Tips for Better Inventory Management
Inventory is often the biggest asset that a business has, and the profit of inventory based businesses is dependent on the best management of the stock. So what are tips to make sure that the stock is correctly managed, for the best profitability of the business.
Use analysis to track the performance of the stock.
Stock turnover is a measure of how quickly stock is being converted into revenue/how many times in a period stock is being bought in and then sold or used.
If stock is held for too long a period, it can indicate that the stock levels are too high in relation to demand or that sales are falling or that there is a lot of obsolete stock. Low stock turnover indicates that the business has tied up its working capital in stock, which may have consequences for cash flow.
If stock is held for too short a period, it can indicate that stock levels are too low in relation to demand – it can be a problem if demand isn’t being met. But generally, a higher stock turnover is more desirable than a lower stock turnover.
To know whether the stock turnover level is good, the business should use benchmarking (ie compare itself against similar businesses) and compare to stock turnover in prior periods. Keep in mind that high margin items will naturally turnover less frequently than low margin items.
To calculate the stock turnover, divide Cost of Goods by the average inventory value.
Group inventory via “A,B,C” categories
It is useful to group stock according to their value – the A category stock being the highest value stock. Rather than trying to control the entire stock, it is better to concentrate stock controls on the most valuable stock.
Group A inventory should be:
a. Counted far more regularly than the other stock groups – say once a month.
b. Analysed for stock variance to see why there are discrepancies.
c. Kept at a minimum level within the business, and preferably sourced on demand, with frequent deliveries and smaller amounts being ordered.
d. Monitored for forecasting purposes regularly, looking at demand and the need for a safety margin.
e. Followed up to ensure that lead times are reduced.
f. Monitored for stock turnover – using this measure to identify and move stock before it becomes obsolete.
g. Identified with serial numbers if the value is very high.
Group B inventory is similar to Group A, but the counts are far less frequent.
Group C inventory is:
- Kept on hand, so supply comes from the stock on hand
- Infrequently counted
- Managed visually, by keeping a 2 bin process (as one is emptied, a new one is re-ordered)
Appoint a stock champion
this is someone who looks at the stock ordering and management processes and who recognises that stock investment is tying up the company’s cash. And set stock targets in place that are measured and reviewed. Identify the causes of ordering errors.
Analyse safety stock
the amount of stock required as a margin of safety so that production doesn’t get held up through shortages and fluctuations in supplier time frames. The more accurate the forecasting, the lower the safety stock quantities that need to be held.
Recognise that the inventory in your business is not a “one size fits all”.
Lead times vary, the minimum on-hand quantity required will vary, the stock A-B-C classification will vary, and the optimum turnover will vary for different types of stock within the one business.