Written by: John Sotos (Operations Manager)
Managing inventory is critical to a business’ cash flow and service to their customers. The balance between the two needs to be continually monitored and updated to the current sales trends for your business. Having too much inventory of items that are not moving and too little of the items that are moving will create issues. We were able to reduce our on-hand inventory by 33% by taking the following steps.
1) Lead times and product minimum stocks were established and charted for all products, whether finished goods or raw materials to ensure reordering was seamless and stock levels could be kept to a minimum.
2) Sales trends were reviewed at least quarterly to ensure we were able to see any changes in demand for our product mix.
3) We then looked at the cost of some of our products to reduce the amount of high-priced items sitting on the floor for long periods of time. We set lower order quantities, even though the price was slightly higher, and recalibrated the minimums to reflect the current lead-times of each of those products. This was the most beneficial way to keep the average inventory down. Sitting on high priced inventory for long stretches is a killer.
4) We also set inventory goals for our purchasing department that were tied to incentives. This ensured buy in from all purchasers. The goals are based on the month end physical inventory totals. If you oversee inventory, you know the saying “Garbage in Garbage out”, so it is critical that physical inventories are continuously monitored for correctness. We are a small business and have an ERP system, but we still do a once-a-month physical inventory to make sure nothing falls through the cracks.
5) Finally, we meet to review the previous month’s inventory to get immediate feedback on inventory levels. We are able to continually improve upon our processes by doing this.
Reducing the inventory has helped decrease accounts payable and alleviate space issues; while not affecting the amazing service we provide to our customers. If you do not make inventory management a priority, you will end up with old expensive inventory and less cash on hand.
