On average, most business’s can expect to have 20-to-40% of their investment capital tied up in inventory. This means that mismanagement of your inventory levels – even to a small degree – can lead to a significant burden being placed not only on your finances, but on the business’s capacity to operate effectively and profitably as a whole.
The more goods you hold in inventory the higher your likelihood of running into costly issues such as obsolescence, theft, tampering, damage and stock excesses that will quickly tie up your cash flow and hold it hostage. With more goods than you need on the shelves your business is also placing itself in the volatile position to being at the complete mercy of market fluctuations in commodity value.
At the mercy of the market
If the market value of goods dips significantly below what you paid for them, and you are holding on to a sizeable quantity of goods, your business is going to take a hit. As any effective inventory manager will readily admit, there is no way to insulate yourself completely from overstock, but there is a lot you can do to reduce your inventory to optimal levels and, with that, contribute to the financial vitality of your business.
The primary aim of controlling your stock levels is to ensure that you always have enough inventory on hand to meet fluctuations in customer demand without tying up your cash flow in maintaining excess or unnecessary stock.
Reducing your stock will automatically free up more working capital to invest in opportunities for business growth, as well as streamline your operations so that your inventory flow is more easily and efficiently managed. There are a number of strategies open to process managers to ensure that they maintain lower inventory levels without running the risk of being under-stocked – here are three of them:
Establish, integrate and fine-tune communication down the supply chain
Communication at every stage of the supply chain needs to be in sync and data driven. This will ensure that your safety stock requirements will be kept to a minimum and goods will reach your customers without interruption. Integrated communication between departments, when driven by real-time inventory data, is a key factor in avoiding stock issues and costly distribution delays.
Remotely accessible inventory management software is ideal for fulfilling this role. It allows process managers along the entire distribution channel to access accurate and fully up to date data and communicate far more effectively inter-departmentally.
2. Get rid of your obsolete or surplus inventory
Inventory management software is also a highly effective tool when it comes to identifying surplus or obsolete inventory. It is very important to be able to not only earmark obsolete inventory for removal, but also to know the most effective ways of doing so. Whilst some inventory managers may be reluctant to dispose of inventory at a considerable loss, the long-term damage of holding on to unnecessary stock far outweighs the short-term downside of getting rid of it immediately.
There are a number of avenues open to businesses looking to dispose of unwanted inventory, but first it should be categorized into stock that can be used within the organization, stock that can be sold off, and irredeemable stock that needs to be scrapped or thrown away.
Negotiating to return surplus stock to the supplier is the first avenue that should be pursued. Closeout and special discount offers, from retail to your customers, is another way to fire up demand and move excess inventory. Following that, offering goods at a discount in international markets will allow you to move unwanted stock and still receive a portion of the goods’ value back. As a last case resort it may be necessary to donate the goods to a cause or charity or simply to have it scrapped.
3. Lower lead times = lower inventory
Lower lead times result in less stock held on stock. It is extremely important to constantly push existing suppliers to improve their lead times or else source out new suppliers with lower lead times.
The most effective way to work on reducing lead times is to first track, trace and record how much time it takes to complete each step in the flow of goods – from order placement, through manufacturing, transport to storage, and from storage through to customer. Do this for each supplier, and you will then be able to pinpoint which suppliers are contributing to your surplus inventory levels through extended lead times.
Compare the lead times of different suppliers or manufacturers, opt for the one that provides the shortest lead time, and then push them to reduce the lead time further. Whilst there is no way a manufacturer can cut down on the production time it takes to manufacture the product, there is usually something they can do to cut down on the ‘idle time’ that accounts for the vast majority of time in the production process.
Reducing your stock is a sure-fire way to increase efficiency and profitability. Because inventory has such an immediate and lasting effect on the bottom line of your business, ensuring that optimal stock levels are maintained can be achieved through improved communication, removing obsolete stock and cutting down on lead times. Investing in a powerful inventory management software system will also greatly upgrade your business’ ability to accurately meet its inventory challenges.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.