Inventory Management and Your Bottom Line

Inventory management is about much more than having sufficient quantity of stock. It is also about ensuring that the right stock reaches the right customer at the right time. For any profit-oriented business, inventory management is a make-or-break factor. In fact, poor inventory management has been the sole reason leading to the downfall the of many companies in the past.

The Hershey Company, one of the world’s most recognized chocolate manufacturers, experienced a massive loss when $100 million worth of Kisses and Jolly Ranchers inventory failed to reach stores on time for the Halloween season.

In another story, a small barcode number mismatch resulted in a $2 billion loss for retail giant Target. In addition to the hefty financial loss, the error also delayed the U.S. retailer’s entry into Canada.

Takeaway: Inventory management is and will be critical for business profitability. Those businesses which manage their inventories well stand a better chance of having a healthier bottom line.

Again, in today’s scenario where omni-channel e-commerce is ruling the roost, retailers are facing extreme pressure to maintain profit margins. Proper inventory management is a must-have to avoid losses and to sustain profitability.

A quick brief about inventory management

Inventory management is the process of ensuring a steady flow of raw materials, intermediary goods or finished goods from manufacturers to warehouses and ultimately to customers. Proper inventory management ensures that businesses do not run into the risk of overstocking – which depletes working capital – or stock outs which result in lost sales opportunities.

Taiichi Ohno, who is considered to be the father of the Toyota Production Systems says, “The more inventory a company has, the less likely they will have what they need.”

Inventory management helps the business maintain the right amount of stock required to run the operations at optimum levels. The tenets of financial management prescribe that businesses maintain at least twice the amount of inventory required for routine operations. However, not all stocks need twice the inventory level. There are some stocks which can be maintained in lesser quantities to keep working capital positive.

Additional Benefits of Inventory Management

Other than ensuring smooth operations, there are several allied benefits that proper inventory management can bring to a business.

Reduced Inventory Carrying Costs

Inventory carrying costs consists of warehouse rent, taxes, import duties, and so on. You cannot bring your inventory to a state where it can be readily consumed in production or operations without incurring these carrying costs.

Without proper inventory management, you could be procuring too much of stock which again is loaded with additional carrying costs. When this faulty process happens throughout the year, you lose a significant amount of your profit margin in the form of hidden inventory costs.

Inventory management techniques like fixing inventory levels for maximum, minimum, average and stock out situations can help avoid such hidden costs.

More Inventory Turnover

James Sinegal, the American business tycoon once quipped, “a sound business policy is one where inventory turns faster than people.” James is so right. Inventory should not be allowed to sit on the shelf. Every inventory handling business must be capable of turning inventory into liquid cash or receivables in the shortest time span possible so that the business can move on, sell more and optimize profit margins.

More inventory turnover means the company has an accurate forecast of its demand and is prepared with sufficient inventory for total order fulfillment. When there is total order fulfillment, there is less inventory left in the warehouse. Thus, the risk of overstocking is avoided.

Inventory write-offs are one of the primary reasons why businesses tend to end up in losses even when their operating profits are positive. Proper inventory management lets you avoid that situation through proactive planning for demand and supply.

Bulk Quantity Discounts

Have you heard of the concept of EOQ or Economic Order Quantity?

EOQ is the optimum quantity at which you get maximum inventory for minimal carrying and ordering costs. It is a classic inventory management technique that helps businesses that consume inventory all throughout the year in large volumes.

With EOQ, instead of buying random quantities of inventory every now and then, a specific quantity of inventory can be purchased which will give maximum economic benefit.

Knowing how much quantity you are going to procure in each order helps negotiate bulk quantity discounts with the suppliers. In fact, EOQ also helps enter into annually spread, centrally priced rates for inventories that need to be supplied across several operational units of the business.

Without proper inventory management and its record keeping, techniques like Economic Order Quantity cannot be implemented. One more reason to upkeep inventory management best practices.

Customer Loyalty

Prompt order processing and perfect deliveries delight customers. And, delighted customers tend to remain loyal. While this might seem usual, there is a huge benefit that retaining loyal customers can bring to a business.

It takes twelve times the cost to acquire a new customer compared to retaining an existing customer. Proper inventory management can be rightly considered a factor that helps create more loyal customers in the long run.

A business which never says “Sorry, no stock’ would definitely be a customer favorite.

Wrapping It Up

Inventory management and a healthy bottom line are directly proportional to each other. A business cannot afford to earn profits when its inventory management is in shambles. Proper inventory management is the foundation from which business profitability can be built up.

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