How Important is my Inventory?

By Brad Walker
NETSTOCK Australia Pty Ltd

For companies who wish to support sales from inventory (sell ex-stock), your inventory implements your market offer and ultimately determines whether you maximise sales or lose sales. Invariably if your inventory isn’t optimised you will hold too much stock in some products and continually be running out of stock of others. This leads to excess stock and obsolescence on the one hand, and stock-outs and lost sales on the other.

In a recent survey where companies were asked what they rated as their number one inventory concern:
• 42% said stock-outs
• 37% said too many dollars invested in stock
• 21% said the time spent calculating re-order quantities

Let’s examine each of the above in more detail.

STOCK-OUTS
If a customer wants to purchase a product from you and you have no stock available for them, then you have a stock-out.  The extent to which that stock-out impacts your business is dependent on the type of product, for example:

• If you are the sole supplier of a product, then customers are more inclined to wait for you to get stock back in
• If the product is a commodity, such as a spark plug, your customers are likely to go next door and buy from your competitor. If you continue to have stock-outs then your customers will go to your competitor first instead. Often you don’t just lose the sale of the spark plug, you lose the shopping list which might have included engine oil, seat covers and a car battery

Ultimately, stock-outs will result in lost sales and consistent stock-outs will result in lost customers. Winning a lost customer back is much harder than retaining an existing one.

TOO MANY DOLLARS INVESTED
In most cases when companies have “too many dollars invested in inventory” it is because they have over-invested in products that are not selling well. This has major implications for your business, such as:

• Poor stock turns and consequently increased cost of capital
• Increased risk of obsolescence
• Discounting to clear excess stock items (lost margin)
• Tying up your cash so that you cannot purchase more stock of items that are continually running out of stock
• Paying for an overflow facility to house the additional inventory
• Having to count the same dead stock at every stocktake

In summary, too much investment has a multitude of flow-on effects for your business, including stock write-offs, increased stock-outs and additional warehousing costs.

TIME SPENT CALCULATING RE-ORDER QUANTITES
The majority of SME companies compute their re-order quantities in spreadsheets using custom-built data extracts (and a lot of manual data manipulation). Whilst this approach is understandable, there are a number of reasons why it isn’t ideal:

• So much time is spent preparing and manipulating the data that not enough is left for making good ordering decisions
• The formulae will generally be too simplistic and won’t lead to optimum orders being placed
• People make mistakes

All of the above impact the efficiency of the ordering process and the appropriateness of the orders that are placed.

Remember: your inventory ultimately determines the performance of your company. It’s that important!

In future articles I will be discussing how you can buy the right amount of the right products, reducing your investment in inventory and increasing your service to your customers.

To talk more about the importance of inventory in your business, click here to contact Enabling.

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