Are we keeping too much inventory on hand? And if so, how do we get it in hand? How do we best manage our inventory?
Thoughts of the Day: Inventory can be tricky. Figure out how to predict upcoming orders. Pay attention to prices, too. Look for suppliers that fit your needs. Build a visual inventory tracking system.
Inventory is what you keep on hand to put into making whatever it is that you sell to your clients. A change in customers and customer ordering, a rush order or a delay in orders, a larger space to store inventory, a change in materials that go into making products can all wreak havoc with the amount of inventory you traditionally keep on hand.
Rather than relying on what you’ve always shipped, which can change in a heartbeat, focus on figuring out a way to plan how sales are going to come in. Historical information can help, but only if things stay status quo with sales. Knowing how sales are likely to change will help you make adjustments with what you have historically kept on hand for inventory to meet sales needs.
It’s not just quantity, but also the price you pay for your inventory. If you have items that escalate in price over time, you have to adjust the price you charge for those items. Replacements will be greater in cost and you’ll need the extra income to restock.
Track how much of your inventory gets thrown out or is otherwise unusable. Use that information to plan how much extra inventory to have on hand to make up for the waste rate.
While it may be convenient to place all your orders with one or two key suppliers, you may do better breaking orders up into smaller, more frequent batches coming from multiple sources. This gives you more flexibility if one vendor has any delays. It also means you have less money tied up in inventory that’s sitting around waiting to get used up. When you compare the cost of money with the savings on bulk orders and big shipments, you may find that bulk orders aren’t so attractive.
Keep in mind that the longer inventory sits around, the greater the risk that it gets damaged, that you lose track of it or that you never use it. The result? You eventually have to throw inventory away or dump it at fire sale prices. Adding the cost of waste to production can far outweigh any savings you might get from a big order or preferred supplier.
The more visual you can make your inventory, the better. Set up shelves with labels and have a specific place for every piece of inventory you use. Add to each label information on the amount of inventory you want to carry and the minimum amount of stock that should trigger someone to reorder. Put incoming inventory on the bottom so that oldest inventory gets used up first.
For every item in inventory, look at the last year of orders. Consider the maximum amount of inventory you’ve used in a week. Compare that to the amount of inventory you use in a typical week. For big swings, look at individual customer history. Are those customers still buying regularly from you? Will they accept a delay in delivery or pay a premium for a rush, such that you don’t have to keep extra inventory on hand just in case. Challenge your sales people to look for regular-ordering customers, not one-offs, which will make inventory planning much easier.
If you can afford it, consider implementing controls such as an inventory management system to help automate tracking and reporting, spot checking inventory is where it belongs and counting inventory to verify you have on hand what your records say you should have.
Looking for a good book? Try “Inventory Management Explained: A Focus on Forecasting, Lot Sizing, Safety, Stock and Ordering Systems” by David J. Piasecki.
Andi Gray is President of Strategy Leaders Inc., StrategyLeaders.com, a business-consulting firm that teaches companies how to double revenue and triple profits in repetitive growth cycles. Have a question for AskAndi? Wondering how Strategy Leaders can help your business thrive? Call or email for a free consultation and diagnostics: 877-238-3535.