The Covid-19 pandemic has changed the world in ways we had never imagined. It creates a lot of supply chain management and inventory challenges. The pandemic led to supply chain disruption. A business’s nightmare is having customers but not enough products to sell. Imagine a baker having a store filled with customers, 100s of cookies ready to be baked but no sugar. Businesses overstocked to avoid this nightmare.
Most businesses try to keep a 3-month inventory ready at all times. But some even stockpiled a year’s worth of inventory due to uncertainties in supply chains and distribution channels during the pandemic. It has created cash flow problems, especially for small businesses. So how much is too much, and how does one maintain a balanced inventory without running out of cash?
How High Inventory Levels Affect Your Business:
Like a well-stocked pantry is the mark of a happy, efficient kitchen, a well-stocked inventory signifies a responsible, growing business. This rings true, mainly if your inventory includes materials required in any manufacturing processes of your small business. Nowadays, international supply chains are convenient and common. But any natural calamities, political instability, or other sudden disruptions in another part of the world could wreak havoc on your supply chain and business. So keeping a good buffer inventory ready always helps.
But there’s a downside as well. Accumulate too much, and with it come heavy storage, insurance, staff, electricity and other costs. Then there’s always the danger of customer preferences changing or a new product launch affecting sales of previously best-selling products. When this happens, you have large quantities of hard-to-sell products, which take up too much space and bleed your business capital and cash flow dry. And if you took the inventory on credit, the rising interest rate environment will add to the cost of holding inventory.
5 Steps to Managing Rising Inventory Levels:
Smart planning and meticulous organizing can save you from such a situation. Here are five steps you can start implementing to keep your inventory levels from getting out of hand.
Know Your Customer Preferences
Surveying which items in your inventory sell the most is an excellent place to begin. It is those bestselling items that usually bring in a majority of your profits. So stock up on them instead of everything on your catalogue. Also, knowing your customers’ preferences and specifications can help you update your inventory accordingly to prevent losing customers to competitors.
Do Away with Old or Obsolete Inventory
Many tech businesses adopt a ‘First In, First Out’ model to ensure the older stock is sold out before it becomes obsolete since things such as phones or software come out with upgrades every six months. This can work well in any business, ensuring the earlier stock makes way for the new (and possibly improved) stuff. If you deal in perishables, this becomes a necessity. A good way of getting such stock out of the way is by offering them discounts or giving them away as a gift on purchases over a certain amount. All customers love discounts and freebies, so there’s an added advantage to your business.
Check Purchasing Frequency and Order Size
Instead of stocking up on your inventory in one go, why not order less frequently? A review of your sales and the overall market situation can help you forecast the demand for your goods shortly. Settle on an order size that will be enough to meet the demand, with a safety stash saved for any unforeseen circumstances, but not so big that it will sit on the shelves for months. It will also reduce losses if the customer preference shifts, making your inventory obsolete. Negotiate a supply plan with your suppliers that minimize delivery time and transportation costs. Chalk out a plan that follows a strict delivery cycle (say, on the 10th of every month) with provisions for urgent deliveries in case of a sudden demand boom.
If you maintain your books regularly, you can analyze your days of inventory which tells you how many days it takes for your inventory to be sold, which can come in handy when determining the delivery cycle with the supplier. Many such ratios and analysis tools can help you identify your inventory needs, track them, and change them accordingly.
Centralized Inventory Control
This may seem obvious, but it’s a point many business owners tend to overlook. As a small business, you might not have a dedicated inventory manager. While your delegated staff might be regularly keeping track of inventory lists, SKUs, barcode data, and many more numbers, do they all follow one procedure and template? A centralized stock-taking system helps reduce discrepancies in incoming and outgoing stock. Think of it this way: you might be able to do it all personally right now, but as your business grows, so will your inventory. It will be challenging to make changes at an organizational or systemic level at that point, so it’s better to start early. Software such as Finale, Lightspeed, QuickBooks Commerce and Cin7 are available, which not only keep track of inventory but also analyze other data like changes in sales figures, market demand and customer shopping trends. Thus, training your staff on such software and metrics can assist in streamlining your inventory systems. All said and done, it is recommended that you, as the business owner, conduct a thorough inventory audit from time to time.
Keep Exploring New Markets
Sometimes, what doesn’t seem to be working for your current customers is just what customers elsewhere are looking for. As mentioned earlier, with e-commerce being a global rage, don’t hesitate to broaden your horizon and look for customers in other states or countries. It could open up growth opportunities for the future and solve the problem of your unused inventory.
While inventory might look like a small part of your business, you can significantly reduce wastage and cost. An accounting business consultant can help you analyze your historical records to identify gaps and wastage, set up efficient inventory management, timely review the system, and suggest changes to keep your inventory dynamic and valuable.
Contact Glenn Graydon Wright LLP in Oakville for Your Inventory Management Needs
Talk to an expert business consultant to make your inventory more efficient and effective for your business growth. At Glenn Graydon Wright LLP, our experienced business consultants can provide consultation services for good inventory practices. To learn more about how Glenn Graydon Wright LLP can provide you with the best inventory management, call us today at 905-845-6633, or connect with us online, to schedule your initial consultation.