Checking inventory management via CashTracker®’s monthly ratios report is smart, but that report alone will not provide enough information to conduct systematic, effective inventory reduction.
Why should you be reducing inventory? If you are a long-time MFA reader, you are likely already painfully aware that every $100,000 in inventory is approximately $10,000 in lost profits due to holding costs. (Just to punctuate the point, that’s $100,000 in lost profits for a company with $1 million in inventory!)
To trim inventory, you need to know specifically which products are moving and which aren’t. This principle holds true whether you own a chain of c-stores or have a lubricants company. For each and every item you carry, you need to know how much of that product you have on hand.
That information is usually readily available from most GL systems via an inventory trend report. This report will tell you the number of days of supply you have on hand for each product based upon prior sales. Some systems allow you to specify the time frame for the sales history, while others use a default time period such as the last 13 weeks.
By reviewing the days supply on hand by product, you can easily see where you are overstocked. So what is overstocked? Anything where the supply time is more than a little bit over your supplier delivery frequency.
For instance, if you have a lubes delivery every 30 days, you wouldn’t want to have more than about 40 days of inventory on hand. With a twice-weekly dairy supplier, five days dairy supply would be plenty. For each item in your inventory, you should have a target days supply on hand that you want to keep in inventory.
If you find you have overstocked any products, your next challenge is to discover why so it doesn’t happen again! What in your purchasing procedures allowed you to overstock this item?
Consider bringing together a small team of employees involved with purchasing and inventory to flowchart your system. Putting your procedures on paper will clarify how and why excess build-up occurs, and will help you streamline your system.
To do your flow charting, you will need a room with a table that can hold two or three flip-chart size papers end to end in one long stream. Write each step in your purchasing/inventory process on Post-It notes (use notes at least 3”x3” in size). Putting the steps on these notes allows you to move, add or delete steps easily.
If you have trouble getting started, think about the paper flow within your system. How do orders get generated? How does the order get accounted for once it arrives, etc. Put the group’s emphasis on the first few steps. How do new products get introduced into the system? What process is used to make new product decisions? These first few steps are the most critical to successful inventory control. You will always have an inventory problem if you buy stuff you can’t sell! Anticipating customer demand is ninety percent of the inventory reduction battle!
Also pay special attention to replenishment procedures. What safeguards are in your purchasing system to reduce purchases as customer demand wanes.
Customer cycles are particularly pertinent to seasonal products. If your company is in the far north, you don’t want to be caught with cases of sun tan lotion in October that you won’t be able to sell until next summer!
For wholesalers, be sure your system has clear procedures for new petroleum products. Without safeguards in place, well-meaning sales persons may be driving warehouse buying. It’s great to be prepared for a potential new customer’s special product needs, but not so great when you order in a pallet of drums and they decide not to buy from you after all!
Once you establish clear inventory supply guidelines by product, you may still have the problem of old, obsolete stuff. Get rid of it! Have a sale. Donate it if you need a tax deduction. Just do something with it so you won’t have to dust it and count it every month! If you’ve spent quality time on your purchasing and inventory procedures, this should be the last time you’ll have to deal with this type of problem.
In summary, spend time determining customer demand, including seasonal fluctuations, set moving inventory targets that accurately reflect that demand, stream-line your inventory paperwork to reduce the opportunity for human error, and then sit back and enjoy the fruits of your labor. Watch your company’s cash balance grow as you trim your total inventory.