Inventory Management and the Bottom Line

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Inventory management affects business performance. If a firm’s stock management function is in disarray, inventory outcomes and company profit will inevitably suffer. Because a firm’s inventory is often one of the biggest lines on its balance sheet, even small inventory mistakes can impact the rest of the business. This thinking has an evidential basis; a study, published in the International Journal of Productivity and Performance Management, found that firms with inefficient stock management tended to have lower financial returns.[1] Here are 5 ways that stock management can improve company performance.

Reducing Waste

Perhaps the biggest point of difference between well and poorly managed stock is the degree of waste. Waste is the anathema of profit; whether stock or time is being used poorly, the firm is spending money without any return. Large companies recognize that waste and profit are incompatible; the just-in-time inventory system, popularized by Toyota in the 1970s and 80s, revolves around the idea that a business should only order parts as and when they are required.

Lean inventory involves minimizing excess stock; using more efficient processes to manage goods and production are crucial to reduce waste. If staff is manually checking stock levels and manually generating reports on a regular basis, the wasted time is costing the business money.

Improving Inventory Forecasts

Forecasting demand is a never-ending quest for accuracy. A business with visibility over its products can use financial and inventory data to generate better forecasts and get ahead of the crystal ball. A business that does not have a good grip on its inventory is likely to inaccurately forecast demand, leading to over or under stocking and a range of flow-on challenges.

Closing More Sales

Poorly managed inventory can lead to lost sales. A customer can choose between many competing retailers, but for convenience he will generally only want to shop with a few stores. By failing to keep one key product on the shelves, your business risks losing a customer who would have otherwise purchased many different items. Even worse, a staff member might tell a customer to try one of your other stores on the basis of inaccurate stock data – if the customer has to go out of their way to visit the other store, you’ll lose goodwill and potentially a loyal customer.

Keeping Things Simple

In a well-managed business, senior staff devotes relatively little of their time and energy to overseeing stock. If inventory goes from crisis to crisis, the whole business has to respond – this often serves as a distraction from other priorities. Good stock management involves leveraging technology to automate many of the tasks that were previously done by staff such as ordering goods, data entry and financial analysis.

Improving Financial Reporting

If a business does not have an accurate understanding of its inventory, it risks producing inaccurate financial statements. By overestimating its inventory performance, a company will mislead investors and incur a higher tax liability. When inaccurate financial reporting is revealed, it can compromise a business’ ability to raise capital from banks or investors.

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Melanie - Unleashed Software

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.

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