August 17, 2017    < 1 min read

Stock management affects a company’s performance in many ways. Too little stock can lead to a reduction in sales and a loss of customers, and too much can drastically inhibit profit. It is therefore crucial that managers find an equilibrium between the two extremes.

Stock management methods can greatly influence the productivity and profitability of the firm. Good stock management weighs the pros and cons of having both excess stock and too little stock, to avoid costly mistakes. Below, we highlight the importance of good stock management, and how it can affect a company in varying ways.

Timing is Crucial

Managing stock to reduce the amount of time it takes for a product to be ordered, manufactured and processed to the customer is a crucial tool for productivity. This requires that the firm make improvements to processes throughout the supply chain, by boosting Just-in Time (JIT) processes, “zero waste” practices and lean management. Research suggests that companies who work on operational efficiency win more market share, earn more profit, and produce higher quality products.

Different Types of Inventory and Profitability

In the International Journal of Operations & Production Management, a study conducted by Vedran Capkun, Ari-Pekka Hameri and Lawrence Weiss demonstrated the efficancy of improving inventory management at each level of the operational process.

The researchers found that improved inventory management at three levels of the operational process – raw materials, partially manufactured products, and finished products – improves financial performance. While inventory management at the raw materials stage had the strongest positive correlation with improved financial performance, the last two stages also had a significant bearing on the firm’s financial state.

Firstly, inventory management at the raw materials stage had a significantly positive affect on gross profits and operating profits. Management of stock at the partially manufactured products stage had a positive effect on gross profits, and management at the finished products stage had a positive influence on operating profits.

Stock Management, Profitability and Industry Type

The research also found that the relationship between financial performance and improvements to inventory management varies from one industry to the next. For example, in consumer goods industries, effective manufacturing processes reduce inventory levels of finished products, generating high profits. However, the study also found that management at the raw materials and partially manufactured products stages has little effect on overall profitability.

In the production of products such as automobiles, computers and machinery, the study found that reductions in any type of inventory helped to boost profitability. Specifically, reducing inventory at the partially manufactured products stage helps to further reduce inventory at the finished product stage. This allows the firm to increase their responsiveness, further improving their financial performance.

A good case study that demonstrates how effective inventory management can improve a firm’s financial performance are Dell and Toyota. Minimising inventory levels have made them leaders in their respective markets, setting a good example for other manufacturing companies looking to improve stock management and increase profits.

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