You may be wondering what on earth inventory health is and how it affects your business. But understanding the ins and outs of it will go a long way in the overall profitability of the company. So what is it? Inventory health is where a healthy balance between stock in and stock out is achieved. This is determined by many factors and failure to achieve this balance can result in loss of revenue from either short-ordering customers or from overstocking and risking product expiring or becoming obsolete.
One yardstick for determining the health of your business is the stock turnover. This is essentially the number of times the stock is sold and then replaced in a certain period and is calculated by the cost of stock sold over the average inventory. Having a high stock turnover indicates healthy inventory as not only are sales up, which is always a good thing, but also any goods stored is purposeful and destined for a sure sale.
Increasing stock turnover can be achieved through a number of methods one of which is to encourage customers to pre-order. This enables the company to know with certainty how much inventory will be sold which means they are only ever ordering what they actually need, minimizing the risk of losing capital tied up in obsolete or expired product.
Consequences of poor inventory health
In the first instance, not selling enough of the stored stock results in an obvious lack of income. However, you must also consider the impact of storing stock unnecessarily. This practice itself incurs significant holding costs (insurances, leasing of the warehouse etc). Additionally, any capital that is tied up in stored goods incurs what is termed a lost opportunity cost, which is the amount of money that could have been invested elsewhere that is instead tied up in the unsold goods.
On the flip side, if not enough inventory is held resulting in either not enough product available relative to customer demand or the inability to complete manufacture, there is also a financial loss to the company. Customer satisfaction and loyalty is of paramount importance to a company’s ongoing success and failing to be able to provide to their needs will negatively impact a company’s reputation. As well, if manufacture has to stop because an ingredient is out of stock, then equipment and staff time is underutilized which also costs the company dearly.
How can you promote your company’s inventory health?
Tools such as inventory management programs can be extremely useful in assisting with good stock control. Historical spreadsheet programs certainly have their place however automated software far exceeds these in providing up-to-date, reliable data of all goods over multiple sites. Obtaining and analyzing this data will reveal trends in customer demand, enable sensible minimum stock levels to be deduced and therefore sound ordering decisions to be reached. And if this all occurs correctly, then the inventory turnover in theory should be high with a lot of inventory being sold and not much inventory being stored and incurring unnecessary costs.
A healthy inventory balance is essential for optimum running of the company both for financial gain but also for future assurance and job satisfaction. If you have worked out your company’s stock turnover and decide it needs improving but you are clueless as to where to begin, fear not! Packages such as Unleashed are designed to help you do just this with customer support available.
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.