The idea of an “inventory day” is becoming steadily more unpopular, even in retail circles, but it is still an essential component of inventory management. Although hardly glamorous, management and optimisation of your inventory is absolutely essential, the bread and butter of a business. It is easy to think of inventory as an asset, but in fact it can also be considered a very real liability until it gets sold, and oversupply ties up far too many resources, both monetary and otherwise.
Storing inventory is incredibly expensive. Many inventories, especially in the catering or food supply industries, have a limited life and will go bad if they don’t move. Having stock sitting in warehouses instead of on shop shelves (and going through tills) can be the essential difference between profit and loss. There is also the supply and demand angle – if your company handles supply chain management for another, usually larger, one, they will want to know that your inventory optimisation capabilities are sufficient that they can depend on your delivery fulfilment.
The root of the problem is how to balance the abilities of your suppliers with the demands of your customers. This kind of “just in time” or “zero inventory management" (buzzwords which arose in the 1970s) is incredibly difficult to achieve, but promises that technologically-aided businesses can fine-tune their inventory levels so that deliveries from suppliers precisely match customer demand so there is nothing left to sit on any shelves.
This in turn leads to the million pound (or more!) question: how much inventory do you need, and how do you know that? Managed inventory is ordinarily measured in “turns” where one turn is the annual sales value divided by the value of the inventory. So if you do £1 million of business and you have £100k of inventory then you’ll be doing ten turns per year, and moving out your whole inventory around once a month. Problems arise if (for example) you have £10 million in annual sales and £5 million of stock. This is only two turns of inventory which takes six months to move. That’s an issue as your inventory has no value (only a cost!) until it is sold – call in an inventory optimisation consultant, quick!
The goal is therefore to hold as little inventory as possible while still fulfilling all of your customer demands and keeping your business running. A software business normally doesn’t have to worry about inventory since code is produced on demand and doesn’t require tons of resource to store (in fact software can be stored in the cloud now which all but eliminates the problem altogether). Retail businesses tend to have more turns, but not too many as they otherwise get stuck when fashions change overnight. Food retail has many turns due to the perishable nature of the stock. Manufacturers play things very close and tight to minimise their overheads and maximise profits.
For expert help with inventory analysis management and inventory optimisation, it is normally a good idea to pull in experts, such as supply chain consultant Gideon Hillman. Visit his site at www.hillman-consulting.co.uk to get in touch for help with your inventory.