Excess inventory can serve as a source of frustration for even the best-managed companies. For every $100,000 invested in inventory, the bank gets about $8,500 per year in interest (calculated at the current prime rate). This amount reduces to about $5,000 in lost savings interest revenue if a company is in the fortunate position of no outstanding loans to pay.
Here’s what’s new to help you reduce inventory expense:
1) Customer demographics – Technological advances are allowing us to know more about our customers and potential customer than ever before, particularly retail customers. What this new data translates to is the ability to customize inventory to our customers’ particular needs and tastes. Investing a few thousand dollars in demographic data can save a company tens of thousands of dollars in slow-moving inventory mistakes. (Visit with several demographic specialists at NACS.)
2) Shorter supply cycles – Good vendors, both in the retail and wholesale sectors, are finding new ways to reduce the order-to-delivery cycle time. The more frequently a supplier can deliver product, the better for your cash flow. As we move into the next decade, watch for suppliers that can tap on-line into your sales data and fill your inventory requirements automatically.
3) Scanning – Meridian’s prediction is that C-stores who do not move to scanning within the next decade will find themselves out of business. While common in C-stores, scanning has yet to become popular at the wholesale level.
Scanning not only eliminates point of sale errors, but provides a wealth of information about how, what and when customers buy. Reasonably priced back office software now allows marketers to analyze commonly-linked purchases and then merchandise those items together for enhanced sales penetration.
4) Universal product categories – After years of struggling with how to group products, NACS members and vendors finally agreed upon a 33-item product breakdown. Some vendors have been slow to adopt the new standards, but by the year 2000 we should see a more universal way of tracking sales, costs and inventory.
5) Outside vendors for inventory counts. Long used by grocery chains, outside inventory counting services are now taking the headaches and much of the cost out of physical inventory counts. After all, why should we put our in-house employees through the drudgery of a monthly inventory count?
Wholesalers have much to gain by utilizing outside inventory services, yet few are doing so. Large lubricants operations particularly can gain tremendous efficiencies and accuracy by employing these outside services.
6) Purchasing methods – The old-fashioned way of ordering inventory was by replacement — if you sold one, you ordered one. Leading edge companies no longer rely on replacement methods. Instead, they use sales forecasts for purchases. The latest cutting-edge technique is known as high involvement planning, or HIP.
HIP starts with a sales forecast, then builds a company budget including inventory around the sales projection. Each area of the company is given information about the prior year’s sales and costs for their individual area. All departments then submit an expense budget for meeting projected sales.
The sales projections and expense budgets go to the finance area for final compilation. If all goes well with the process, a healthy profit is forecast. If the budgets don’t work — the company won’t meet profit targets — the numbers go back to the troops for a second pass.
Companies with wholesale sales staff or store managers who have never been held accountable for forecasts may encounter resistance to this process. Accountability, however, is the name of the game in good business practices. After initial shell-shock, your people may even come to enjoy the HIP process.
7) Inventory control bonuses – Highly profitable companies typically reward employees for hitting inventory targets. Great inventory control means having just enough product to never run out. New age thinking is to educate all employees about the cost of excess inventory. With a bonus system, everyone in the company works hard to “right size” the inventory.
Use the table on this page to check your inventory management results compared with that of the industry. To compute your company’s supply time, divide your the dollar amount of inventory (at cost) by one day’s average cost of goods sold. Compare that result in the table above which is segregated by industry sector and sales size.
If you don’t like the results, it’s time to for a change in your inventory management system. Act right now to cure the problem before 12/31/98 when others will see your folly!