning supply chain. --- ## Key KPIs at a Glance If you don't know these five key figures monthly, you're flying blind. | Key Figure | What it indicates | SME Benchmark | |---|---|---| | Inventory Turnover | How many times stock rotates per year | 6–12× | | Days on Hand | How many days stock will last | 30–60 days | | Service Level | Proportion of orders available for immediate delivery | > 95% | | Inventory Accuracy | System vs. physical stock alignment | > 98% | | Obsolescence Rate | Proportion of unsaleable goods | < 2% | *Benchmarks are based on industry standards from APICS/ASCM Supply Chain Operations Reference Model (SCOR) and Swiss SME practical values.¹* > **Important:** The benchmarks are guidelines – optimal values can vary significantly depending on the industry, product range, and business model. A watch component manufacturer has different requirements from a food retailer. --- ## Briefly Explained: ABC/XYZ Analysis The ABC/XYZ analysis is the foundation of any structured inventory management: - **ABC** classifies items by their value share of total sales (A = top 70–80%, B = 15–20%, C = remainder). - **XYZ** assesses demand variability (X = stable, Y = fluctuating, Z = irregular). An A/X item – high value, stable demand – requires a completely different strategy than a C/Z item. Those who ignore this and treat all items equally waste capital on the one hand and risk supply shortages on the other. --- ## The 4 Most Common Mistakes in Swiss SMEs **1. Blanket Safety Stocks** "10% of everything" is not a strategy. It ignores that an A/Z item – high value, irregular demand – requires a completely different buffer than a C/X item. The result: too much of the wrong thing, too little of the right thing. **2. Non-existent or Outdated ABC/XYZ Analysis** Set up once and never adjusted. Product ranges change, customer behaviour changes – classification should be reviewed at least annually. **3. Purchasing and Inventory Management in Silos** Setting order quantities without knowing the current days on hand systematically creates overstocks. Inventory and purchasing must share the same data. **4. Annual Inventory Count Instead of Continuous Inventory** An annual cut-off date inventory – often during Christmas week – is time-consuming, prone to errors, and provides data that becomes obsolete after a year. Continuous inventory with rolling samples is more accurate, cheaper, and less burdensome for the team. --- ## Practical Checklist: Improve Inventory Management in 30 Days Prioritised by effort and impact: **Week 1 – Establish Visibility** - [ ] Conduct an ABC/XYZ analysis over the last 12 months - [ ] Identify the top 20 items with the highest capital tie-up - [ ] Systematically record slow-moving and obsolete items **Week 2 – Optimise Parameters** - [ ] Recalculate safety stocks per class (instead of a blanket approach) - [ ] Renegotiate lead times and minimum order quantities with suppliers - [ ] Initiate obsolescence reduction process (promotions, returns, disposal) **Week 3–4 – Embed Processes** - [ ] Introduce continuous inventory for A-items (at least quarterly) - [ ] Include days on hand as a KPI in monthly reporting - [ ] Clarify responsibilities between purchasing, warehouse, and disposition in writing --- ## How AI and Modern Tools Help Today Modern inventory tools – many already integrated into Swiss ERP systems like Abacus, SAP Business One, or Microsoft Dynamics – automatically calculate optimal reorder points and safety stocks based on predefined parameters. AI models go a step further: they recognise seasonality, trends, and special events such as trade fairs or discount campaigns, and dynamically adjust parameters – without manual maintenance. According to an analysis by McKinsey, companies with AI-powered inventory management can reduce their inventory levels by up to 35% without compromising service levels.² For Swiss SMEs, this means less Excel maintenance, fewer gut decisions, and more time for supplier development and strategic purchasing work. Find out more in the article ["How AI is Revolutionising Supply Chain Management: 7 Use Cases for Swiss SMEs"](/blog/ki-supply-chain-management-7-use-cases-kmu). --- ## Conclusion Inventory Management is not a warehouse issue – it is a financial issue. Actively managing inventory simultaneously improves liquidity, margin, and customer satisfaction. The most common problems are not technology questions but issues of structure and discipline. Getting started is easier than you think. With the free [Procurement-Assessment](/free-assessment), you can see in 10 minutes how mature your inventory management is compared to other Swiss SMEs – and where the biggest leverage lies. --- ## Sources 1. APICS/ASCM (2022): *Supply Chain Operations Reference Model (SCOR) – 13th Edition.* ascm.org/supply-chain-management-resources/scor 2. McKinsey & Company (2023): *Succeeding in the AI Supply-Chain Revolution.* mckinsey.com/capabilities/operations/our-insights/succeeding-in-the-ai-supply-chain-revolution --- *This article was published on [procurementjoker.ch](https://procurementjoker.ch) – the platform for modern procurement management in Switzerland.*