Inventory Management is Critical to Profitability and Competitive Edge

While managing inventory may seem like a mundane afterthought, CFOs need to recognize this task as a key part of a company’s overall business strategy. Inventory management should not be an afterthought. It is a critical element of a company’s business and should be considered early in the growth cycle and will need to adapt and change over time as the business matures. The term inventory management really describes the effective method of controlling objects and activities and ensuring that they get to the right place at the right time all within a cost parameter. Ultimately bad inventory management represents money that is being lost to a business as a result of excess inventory, or lack of inventory – which can result in lost customers.

Effective Inventory management covers amongst other things, stock control. It is important to order enough stock of a product that sells well – but it is also very easy to over order good selling items. You are then faced with the problem of additional overheads in the form of insurance, stock control and storage. It is also just as easy to over order products that just don’t sell, or just sell very slowly. Good data for tracking cost and item information in a financially sound way is a key to successful inventory management.

Companies can significantly improve data quality and inventory forecasting capabilities by developing and maintaining solid working relationships with their customers and suppliers. Developing relationships that enable the company to accurately plan for customer needs leads to a better handle on the company sales forecasts. Conversely developing and maintaining solid relationships with your suppliers enables the company to know supplier capabilities and limitations. Sourcing a supplier who can not only produce a quality product but can turn around a large order for you at very short notice is the goal of every inventory manager. Improving these relationships can result in better inventory controls.

There is a fine balance to be learned and put into place between not ordering to much stock and also not reducing service. Ultimately customers don’t like to be kept waiting while an item has to be reordered. Inventory should also be spread over a large range of stock, but the most popular items should have plenty of stock against them. Buying enough stock in advance can also reduce costs as volume sales can often be negotiated downwards in price. Turnover rates ultimately vary though depending on the type of business and how the inventory to sales ratio is worked out. Develop a good understanding of product inventory to sales ratio and you have created the basic ingredients to successful inventory management.

In addition to the physical monitoring of materials being moved into and out of the stockrooms and drawing up reconciliations of the inventory balances, other tasks involved in inventory management may include tracking and reporting of replenishment techniques, analysis on the actual and projected inventory status as well as setting periodic targets and re-engineering the execution framework. Other tasks include good practices such as:

  • making accurate entries for physical stock received into the inventory tracking system,
  • establishing a replenishment strategy on all inventory items,
  • establishing specific guidelines on the control of excess inventory as well as on-going dead stock.

Such effective inventory management habits will give any kind of businesses a superior competitive advantage over their competitors, especially with an easy-to-use stock analysis tool that delivers quick and accurate information.

Lack of knowledge on the part of employees is one major distraction when you are attempting to create effective inventory management systems. There could be several problems to address in this circumstance. Typically the root problem is the lack of any kind of effective inventory management strategy.  There may be a strategy, but there is a lack of efficient systems and communications to enable effective execution. CFOs are in a position in which they can determine the courses of action to create effective inventory management. These actions typically involve training employees in effective inventory management techniques, including proper labeling and stocking of product, inventory tracking systems, and ordering strategies.

In every kind of business, inventory management consists of a series of processes on the multiple functions with reference to the tracking, handling and managing of goods and materials that are held in stock. Efficiency in effective inventory management will always give a competitive edge to the business, regardless of its nature. In addition to cutting down on operating costs, it will also bring satisfied customers back for more business in the near future.  Harvest CFOs bring to companies significant skill and experience in implementing and executing on effective inventory management to increase profitability and create a needed competitive edge.

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