Sunday, 21 June 2009

Inventory Management

Managing inventory is a juggling act. Excessive stocks can place a heavy burden on the cash resources of a business. Insufficient stocks can result in lost sales, delays for customers etc.

The key is to know how quickly your overall stock is moving or, put another way, how long each item of stock sit on shelves before being sold. Obviously, average stock-holding periods will be influenced by the nature of the business. For example, a fresh vegetable shop might turn over its entire stock every few days while a motor factory would be much slower as it may carry a wide range of rarely-used spare parts in case somebody needs them.

Nowadays, many large manufacturers operate on a just-in-time (JIT) basis whereby all the components to be assembled on a particular today, arrive at the factory early that morning, no earlier - no later. This helps to minimize manufacturing costs as JIT stocks:
  • take up little space,
  • minimize stock-holding and
  • virtually eliminate the risks of obsolete or damaged stock.
Because JIT manufacturers hold stock for a very short time, they are able to conserve substantial cash. JIT is a good model to strive for as it embraces all the principles of prudent stock management.

The key issue for a business is to identify the fast and slow stock movers with the objectives of :
  • establishing optimum stock levels for each category and, thereby,
  • minimize the cash tied up in stocks.

Factors to be considered when determining optimum stock levels include:

  • What are the projected sales of each product?
  • How widely available are raw materials, components etc.?
  • How long does it take for delivery by suppliers?
  • Can you remove slow movers from your product range without compromising best sellers?

Remember that stock sitting on shelves for long periods of time ties up money which is not working for you.

For better stock control, try the following:
  • Review the effectiveness of existing purchasing and inventory systems.
  • Know the stock turn for all major items of inventory.
  • Apply tight controls to the significant few items and simplify controls for the trivial many.
  • Sell off outdated or slow moving merchandise - it gets more difficult to sell the longer you keep it.
  • Consider having part of your product outsourced to another manufacturer rather than make it yourself.
  • Review your security procedures to ensure that no stock "is going out the back door !"

Higher than necessary stock levels tie up cash and cost more in insurance, accommodation costs and interest charges.

Our range of financial planners, Exl-Plan and Cashflow Plan, contain extensive facilities for exploring alternative stock-holding strategies. See also the white paper on Making Cashflow Forecasts and Checklist for Improving Cashflow.

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