Inventory is one of the major current assets of an organisation. Hence, the quality of inventory management has a direct bearing on the organisation’s bottom line and an indirect impact on its top line too. Let’s look at how inventory management impacts the profitability, productivity, efficiency, growth and sustainability of an organisation.
There are various costs associated with inventory. They can be broadly classified as ordering costs, carrying costs and losses on account of damages, obsolescence and thefts. These costs are directly attributable to inventory. However, inventory contributes to other indirect costs such as human resources costs and finance costs. A good inventory management strategy goes a long way in containing these costs, thereby improving profitability.
Tracking the expiry dates of inventory and triggering alerts suitably can minimise losses due to obsolescence. Putting in place a good inventory management system enables an organisation to evolve strategies to sell items that are approaching expiry, which then curtails financial losses due to obsolescence. A similar approach can be adopted with non-moving stocks as well. A good inventory management system is therefore a two-pronged strategy of reducing costs and minimising losses, which contributes to improved profitability.
Improving manufacturing productivity and efficiency
Inventory is a crucial element in the functioning of all the departments of a company, including marketing, sales, production, human resources management and finance. A good inventory management system like Unleashed boosts the confidence of marketing and sales personnel, as they can acquire new customers or commit to repeat orders from existing customers without fear of delivery delays. This improves the productivity of the marketing and sales departments.
A sound inventory management strategy helps curtail the down time in the production department as it ensures the availability of inventory as per the production schedule. This increases overall manufacturing productivity by lifting labour productivity.
The finance department also benefits from a good inventory management strategy as they can ensure efficient working capital management and improved cash flows. This helps them reduce dependence on borrowed funds, thereby decreasing finance costs. This lifts the productivity and efficiency of the finance department in addition to increasing profitability.
An effective inventory management system facilitates management by exception, by triggering e-mail/mobile alerts in the event of an exception condition. The focus of employees and management can then be placed on critical issues, which reduces time spent on non-productive activities. Upper management can also focus on macro issues helping to improve the overall efficiency of the processes and productivity within the business.
Growth and sustainability
In the present day environment of high competition characterised by similar products, pricing, availability and marketing strategies, customer service is a major differentiator. A sound inventory management strategy paves the way for excellent customer service, which in turn fuels top line growth. This, coupled with an improvement in financial ratios, profitability indices such as Return on Assets and Return on Equity, goes a long way in satisfying both internal and external stake holders.
Improved financial indices and efficient processes can also help an organisation obtain certifications in terms of quality standards, such as ISO certification, and make it a potential candidate for awards of excellence. Such certifications and awards help improve brand image, increase brand loyalty and attract new customers and investors. In an age where frontiers are vanishing, an impeccable brand image is needed for an organisation to foray into international markets.
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.