Excess inventory may be a hidden goldmine in your small business. When small ventures grow they often expand catalogue item numbers, purchase materials “just in case” bid orders come through, and develop new concepts that seem good but don’t turn into saleable products. All of this can lead to growing non-productive stock sitting in a warehouse gathering dust and incurring big carrying costs.
These inventory carrying costs grow quickly, totalling up to 10 to 30% of inventory value annually. Bringing inventory into control and disposing the non-essential material can drive savings directly to your bottom line. An additional benefit of inventory management is that a business operating in a Lean mode can actually be more agile and responsive to market changes than a business with mountains of inventory filling the supply chain.
The best way to manage inventory is to take stock financially and physically, build a management plan, and engage your workforce to reduce and control inventory.
Taking stock generally includes a physical count of raw materials, work in process, and finished goods. It should also include scrutiny of accounts receivable and payable to look for opportunities to keep from tying up cash unnecessarily. Five Star Accounting can help plan and analyze this investigation.
The physical inventory will usually show that goods fall into an 80:20 pattern, that the highest inventory value (80% of the total) will be found in only 20% of the inventory count. Classification of inventory into an ABC priority ranked by value and usage can help focus on the areas with the biggest management opportunity.
Companies can also implement lean practices such as a Just-In-Time inventory management system that will minimize the amount of inventory that is on hand. Careful analysis of your demand and inventory supply will allow you to lower the quantities you carry on hand.
Negotiations with customers and suppliers can also incorporate just-in-time and other inventory management practices that make smart business sense throughout the supply chain. For example, keeping minimal quantities of finished goods on hand reduces the potential for having large amounts of product becoming obsolete when customer requirements change, a win for both the customer and your business.