If you don’t have the “right” inventory, you are losing cash flow. Each $100,000 in over-stocked, slow-moving inventory costs you $100,000 in cash flow!
For a little motivation, if you could reduce your inventory by $100,000, you would save $10,000 per year in lower interest costs on working capital debt or you would earn $5,000 more in savings interest if you don’t borrow. That’s not including the savings from not having to dust, count and move the stuff around!
In past articles, we’ve provided you with an overall measure of inventory management — “Days of Supply On Hand.” By dividing your total inventory by your average daily costs of goods sold, you find the days supply you normally keep on hand.
By comparing your results to that of other companies of similar profile, you get a general idea of how you are doing with your inventory management. What inventory days supply on hand does not tell you, however, is whether you are stocking the right inventory. The “right” inventory is, of course, what your customers want.
The first easy step to having the “right” inventory is getting rid of the wrong inventory. Quite simply, wrong inventory is stock that doesn’t sell. Within your general ledger system, you likely have a report that will tell you exactly the slow movers in your warehouse on your retail shelves. The first step to better inventory management is get rid of that slow-moving stuff and stop buying any more! Family businesses who have embarked upon serious inventory management typically find that at least 20% of their normal stocked items don’t move and should be discontinued. Think of what a 20% reduction in your inventory would do for your cash flow!
Next, determine the least amount of stock you need to keep on fast-moving items to avoid running out. For store owners, since your success depends upon having the right product at the right time, err on the side of overstocking than to risk running out. The customer who comes to your store and finds you’ve ran out of what he wanted will likely not return.
For wholesalers, however, you should be able to get your customer’s buying patterns down to a science. These buying patterns, together with information on supplier quantity discounts will let you totally fine-tune your restocking procedure.
Now, here’s the tricky part. What do your customers want that you are not carrying? Those are the products they want and need, but buy elsewhere because they don’t even think about your company when it comes time to buy! The only way to find out, of course, is to ask.
For wholesalers, conduct a mail survey. Specifically ask your customers what percentage of your industry (clothing, automotive care, garden supplies, etc.) needs they purchase from your company. You may be surprised to find that customers you thought were buying all their needs from you are actually at 50% or less! Be prepared to do telephone follow-up and mobilize your sales force as needed based upon survey responses.
In stores, cashiers should routinely ask customers, “Is there anything you want that we’re not currently providing?” This question serves two purposes. First, you may actually have what the customer wants and they just couldn’t find it. By filling their request on the spot, you immediately increase your sales and profits. (This also lets you know you need better merchandising.) Second, by noting repeated requests, you can add these products to your line and know you’ll have sales.
Verbal check-out surveys are also useful to determine demand for a new product such as a payroll cashing machine or new fast food line. The customer may not think to ask for this service, but if prompted, will let you know the likelihood of purchasing the new product or service.
For every sector, inventory management is critical to cash flow. Getting your inventory “right” will reap big cash rewards.
