We got caught with inventory on hand. It built up as usual and then we suddenly lost a number of orders. Now what should we do?
Thoughts of the day: Figure out what you can and can”™t use. Take your lumps; write off, clean up and get an accurate count of usable inventory. Automate what you can. Put people in charge of keeping inventory under control. Have operations work with sales and finance to improve inventory planning.
Whether you”™re talking about office suppliers or a factory running at full tilt, it”™s easy to build up excess inventory. That”™s why it”™s important to periodically identify what can and can”™t be used. Try selling obsolete items elsewhere ”“ eBay, clients, competitors, suppliers or whatever.
Forget about what you paid for unusable inventory. If you don”™t sell it, it”™s worth zero. Any money you make on it, as long as you cover shipping and handling costs, is better than no money.
Whatever you can”™t sell, dump. Stop cluttering shelves with unusable goods. It makes it harder to see what”™s really going on with active goods.
Every piece of inventory should have its own place. Label shelves as to content and quantity. Build a system to easily eyeball if there”™s enough, too much or too little.
Establish stocking counts, including min and max. Min is the point at which additional stock is ordered. Max is the total amount that should ever be carried of that item.
Establish max inventory by setting order frequency and calculating the amount of inventory used between orders. Keep enough inventory on hand to cover the time it takes from ordering to receipt, to next order, plus 25 percent in case there”™s a shipping delay. If specific items have a long order lead time, look for options to cut the cycle down, so you”™ll be able to carry less inventory.
Tracking inventory can be complicated. Build a spreadsheet. Set up rows for each item with columns for current level, min and max stocking levels, preferred vendor, terms, lead times, pricing, shipping costs, last time price was checked, etc. Make sure that someone updates the sheet regularly.
Remember that finance has to manage the checkbook. Paying for a big order at the wrong moment in time can be very problematic for many companies. Consider having finance review all orders over a particular limit, as a check on spending and cash flow.
Assign someone to monitor inventory. Consider setting up a reward system for that person. Focus on keeping inventory write-downs in check, while maintaining accurate min and max levels.
Put someone else in charge of establishing and reviewing min and max levels. Keep in mind that one job is very hands on ”“ keeping track of inventory. The other job is more numerical and theoretical ”“ setting the mins and maxes.
Have one person responsible for checking that inventory has been “shopped” recently, comparing vendor prices and delivery timeframes. It may be worth paying a little more to get faster delivery, thereby cutting down the size of each order. Smaller ordering batches can save on cash flow and reduce potential for write-downs in case the inventory suddenly becomes obsolete. Remember to factor in the cost of shipping and handling.
It”™s worth having a regular interdepartmental meeting that includes operations, finance and sales. Review new sales and losses, inventory status, pending write-downs, current ordering needs, cash flow, results of recent vendor surveys on pricing and order lead times. Have a group discussion about what needs to be ordered, what can wait, what to stop. Plan out who will gather information to help with decisions for the next round of ordering.
Looking for a good book? Try “Essentials of Supply Chain Management, Third Edition” by Michael H. Hugos.
Andi Gray is president of Strategy Leaders Inc., strategyleaders.com a business-consulting firm that specializes in helping entrepreneurial firms grow. She can be reached by phone at (877) 238-3535. Do you have a question for Andi? Please send it to her, via email at AskAndi@StrategyLeaders.com or by mail to Andi Gray, Strategy Leaders Inc., 5 Crossways, Chappaqua, NY 10514. Visit AskAndi.com for an entire library of Ask Andi articles.
