Inventory is one of the major current assets of an organization. Hence, the quality of inventory management has a direct bearing on the organization’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 organization.
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, therefore improving profitability.
Tracking the expiry dates of inventory and triggering alerts suitably can minimize losses due to obsolescence. Putting in place a good inventory management system would enable the organization to evolve suitable strategies to sell those items that are approaching expiry, which then curtails financial losses due to obsolescence. A similar approach can be adopted with regard to non-moving stocks too. Therefore, a good inventory management system would be a two-pronged strategy of reducing costs and minimizing losses contributing towards improved profitability.
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 helps to boost the confidence of the marketing and sales personnel as they can acquire new customers or commit to repeat orders from existing customers without the fear of delays in delivery. This in turn would improve the productivity of the marketing and sales departments.
A sound inventory management strategy helps to curtail the down time of the production department as it ensures the availability of inventory as per the production schedule. This helps to increase the productivity of the human resources associated with production.
The finance department also stands to benefit out of a good inventory management strategy as they can ensure efficient working capital management and improved cash flows. This would help them to reduce dependence on borrowed funds, thereby decreasing finance costs. Therefore, the productivity and efficiency of the finance department would improve in addition to an increase in profitability.
An effective inventory management system facilitates management by exception, by triggering e-mail/mobile alerts in the event of occurrence of an exception condition. The focus of the employees and the management can then be placed on critical issues, which helps to avoid placing efforts towards non-productive activities. The top management can also focus on the macro issues rather than the issues at grass roots level 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 characterized by similar products, pricing, availability and marketing strategies, customer service is a major differentiator that influences the choice of customers. As seen earlier, a sound inventory management strategy paves the way for excellent customer service, which in turn fuels the top line growth. This, coupled with the improvement in financial ratios, profitability indices such as Return on Assets and Return on Equity, would go a long way in satisfying both the internal and external stake holders.
Improved financial indices and efficient processes can also help the organization to 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 of excellence would help to improve the brand image, increase brand loyalty and attract new customers and investors. In an age where frontiers are vanishing, an impeccable brand image would enable the organization to foray into international markets. Exports would boost the economy, and hence the government would also support such ventures. You can see how then inventory management plays a key role in improving business sustainability.
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.