Optimising perishable inventory

Julie Neal is a Director and Consumer Products sector specialist and Sabine Sayer is a Managing Consultant at Vendigital. They recently shared their insights with FMCG CEO.

For manufacturers of perishable products, demand uncertainty and heightened risk of supply shortages are a recipe for under performance. However, there are steps that they can take to improve operational efficiency by optimising inventory management and minimising food waste.

Rightsizing inventory and streamlining supply chain processes in an industry where there is a high degree of complexity and variability is incredibly challenging. For example, a simple change in the weather could trigger a variety of issues for food businesses, which must be addressed if they want to succeed in quickly getting products onto shelves so they can be bought and eaten by consumers while they are still fresh.

As seen this summer, unseasonal wet weather has contributed to a pan-European potato shortage, which has impacted both the availability and quality of this food staple and driven up prices for manufacturers and consumers alike. The wetter-than-average summer has also depressed demand for certain seasonal foods such as ice cream and BBQ-ready meats, increasing the risk that grocery shops and supermarkets are left with excess inventory that they are unable to sell within the required timeframe.

To mitigate the risk of under or overstocking, food businesses need to base their decisions on accurate and reliable data sourced from multiple points across the end-to-end supply chain. For food processors, enhanced data visibility could transform operational efficiency by enabling them to react to shortages and other supply-side challenges promptly. For example, they could shorten production runs or temporarily switch to other product lines to avoid a situation where margins, and potentially much-needed working capital, are eroded.

A rapid uptake in AI and machine learning is also helping to raise data understanding across the food industry, bringing opportunities for individual businesses to improve their operational efficiency through more accurate demand forecasting and increased agility. Research published by WRAP and the World Wildlife Fund in 2022 found that use of AI software had enabled food grocery outlets to reduce food waste by 14.8 per cent.

For food businesses looking to optimise their inventory for products with a short shelf life, these five steps may be helpful.

1. Ensure end-to-end data visibility

Many businesses are data rich, but don’t necessarily analyse this data regularly or utilise it to its full potential to gain insights. Understanding the full breadth of data available within their business and identify any missing data to enable regular analysis feeding into their planning process are therefore key first steps.

Furthermore, by taking a more holistic and integrated approach, including not only their own business data but also external information, decision makers can improve end-to-end visibility and develop a more agile operating model. For example, climatic changes could be affecting food growers, but do food processors know how this might impact their suppliers in the coming weeks and months and how best to prepare?

Collecting the right data at the right time and monitoring for changes will improve the accuracy of demand forecasts and support businesses in optimising inventory management.

2. Embrace GenAI and automation

AI-based models can be developed to support food businesses in reducing time to shelf by smoothing out demand uncertainties and mitigating the risk of supply shortages. But AI technologies could also enhance operational efficiency and reduce food spoilage.

Bespoke AI models are increasingly employed to improve demand forecasting and influence inventory management strategies. Trained using a mix of internal business data and data sourced from multiple points across the end-to-end supply chain, these integrated demand-forecasting models can assist businesses in rightsizing inventory based on accurate volume and volatility data.

These models can also aid the classification of individual products and raw materials based on their volume and volatility, allowing inventory managers and production planners to step in as appropriate to increase safety stocks, search for alternative suppliers or strengthen existing supply agreements. To speed up the adoption of AI in the food industry, Siemens has developed an innovative platform, the Xcelerator Marketplace, that businesses can use to accelerate digital transformations and improve process efficiency.

3. Strong Supply Chain Relationships

Effective inventory management relies on strong supply chain relationships, backed up by well-balanced agreements. To ensure resilient supplies of mission-critical ingredients, a food business may need to negotiate agreements for the long term based on projected volumes, but what happens if the situation changes?

Is there some flexibility built in and what are the options when it comes to renegotiating terms? Flexible supply agreements, based on an understanding of end-to-end supply chain resilience including factors such as weather conditions, external crises that may impact availability and price, will enable the business to make the changes necessary to avoid excess inventory and protect process efficiency.

4. Make inventory management a strategic driver

For many food businesses, decisions on inventory management tend to be reactive; affecting product cost and/or availability. Setting up a more robust process allows businesses to address inventory management in a more proactive way and turn it into a strategic driver. Combining inventory management with digital expertise and strategic outlook could transform this component of supply chain management.

For any direct-to-consumer business, minimising waste and improving sustainability through increased circularity can have a positive effect on sales. Food businesses can increase their market cut-through and drive sales by demonstrating that their inventory management strategies are not just minimising food waste, but lowering carbon emissions and supporting the transition to a circular economy.

5. Change, monitor, learn, repeat

Optimising the end-to-end inventory management needs to be supported by regular reviews. Those reviews should cover individual products as well as the overall processes and involve stakeholders from relevant areas within the business. Any changes made to inventory management strategies should be reviewed carefully to ensure they are effective in mitigating the risk of under- or overstocking and minimising food wastage.

If excess or insufficient inventory becomes an issue, root cause analysis is key to identify the drivers. Keeping strategies under review, considering data and AI best practice and maintaining a holistic view of the end-to-end supply chain will also help to improve operational efficiency and develop a culture of continuous improvement based on constant monitoring and learning.

Optimising inventory management for perishable products is crucial for food businesses to maintain operational efficiency, minimise waste, and respond to fluctuating supply and demand dynamics. Implementing strategies such as ensuring end-to-end data visibility, embracing AI and automation, fostering strong supply chain relationships and making inventory management a strategic driver can significantly improve performance.

By continuously reviewing and refining inventory practices, businesses can mitigate the risk of under- or overstocking, reduce spoilage and better meet consumer demand while staying resilient against external challenges. Adopting these proactive approaches will not only boost profitability but also contribute to a more sustainable and agile supply chain.