How you control your inventory management has a big impact on your business. Efficient stock optimization means ending up with less obsolete stock, not shelling out for unnecessary warehousing expenses and preventing tying up too much working capital in your inventory. All those improvements lead one thing: Better cash flow.
Healthy cash flow means lower borrowing needs and smaller interest payments, which in the long-term leads to better cash flow, which leads to more growth and expansion opportunities, which leads to, you guessed it, more cash.
Cash flow is the lifeblood of every business, and contrary to what the sales team would have you believe, revenue alone is not king. Profitability is a careful balancing act, and the procurement department is central to making it all happen.
Here are our top six tips for the gold standard of inventory management:
1. Step Up Your Auditing Game
First and foremost, to tighten up control over your inventory management, a thorough stock count needs to take place to coincide with the end of any reporting period. This means opening every box and counting all stock, no estimates allowed. Introducing more regular stock counts, and quality control measures that hold staff accountable for ensuring correct stock control procedures and logging is paramount to ensuring there are no gaps when it comes to reconciliation or order fulfillment issues. Alternatively, real-time inventory tracking software can give you constantly up-to-date information about your entire inventory and reduce the man-hours and workload involved in regular full stock counts. When the opportunity cost of frequent full-scale stock counts is taken into consideration, real-time inventory management software could be a wise investment.
2. Trend alert
Being on top of sales trends can help you optimize your inventory in multiple ways. First, it will help with how your stock is organized. High demand items should be easily accessible, naturally. But if you analyze your sales data to identify trends about which items are sold together, you can shorten order fulfillment times and free up time and resources. Second, being savvy when it comes to downward trends in sales statistics for certain stock items, you can predict and therefore prevent stock obsolescence by knowing when to start focusing on discounting and offloading stock. Remember the saying that something is only worth what someone is willing to pay for it.
3. Easy as ABC
Using the ABC categorization method to prioritize your inventory can help focus attention on the most critical items, and help your business follow the 80/20 rule, derived from an economic concept called the Pareto principle. The rule states that a business should make 80% of its profit from the top 20% of its activity. Prioritizing your stock based on this principle should ensure a streamlined inventory management process, which serves to maximize your buying power and make sure your warehousing budget is being spent wisely.
4. Know when to reorder to avoid disorder
Identifying your reorder point will help you manage stock levels to ensure there is no gap or delay in order fulfillment, whilst continually minimizing stock levels. There is a handy formula for calculating your reorder point, which is (average daily unit sales x delivery lead time in days) + safety stock = reorder point. This formula assists in creating the harmony you need between ensuring you have a consistent supply of readily available stock to ensure you are delivering on your promises, whilst sticking within tight warehousing regulations.
5. Resist temptation
Applying the same economic principles to your professional purchasing decisions as your personal ones can be helpful. It’s more important to ask yourself if you need it, have space for it and will use it than if it’s good value. If you don’t need it, it isn’t a bargain, it’s just unnecessary spending. Those cut-price deals might appear attractive, but do you really need double the units you were initially asking for? The unit price is only part of the picture. Perhaps your supplier’s kind offer of a volume discount is their way of liquidating their assets and passing their own inventory problem onto you.
The key to running a tight ship when it comes to your inventory management is knowledge. Continual and consistent analysis of your sales data and entire supply chain will help you discover important insights that improve your ability to forecast and plan for future needs. Think about what changes could you implement to optimize your inventory management today.
ProcurePort has a range of eProcurement solutions and a team who provide expert guidance in how we can help drive down the cost of doing business. Contact us to find out how here.