Tuesday, September 25, 2012

Ten Ways to reduce the impact of inventory costs

Wanted to share this article with the class

Ten ways to reduce the impact of inventory costs

Consumers are more demanding than ever. More businesses are increasing inventory to accommodate diverse customer preferences. Unfortunately inventory is an asset and as such can erode company profit if not managed effectively.
Global and Mail has worked with small and mid-sized business (SMB) owners, and have identified numerous strategies to maintain optimum levels of inventory, regardless of business sector or size. In no particular order, here are the ten most effective strategies:

1. Inventory as part of strategy. They have yet to find a business that does not have money invested in obsolete or slow-moving inventory. Interestingly enough, business owners are typically aware of this, but struggle with how to avoid it. Aligning inventory investment with business growth strategies will help to define the spending patterns, volumes, and space requirements fundamental to achieving business growth with minimal investment in assets.   Getty Images/iStockphoto

2. Understand usage patterns. I find it difficult to predict how much gasoline to put into my car to drive to Montreal if I haven’t spent time to determine historically how much gasoline I consumed on a similar trip. Lack of awareness relative to inventory consumption is one of the most significant problems that SMBs struggle with. Not having clarity around material consumption will only result in two possible outcomes: over-ordering, which is a waste of money; or under-ordering, which leads to a loss in revenue. Taking time to review customer order history and purchase frequency can provide significant insight into how much inventory to purchase, seasonal patterns, and the influence of pricing stimulation.

3. Forecast the future. Managing inventory requires a forecast. However, when building a forecast it is important to consider more than just customer demand. When a new competitor enters the market, most businesses move to quickly diversify their offerings, shedding low margin and goods in an effort to reduce the risk of inventory over-stock and obsolescence. This might seem sensible, however competition can often open markets rather than close them. Why do you think car dealerships, restaurants and gas stations often open across the road from one another?
To assist with developing an effective forecast, ask yourself the following questions: How might customer demand patterns evolve? What new products are likely to enter the market that might impact the demand of existing products? What are the regional economic forecasts over the next three to five years?

4. Incorporate lead times. Supplier lead-times place business owners in an uncomfortable position, stuck somewhere between customer demands and supplier deliveries. The response for most, particularly to appease demanding customers, is to increase inventory levels. Well, here is another strategy. Develop a stocking program for your key customers (i.e. those who demand quick turn around or for whom you retain high value inventory) whereby you charge a small fee in order to stock inventory specifically dedicated to their use. Although inventory may remain at existing levels, you can actually collect compensation to hold the inventory, allowing the offset of finance and holding charges. Some of our client’s customers are delighted with this program, as it is not offered by competitors and guarantees them quick order replenishment despite fluctuations in their demand. Try it and see for yourself.

5. Avoid ‘impulse buys.’ Walk through the back of any storeroom or warehouse and you will observe several examples of ‘impulse buys.’ These are inventory buys that have been influenced by such things as a supplier sale, a highly demanding customer, an end-of –model year, lack of awareness of customer demand or lack of time. Such buying impulses are detrimental to any organization in that they are unplanned and do not typically align with the business growth strategy. Buying on impulse is similar to leaving money at the front door. There is a chance it will be there at the end of the day, but it is unlikely.

6. Maintain accountability. One of the easiest ways to maintain control over inventory investment is to make someone accountable. In a small business this is often the owner, but in these circumstances, the owner is often buying what employees tells him or her to buy. Making someone else accountable to monitor and replenish inventory frees up time for the business owner, allowing him or her to focus their time on more valuable inputs while ensuring they are confident that inventory will be maintained at the levels they have identified.

7. Monitor accuracy. Inventory accuracy in a small or mid-sized business is typically measured in one of two ways: A physical inventory is completed once per year; or inventory is counted on a more frequent and smaller scale (i.e. cycle counting). Both exercises are a waste of time unless someone takes action to resolve discrepancies (hint:this is where most businesses fail). Despite which method you use, answer the following questions as part of inventory validation: What is the acceptable financial tolerance for adjusting inventory? What items should I count more frequently to maintain improved accuracy? What are the possible reasons for inaccuracy, and how might I resolve them?

8. You can’t manage what you can’t see. Inventory management is 75 per cent visual, and by that I mean the business owner must be able to see their inventory if there is any hope of effectively managing it. Have you ever been to a grocery store and found that they have overstock inventory on upper shelves? This is a great example of visual inventory management, because it allows those who are ordering stock to see the inventory that is on-hand (most of the hand-held order input terminals in grocery stores do not reflect any inventory that is held in the back stockroom). Remember, if you can see it, you can manage it.

9. Use space effectively. If you could take a peek into the backrooms of most businesses, you will find that the greatest amount of space is consumed by slow-moving or obsolete inventory. Managing inventory investment requires the frugal management of space. How you position or display inventory is the key to supporting visual inventory management (see item #8 above). To minimize inventory investment; support rapid customer order replenishment; and manage inventory space allocation, we recommend to our clients that storage space be reviewed and re-positioned at least quarterly.

10. You’re bigger than you think. When we suggest that our small and mid-sized clients discuss inventory management programs with their suppliers, we repeatedly receive the same response: “But we are too small, they won’t listen.” Wrong. Small businesses are a lucrative market for most businesses as they are quick to pay their bills, which is in stark contrast to larger conglomerates that can take between 90 to 120 days to pay suppliers. Ask your supplier’s what types of programs they offer to help manage or offset the cost of inventory. You will be surprised at how many have a program already available to support a reduction in your investment of cash and time. If you don’t ask, you won’t receive.
Try applying just three of the above suggestions in addition to what you may have in place today, and you will gain more clarity and control over your inventory and your cash. For other tips to reduce costs, check out our website under the resources tab. www.casemoreandco.com .
Interestingly, did you notice that out of ten points I never once mentioned reducing your price?

Casemore, S. (2010).Ten ways to reduce the impact of inventory costs. The Globe and Mail. Retrieved 9/11/2012. Available at: http://www.theglobeandmail.com/report-on-business/small-business/sb-tools/top-tens/ten-ways-to-reduce-the-impact-of-inventory-costs/article4507979/

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