Cashflow is King: 5 Ways to Improve Your Inventory Management
Improve Inventory Management
Many jargon terms are thrown around in the world of inventory management. You may have heard of cycle counts, moving speed, consumption, speculative buy, forecasting, the list goes on.
In many companies, inventory is the number one asset and has undoubtedly a very large impact on cashflow. If your company has $5million of stock, then you are tying up the equivalent stock value in cold hard cash. If you could categorise this inventory to pull your average stock value down to $4.5million, then you free up $500,000 of cash that could be put to better use – rather than sitting in a warehouse collecting dust.
This sounds pretty simple and is usually looked after by a logisitics manager that reports into the executive level. There is no doubt inventory is one of the most significant aspects of a company, so it’s not surprising the CEO and CFO want to make sure they have a good handle on the management of stock, without understanding all the complex terminology and calculations required for a utopia of inventory health.
Any company owner will always want a lean stock position, without any impact on the budgeted targets set by the shareholders.
Another major headache for large stock holdings is the write-off potential of unmovable stock. This could be in the form of complete scrapping for a $0 return or a write down/discounted sale to below the cost value, resulting in an impact to the bottom line.
Ultimately in business, we all know that one inventory management system will not work for everyone. However, these 5 universal ways will help you keep a handle on your inventory health and put much less risk in your tied-up cash.
How many times a day do you receive a report that you either just skim over, can’t understand or blatantly ignore? Well, the same goes for everyone. Usually inventory reports are incredibly complex and can be overwhelming to anyone without context. Treat them with the same importance as sales reports. No point in high fiving everybody for making that $100k sale when you need to write off $100k of stock due to bad inventory management.
Next time you are creating any report, make sure it’s ACE.
ACCURATE – just a simple thing like showing a “last refreshed date” on the report, so that no assumptions are made in regards to how old the data is.
CONCISE – Keep the complexity down to an absolute minimum. Only show what the audience NEED to see. Structure your reports so that they have a flow, which will ultimately assure the reader does not lose any of the story.
ENGAGING – Make them want to read it! Take advantage of the tools on your dashboard – set up graphs and visual representations – my personal favourite is the ‘rev counter’ showing when your hitting the sweet spot, or lagging behind your set targets.
Many times, when businesses think of grouping inventory, they will lean towards the standard terms such as new, excess, obsolete etc. Try and re-invent (pardon the pun) your terminology that aligns with the audience. Some terms as an example could be “New consumption stock”, “New speculative stock”, “Obsolete or revalued stock”, “Need to move stock – HOT”, “Need to move stock – COLD”. Whenever any of these groups appear on documentation, whether they are in reports, dashboards or even directly accessed, they are clear and concise to the audience, what the Inventory is. I am sure there are many more that you can think of yourselves, pertaining to your types of industries. You will also notice above that I added HOT and COLD to the last 2 terms. This alone can be much clearer when assessing a potential stock sale to free up some cashflow. Maybe a decision is made to just sell off the COLD stock at a slightly discounted rate and let the HOT stock sell out over time.
How many times have you asked this question. “Why did we not sell it earlier”? You are not alone. Selling anything always has an element of risk, which we need to manage in the best/only way we can. Proactive decision making is the key. If the inventory is in a bad group today don’t assume it will all be good tomorrow. Let me give you an example. You have recently made some speculative purchases of a brand new product that has hit the market. You have never sold it before and therefore you do not know how well it will sell. First mistake people make is that they are not clear on a timeline of how long they are prepared to keep hold of the stock. Which means it sits on the shelf until it becomes obsolete. Being proactive and putting simple attributes to this inventory on receipt into your database system, is an absolute must. You also need to adhere to this decision when the timeline passes. Otherwise many times you are going to be left with non-selling inventory which impacts not only cashflow but the end of year bottom line profits.
I realise everybody is busy and sometimes may not pick something up in a report. Therefore you must always have alerts set on your inventory to make sure action can be taken before it’s too late. This alert can be useful for your sales team. An item that has had consistent consumption for many months maybe suddenly stalling due to an alternative supplier hitting the market. If you are not alerted to this immediately, you cannot address the situation and therefore will more than likely end up with what was once your bread and butter suddenly turn into a pile of un-recoupable cash.
As mentioned at the beginning of this article, your Inventory is likely to be your largest asset in your business. Therefore, why would you not want a wider company involvement on all that tied up cash. This does not just mean your logistics team but involve finance, sales, warehouse. You may ask yourself why warehouse staff. It is very common for the warehouse Manager to pick up a slow moving stock item well before any system can, so include them. This is another reason why simplified, easy terminology in all dashboards and reports is an absolute essential for better management of your Inventory – SORRY CASH.