A key area of business directly affects the overall health of a business is how accurate its inventory levels are. For businesses who fail to maintain a finger on the pulse of inventory as it flows through their operation the consequences can be dire – perhaps even fatal.
One thing is for sure; if inventory levels are inaccurate the health of the business will deteriorate. If too much unnecessary stock is allowed to build up over time then the healthy circulation of cash flow in the business will become restricted. When this occurs lost opportunities cannot be capitalized on, much needed ‘in-demand’ inventory cannot be ordered in time to meet with fluctuating demand, and expenses related to storage, handling, damage, theft and obsolescence pile up and overwhelm the bottom line.
Conversely, if demand forecasts are driven by out of date and inaccurate data – which often occurs when a business relies on outdated inventory management systems like spreadsheets and annual stocktaking – then the operation will run into under-stock issues. The effects will be felt by a sudden and sharp drop in revenue thanks to missed sales, and more chronic symptoms such as a dwindling customer base and a loss of market share.
A healthy business is one that exercises accurate and effective inventory management in much the same way that a healthy individual exercises a disciplined and wholesome lifestyle. And much like an individual, when a business begins to suffer – due to ineffective inventory management practices – three important steps are required in order to bounce back to optimal health: diagnosis, prescription and implementation
Disease #1 – No clearly defined categories for operating inventory
Diagnosis: When process managers do not have a clear appreciation of exactly how much safety, replenishment and excess or obsolete stock is on hand then any forecasting, planning and purchasing will be off, and send the business out of alignment.
Inaccurate inventory levels contribute to one of two major costly issues businesses encounter – overstock and under stock.
When a business over compensates due to a fear of running out of buffer stock and failing to be able to meet future demand, it purchases and carries more stock than is really necessary.
Conversely, if purchasing managers are unaware that a stock shortage is about to take place due to a reliance on out-of-sync, inaccurate inventory reporting, they will fail to re-order necessary stock in time. This will result in a stock-out and revenues will be lost due to lost sales and overall profitability will shrink as customers move over to competitors.
The prescription: A business needs to immediately conduct a thorough appreciation of its inventory and classify all operating inventory into their respective categories – safety stock, replenishment stock and excess/obsolete inventory.
Implementation and cure: Investing in a powerful, integrated inventory management software system will allow for accurate tracking, tracing and accounting of all inventory. This will make the job of accurately categorizing and maintaining accurate inventory levels far easier.
Disease #2 – Inaccurate profit reporting
Diagnosis: The value of inventory on stock is dramatically underestimated, and profit reports display Net Profit margins that are over-inflated. In effect, accounting is totally out of touch with the reality of the situation ‘on the ground.’
The prescription: Every piece of inventory bought will be reflected on the balance sheet with an asset value. This makes it critical for inventory processes to be accurate. It is essential to utilize the correct statistical formulas and inventory valuation methods (FIFO, LIFO or Average Landed Cost) informed by real-time, data-driven inventory management.
Implementation and cure: Use up-to-date, real-time data to help you calculate your inventory levels. Again, investing in an effective inventory management software solution will help you ensure that your inventory is accurate. When inventory is accurate and your valuation system is the correct one, then your accounting will naturally be accurate too.
Disease #3 – Communication breakdown
Symptoms and diagnosis: Different departments operate totally out of alignment and chaos reigns supreme. Purchasing bases orders off of outdated data, while sales is left scrambling to locate orders that storage and warehousing says are in stock, but in reality are nowhere to be found.
This is because the staff has no way to access or input reliable, real-time data that can be seen and shared by everyone along the supply chain. The result manifests as a service delivery nosedive, panic purchasing and an overall breakdown in communication.
The prescription: Accurate information needs to be made accessible and shareable through an integrated inventory management system. This will ensure that staff will know that inventory levels are always accurate and up-to-date, thereby fostering enhanced inter-departmental communication, and a greater confidence and reliance upon the information systems in place.
Implementation and cure: Install a cloud-based inventory management solution and train staff how to use it.
Prevention is better than cure – always
In essence, as with physical health and vitality, the health and vitality of an inventory-based business hinges on the tried and true principle of ‘prevention is better than cure.’
While inventory management software is no panacea for all the inventory ills a business will face, it will definitely go a long way to helping prevent many of the diseases mentioned above. Focus on prevention: Try Unleashed.