Article provided by Fedgroup
Most business owners know that poor cash flow is the number one business killer. However, bad cash flow can have multiple causes, and many of these, such as poor inventory control, are completely within the control of the business. Even where cash flow is not a problem, better inventory control can substantially improve the profitability of the business.
Every single day a product spends in your warehouse, it is costing you money by not being turned into cash, while taking up space that you pay for. Herein lies the headache of almost every business owner. Increased stock means that you can buy in bulk and save on components, while ensuring that you keep clients and consumers waiting.
On the other hand, decreasing your stock can generate significant savings on warehousing space and free up the cash to grow the business that would otherwise have been spent on keeping a large inventory.
Even if you are fortunate enough to have a large space available, the money locked up in your products can always be spent better elsewhere. Keeping a large inventory also creates the risk that the products may become obsolete before they can even be sold.
The prudent business owner therefore has to do his math perfectly to ensure that the inventory is always at such a level that clients can be serviced timeously, but that nothing stays in the warehouse longer than necessary. Therefore, there has to be a formula that calculates the time each and every item in the inventory spends in the company before leaving the building and turning into money.
In a perfect world, you would be able to allow your stock to drop to zero, order new stock and have it arrive almost immediately. In the real world, however, deliveries take time. Business owners therefore need a reorder point. The reorder point is reached when stock levels reach a certain point and new stock is ordered. This ensures that new stock arrives just in time before current stock drops to zero. Each item on the inventory would have a different reorder point.
If these calculations do not sound complicated enough, business owners should also be mindful of the fact that they may be able to get discounts for bigger orders. So, it may be beneficial for the business owner to have a look at other items on the inventory to see if any products from the same supplier are also nearing their reorder points. If the supplier is willing to give a discount on a bigger purchase, it may be a good deal to order these items slightly ahead of their reorder points. Bulk orders also have the benefit that you might be saving on delivery costs. But you have to be sure that the cost of warehousing additional stock and the burden on the cash flow can be balanced out by the savings on a bulk order.
Of course, if you cannot negotiate good discounts for buying in bulk, it would be better for the business if you ordered less stock at a time and order more frequently.
It should also be kept in mind that the reorder point may not always be the same, to allow for seasonal fluctuations in the demand for your product.
Manufacturing businesses should keep tabs on inventory even more closely than other businesses. If only one vital component is missing, it creates a bottleneck that affects the entire company, while the stock in the inventory most likely just keeps on growing.
An innovative way to keep low stock and ensure high turnover is to manage the demand cycles of the customer. Some clothing brands have done this with great effect. Instead of just having four seasons for clothing in a year, they have split their catalogue up into even shorter seasons. Customers know that they only have a very limited time to pick up the garments that they like before the season comes to an end, which drives demand and stock turnover. The moment the season comes to an end and hopefully the vast majority of the stock is sold out, a new season starts and demand and turnover is created all over again. If such a strategy is followed, it is vitally important that the lead times are managed to a tee, because the products have to be available on the day the season starts, because the company would have advertised the start of the new season to generate anticipation.
It should also be kept in mind that large inventories are usually a sign that something in the company is wrong. This could include forecasting, decreasing demand for the product and stock management. The state of one’s inventory should be checked regularly, as a lean and agile inventory is one of the greatest tools to ease cash flow problems and free up money that can be better spent elsewhere in the business.
Sometimes, large inventories are not the disease but the symptom of flawed processes elsewhere. Problems across the entire supply chain often manifest themselves in the inventory. When there is a bloated inventory, the business would do well to examine its entire order-to-delivery cycle to see where efficiencies can be achieved. Even cutting down this cycle by a few days could have a massive impact on the amount of stock required at any given time and improve the profitability of the business to a huge degree.
Inventory control is an ongoing exercise and all calculations have to be checked regularly. Whenever new stock arrives, a tally of existing stock should be taken. If this tally goes up or down, it may be time to reconsider the reorder point.