Inventory Management: Welcome to The 31% Club

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How good inventory management can help ensure business success in a marketplace where 69% of businesses never make it past their 7th year. 

Inventory management is regarded as one of the most challenging aspects of running a successful business, yet it remains one of the most essential components businesses fail to get right. The road to business success lies littered with the carcasses of failed businesses that neglected to implement an effective inventory management strategy.

In fact, with just 31% of companies successfully making it past the seven-year mark (SCORE Association, 2013), the importance of developing and implementing a good inventory management strategy cannot be emphasized enough. Were one to conduct an autopsy on those failed businesses, amongst the major contributions to their failure one would inevitably find evidence of the following four poor inventory management symptoms.

#1 Pricing errors – Not knowing the numbers

Such evidence would include pricing errors and a failure to be able to work with any real accuracy with regards to their pricing policy. This is because, without the ability to track, trace and account every item of inventory moving through the supply chain, a business has no way of being able to accurately calculate the landed cost of parts, raw materials, sub-assemblies or finished goods.

Lesson number one in business is to know your numbers. If you don’t know the true COGS (cost of goods sold) there is no way to accurately maintain your margins. Over time, even a seemingly small discrepancy in pricing can compound and lead the business to operate at a loss.

A good pricing strategy hinges on having accurate data to work from. Inventory management software allows businesses to accurately calculate their COGS, which places them in a much stronger position to map out a competitive pricing strategy that won’t have them unknowingly compromising on their profit margins.

#2 Poorly organized warehousing

One of the leading causes of operational inefficiency in a business that deals with a significant amount of inventory is poor warehouse or factory floor layout and protocols. Inefficiency can be regarded as a ‘silent killer’ in that it is not so readily perceptible to the naked eye, yet its end result is an increase in unnecessary costs and the steady erosion of quality, productivity and profitability.

Poor warehouse planning and operation leads to a congested and disorganized workspace where losses as a result of time, labor and materials wastage notably increases. A lack of accurate inventory management will also compound the problem by increasing the amount of unnecessary stock on hand and raising the instances of theft, damage and obsolescence.

Utilizing a cloud-based inventory management software solution allows for a simple and efficient inventory storage space to be set up and maintained. Labeling can be coded and priority picking, packing and shipping protocols – such as picking older inventory first – can be put in place.

What’s more, inventory levels can be set and automated reports can be used to alert sales and the purchasing department when certain inventory levels are getting dangerously high or low. This will help to ensure that optimal inventory levels are maintained and workers are not left bumbling about in a poorly organized and congested workspace.

#3 Large year-end liquidation sales or stock write-offs

One of the largest challenges an inventory management team faces is accurately forecasting demand, and ordering just enough inventory to see them through unforeseen fluctuations in demand. The trouble is that when forecasting is based off outdated and inaccurate data – typical in the case where spreadsheets or seasonal stock takes provide the only data available – then the net result will be an over or an under forecast of supply and demand.

Over-forecasting leads to overstock which happens when purchase orders are placed in anticipation of upcoming demand based off the understanding that current inventory levels are lower than they actually are. The result is taking on an excessive amount of unnecessary stock. This bleeds off cash flow, burdens warehousing and storage, and ends up with the business having to liquidate inventory at year-end stock takes. In effect, the business literally ends up throwing money away.

When a business’s inventory management is integrated – bringing all nodes in the supply chain together through accurate and real-time information sharing – inventory is accurately tracked, traced and accounted for. This gives forecasters the ‘whole picture’ and they can then make data-driven decisions that will help ensure that optimal inventory levels are maintained.

#4 Consistently missing customer service targets

Poor inventory management inevitably leads to inaccurate inventory levels. As outlined above, when a business bases its fundamental purchasing decisions off erroneous data it soon finds itself battling inefficiency on multiple fronts – wasted time and labor costs, overstock issues, obsolescence and impeded cash flow.

A business that is unable to purchase the inventory it actually requires to meet its customer service targets more often than not is experiencing the coup de grace in the business failure arena. With cash flow tied up in slow moving or obsolete inventory, and forecasting unable to drive smart and on-point purchasing decisions, businesses are often left impotent – unable to meet the needs of their customer.

Under stock issues mean that revenue is lost through missed sales, but more devastating, is the loss of customers and the tarnishing of the business’s reputation. These days, with social media platforms affording customers more power and leverage as consumers than ever before, a business that consistently fails to deliver on its promises will not last very long – especially in a competitive arena with rival businesses that are implementing sound inventory management strategies and are able to follow through on their customer service targets.

With the recent emergence of cloud-based SaaS (Software-as-a-Service) inventory management solutions into the marketplace, powerful inventory management technology is now available to even small and mid-sized businesses where budget is still a major concern.

The way forward

Businesses are now able to afford inventory management software that is more powerful and more versatile than anything previously on the market. The result is a shifting of the goalposts that is driving business growth and innovation by allowing a business to harness the power of effective and efficient inventory management. The ability to control inventory in real-time, from anywhere and across all functions of the supply chain, means that optimal inventory levels and protocols can be maintained. The net effect is an increase in meeting customer service targets, increased efficiency and elevated profitability.

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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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