“Every company has metrics that track performance. The key question is whether these metrics really provide visibility to performance as viewed by the customer.” Steve Matthesen
Inventory management is an aspect of business which needs to be given more attention than what it currently receives. It is certainly not the most glamorous aspects of running a business. Inventory management is a basic business building block like marketing, sales or finance. Simply put, inventory management deals with how efficiently an organization manages it stock cycles. Stocks in inventory, relate to aspects of business that are exposed to risk when accumulated beyond certain thresholds. In the case of a service business, it is the amount of outstanding payments. Efficient inventory management helps a business to maximize its existing assets by increasing turnover. Listed below are five steps to assist your business in managing inventory cycles better:
1. Inventory Velocity: This is an essential metric, which measures the speed at which a business can move it’s stock. The speed at which a business moves it’s inventory will impact substantially on its profitability and ROI. Inventory velocity can be calculated by simply dividing the cost of goods sold by the average inventory for the period. This is a benchmark all businesses should watch very closely. To learn more about the importance of measuring inventory velocity please click here.
2. Forecasting: Mistakes made by forecasting incorrectly will impact directly on the level of inventory at the end of a financial period. There are three important aspects to be considered when constructing forecasts. The forecasts need to be based on data acquired from the market, sales channels and the current pipeline. Based on these aspects, we can construct forecasts for multiple scenarios which enable us to put measures in place, for the best and worst case scenarios. It is important to remember that forecasts are only as good as the assumptions they are based upon. To learn more about how to forecast revenue for your business please click here.
3. Communication Channels: When there are insufficient channels of communication between the producer, distributor, retailer and customer inventory, management becomes challenging. The information gap needs to be bridged by implementing several communication channels which include, allocated representatives, conference calls, real time stock levels and feedback channels. When information is allowed to flow freely from the customer to the producer, changes can be made faster and everyone in the chain stands to benefit. To learn more about the various communication channels please click here.
4. Technology: Organizations such as Walmart and Dell have shown the power of technology to optimize inventory management. Today, entrepreneurs have access to several tools such as bar coding, inventory management and billing management software, which can help give small businesses an edge in managing their inventories optimally. To learn more about different types of technologies available for inventory management please click here.
5. Internal Policies: Policies and controls need to be selected carefully. Their main objective should be to facilitate bottom line growth for the business. These objectives act as guiding principles, and policies are intended to facilitate reaching those goals. Proper inventory management can impact bottom line figures and results for the business substantially. Policies pertaining to ordering, review and collections need to be mapped out in detail to ensure proper management of inventories. To learn more about internal policies relating to inventory management please click here.
Operations and supply chain management are the nuts and bolts of all businesses. Without smooth operations and proper controls, we could have a great website, killer marketing strategies and still come up short. When a customer does not get the product in time, or at the right price, we lose the customer. It all comes down to execution, and ensuring that we have systems in place to manage each order optimally. Inventory management is a critical aspect of this chain, and I recommend all business owners review their inventory cycles and work out ways to optimize them.