Inventory management is not only about stocking and selling products. Rather, the right balance between supply, demand, and cost efficiency determines your business success. Though traditional methods like spreadsheets help to manage stock to some extent, these practices miserably fail to position a business in the competitive market. To avoid such scenarios, companies rely on more structured frameworks. One of them is matrix inventory management. Here, the matrix systematically indexes the inventory into multiple traits. It helps businesses to classify and track inventory. At the same time, it improves purchasing decisions and overall profitability.
What is Matrix in Inventory Management?
A matrix is a data grid divided into rows and columns. This helps to categorize and analyze inventory information. This organizes data in a multi-dimensional format which enables businesses to track various attributes at a time more efficiently. Instead of simple stock counts, this offers demand visibility, lead times, and stock levels. The matrix method usually sorts products based on ABC analysis, XYZ analysis, and Demand vs. Supply matrix. Mapping stock levels against demand trends can improve demand forecasting. Finally, this aligns customer demands with stock levels, breaking the vicious cycle of overstocking or underproduction.
Types of Matrices Used in Inventory Management
Matrices can simplify business processes by managing vast items in the most manageable way. However, to do that efficiently, companies need to understand and use the matrix types accordingly.
Inventory Classification Matrix
The inventory classification matrix is an essential business management and can be divided into two major types – ABC and XYZ analysis. These management techniques categorize the products into three parts to streamline and track inventory. In ABC analysis, items are divided into three parts based on their importance. ABC analysis is mainly a form of the Pareto principle, suggesting that the most valuable items in the inventory will be of a lesser percentage. For example, ‘A’ has the highest value (20%), ‘B’ has a moderate value (30%), and ‘C’ has the lowest value (50%).
Stock Level Matrix
Generally, the stock level is the optimum inventory level required for the company’s smooth running. The stock level matrix is the matrix that maps and manages this nitty-gritty of the inventory. The stock levels can also be classified into various subtypes-
- The minimum stock level is the lowest stock required to prevent sudden stockouts.
- The maximum stock level is the level that needs to be held to avoid extra costs.
- The reordering level is when new orders are placed to replenish the stocks.
Mapping into the matrix helps businesses identify the pricing strategies and seasonal demands. As the maximum and minimum levels prevent stockouts and overstocking, the reordering points ease the order processing. Thus, companies replenish their inventory with minimum cost without any hassle.
Demand Vs. Supply Matrix
As the name suggests, the Demand vs. supply matrix studies the relationship between the demand and supply of a company. For simplicity, the business mapped items into four quadrants in the matrix. The quadrants are –
- Low Impact, Low Risk
- Low Impact, High Risk
- High Impact, Low Risk
- High Impact, High Risk
When the items are grouped in this format, the profits of each group become clearer. This enables businesses to analyze the profit margin for each category individually. As a result, any error between demand and supply can be easily searchable and solvable.
Lead Time Matrix
Lead time is one of the crucial components of inventory management. Mainly, it is the time between the order processing and completion. Also, the lead time can be related to supplier time and transportation time. The measurement of this time frame is crucial for demand forecasting and accurate replenishment. Lead times can reveal revolutionary data about your business.
As Irshadullah Asim Mohammed mentioned in their article International Chain of Supply Chain Management, higher lead times can imply many things like degrading supplier relationships. For this reason, adhering to the lead time can be helpful for the business for risk management in the long run.
How Does the Matrix Help in Decision-Making?
Matrix methodology in inventory management allows the business to control its inventory in multiple facets. Analyzing the stocks from various dimensions and angles, it becomes easier to make less costly decisions.
Inventory Control and Optimization
When matrix methods like ABC or XYZ analysis are implemented, inventory control can get easier. As ABC helps to control inventory based on their importance, XYZ clarifies the demand variation of each group. Delving deeper into these factors allows businesses to focus on the aspects where it is needed the most. For example, as ABC analysis’s ‘A’ item depicts the highest-value product with the lowest stock, businesses should prioritize it more with the strictest controls. Thus, it reduces the extra management loads distributing the work. As a result, companies can guarantee targeted management and inventory optimization.
Prioritizing Fast-Moving vs. Slow-Moving Items
Fast, Slow, and Non-moving methods, also known as the FSN technique, are quite common practices in inventory management. This analysis helps the business group items into three types:
- Fast-Moving: Items that sell quickly have higher demands (lower profits)
- Slow-Moving: Items that sell slower and have lower demand.
- Non-moving: Items that have no sales after a certain period due to their declining demands.
When the matrix is applied in FSN analysis, these three types of products become visible. So businesses can easily find replenishing products to maximize profits. With this, purchasing decisions align with sales and customer satisfaction.
Replenishment and Purchasing Decisions
ABC and XYZ analyses enhance purchasing decisions by optimizing replenishment timings. When these two methods are applied to a 3×3 matrix, businesses can find nine attributes (like AX, BX, CX, and so on). Combining these gives data from both consumption and variable demand, which enables stock safety. With this classification, verifying the order quantity and time is more straightforward. Businesses can make better purchasing decisions, avoiding overstocking less critical products.
Minimizing Holding Costs
Along with the product costs, the holding costs are also responsible for lowering the profit margin of a business. With simple grids and rows/columns, enterprises understand the emphasized items, lowering holding costs. For this, they can maintain inventory levels for fast-moving items with high demand to fulfill customer demand. When maintaining these, companies can finally look beyond the traditional inventory systems by aligning demand with the inventory.
Benefits of Using Matrices in Inventory Management
Using matrices in inventory management can be life-changing. Starting from better inventory control, you get better forecasting capabilities and enhanced ways to use resources. All of these are at the most affordable cost.
- Better Inventory Visibility: When matrices are applied, the entire inventory can be controlled across various categories, locations, and demands. Companies can also identify items based on multiple stock levels. The grids help to determine different products based on the categories. This enhances a more detailed and scrutinized view of the inventory with which actionable measures can be taken.
- Improved Forecasting Accuracy: Matrix utilization comprises different methods like XYZ analysis, which are designed explicitly for demand forecasting. The demand variability measurement makes it easier to look between the demand patterns. Furthermore, businesses can also visualize seasonal demand trends. As it provides more detailed historical data and trends, it also shows the accuracy of the forecasting.
- Optimized Resource Allocation: Often, businesses struggle to find out where they should allocate resources among various options. However, with a matrix, this resource allocation is a piece of cake. Demand vs supply and ABC analysis are some types that easily reveal which products are valued and in demand. Knowing this unique trait lets you see where you need to allocate resources.
- Cost Efficiency: Cost minimizing is not a big deal when you make the right decisions. Companies can simplify the order quantities and timings using a matrix in regular inventory management practices. When all these are done accurately with precise demand prediction, the risks of holding and order expenses are reduced dramatically. Also, by managing the stock levels, businesses can easily save themselves from excess shipping costs or lost sales.
Examples of Matrix in Inventory Management
Example 1: ABC classification of inventory items
To illustrate the ABC analysis here, let’s take an example of a jewelry shop. The table below shows the number of each item and the unit cost of them. By multiplying both, we get the annual consumption value.
ACV (annual consumption value) = annual demand x unit cost
| Product name | Items sold annually | Per unit cost | Annual cost |
| Earrings | 200 | $100 | $20000 |
| Necklace | 1000 | $250 | $250000 |
| Rings | 400 | $150 | $60000 |
| Bracelet | 300 | $120 | $36000 |
| Jewelry Sets | 100 | $500 | $50000 |
| Anklet | 600 | $200 | $120000 |
The items need to be categorized in descending order according to the annual cost. After sorting the table, the total number of items sold and the yearly cost need to be added. The table also needs to have two more new columns for the percentage of items sold and annual cost. The table will look like this –
| Product name | Items sold annually | Per unit cost | Annual cost | Percentage of total items sold annually | Percentage of total annual cost |
| Necklace | 1000 | $250 | $250000 | 38.46% | 46.64% |
| Anklet | 600 | $200 | $120000 | 23.08% | 22.39% |
| Rings | 400 | $150 | $60000 | 15.38% | 11.19% |
| Jewelry Sets | 100 | $500 | $50000 | 3.85% | 9.33% |
| Bracelet | 300 | $120 | $36000 | 11.54% | 6.76% |
| Earrings | 200 | $100 | $20000 | 7.69% | 3.73% |
| Total | 2600 | $536000 |
With this, we have found the appropriate data for each item annually. We need to divide these items into three categories: A, B, and C. In this case, it is best to split them in the ratio of 80:15:5 for A:B: C.
Category A (Necklace, anklet, and rings) = 46.64%+22.39+11.19% = 80.22%
Category B (Jewelry sets and bracelets) = 9.33%+6.76% = 16.09%
Category C (Earrings) = 3.73%
Example 2: Lead time vs. demand matrix for a particular product category
To exemplify the Lead time vs demand matrix, we can delve into a real-life scenario of the apparel store.
| Product name | Demand | Lead Time |
| Jeans | Stable | 7 days |
| Shirts | Stable | 30 days |
| Dresses | Variable | 5 days |
| Jackets | Variable | 45 days |
For real-life application and analysis of inventory control, l we can conclude from the table –
- Jeans – can be ordered immediately just when they run out.
- Shirts – buffer stocks are required.
- Dresses – need to keep safety stocks
- Jackets – need to have large buffer stocks.
Example 3: Reorder point matrix showing various product categories
| Category | Average lead time per day | Lead time | Safety stock | Reorder point |
| Fast moving items | 200 | 5 | 500 | 1500 |
| Slow moving items | 100 | 10 | 300 | 1300 |
| Non-moving items | 50 | 15 | 150 | 900 |
To find out the recording points, use the following formula –
Reordering points (ROP) = (daily demand x lead time) + safety stock
= (200 x 5) +500 = 1500
Here, the fast-moving items have higher ROP, while the slow-moving items have lower ROP. This indicates the frequency at which the items must be replenished to avoid stock shortages.
Challenges in Implementing Matrix in Inventory Management
Matrix implementation in inventory management has numerous benefits, from improved forecasting and enhanced decision-making. Still, businesses struggle with some challenges while using matrix in their traditional approach.
Data complexity and management
To implement the matrix in your organization, you need to make sure to include various data. From sales data and stock levels to supplier information, supplier stocks, and demand forecasts must be integrated. Managing all these data in one place is often difficult, leading to costly mistakes and wrong purchasing decisions.
Resistance to change in organizations
Initiating a change is always a tough job in any organization. Employees often resist changes and prefer the traditional way, even with hardships. Also, even after having an interest, many teams fail. If a member fails to adopt this change, it disrupts the workflow of the entire organization. Thus, proper training programs and workshops are necessary to implement the matrix in the organization to prevent this.
Integration with existing inventory management systems
Another problem that businesses often face is seamless data integration. Even after you efficiently collect your data, the shifting from the traditional system to the matrix is technically hectic. Compatibility and customization issues often interrupt the steady data migration process. Yet, this problem can be solved with a technical expert’s help and is worth it.
Maintaining accuracy and avoiding errors
You will only experience the real blessings of the matrix implementation when you have accurate data. Any discrepancies can lead to errors in every matrix grid, producing incorrect inventory assessment. Another problem is the system bug; it can corrupt and sometimes result in faulty reports. So, out of all of this, you need to ensure all these data are correct to get the most out of your matrix analysis.
How to Implement Matrices for Inventory Management
Matrix in inventory management can make your business successful only when you know how to apply. Following some of the best practices in your organization, you can ensure accurate forecasting and the right decision-making.
- Regular data updates: Don’t delay your data collection. Instead, regularly update it. Integrate with various systems to get the updated data at your fingertips. This helps to audit your data regularly on a weekly or monthly basis. As a result, erroneous data and discrepancies can be easily avoided.
- Training: Implementing the matrix can be a huge plus point, but learning to use it is harder. Thus, employees need hands-on training sessions to understand and apply the matrix methods. A dedicated team should supervise the progress and find the bottlenecks as the ongoing learning programs are implemented. Also, sessions should be held about system improvements.
- Using automation tools and software: You can not implement a matrix properly in the traditional structure. The work simplifies when you use the inventory management software. This automates the data collection and processing using cloud-based systems. Many software applications have methods to implement XYZ and ABC analysis and other inventory management techniques. As a result, API solutions provide seamless data integration that is faster and smarter.
- Aligning matrix strategies with business goals: Use various matrix analysis techniques for ABC, XYZ, FSN, and demand vs supply time to tailor to unique business needs. Predictive analysis of these matrices can help to adjust stocking levels in seasons and off-seasons. When pinpointing each one precisely, monitoring KPIs becomes much more manageable.
- Continuous supervising and optimization: To get the best of the matrices, you must monitor them regularly. Set up alerts, perform quarterly analysis, and use feedback loops to refine the inventory matrix parameters. Using historical data, a business can adjust the safety stock threshold and reorder points
Conclusion
In the fast-moving market, your business always needs to stay ahead to beat the competition. Matrix can be the best solution for managing inventory management. By leveraging the various techniques of the matrix, like ABC classification, Lead Time matrix, and Demand vs Supply classification, companies can optimize their stock levels, predict demands, and adapt to sudden market changes. Implementing this can help businesses get more detailed inventory visibility, more intelligent resource allocation, and better purchasing decisions. With the changing supply chain, companies should adapt to matrix-driven business strategies to gain a competitive edge.
