When Donnyale Ambrosine, chief executive officer of Simply Alive, saw that the slowdown was starting to affect her business, she went straight to the biggest source of potential waste and mismanagement for most manufacturers: inventory.
“We wanted to figure out how to better manage our inventory to ensure that we’ll keep our customers happy, maintain a strong cash flow, and make it through the downturn,” says Ambrosine, whose company sells a range of products for writing and entertaining. She made some big changes, moving quickly to a just-in-time computerized inventory-management system.
“We also discounted all of our items that weren’t moving in order to get them off our shelves. While this lowered our profit on these items, it also lowered our inventory costs, freed up shelf space, and helped increase our inventory turn.” As a result, she says her company is weathering the tough times and is well-positioned for the expected economic recovery.
Inventory at most companies is a pool of trapped cash when it isn’t managed efficiently, notes William Gindlesperger, founder and CEO of e-Lynxx and the inventor of a patented procurement methodology known as the Gindlesperger method.
“Inventory control is critical to running a profitable business,” he says. “Excess inventory ties up cash not only in the goods that are sitting in warehouses but also in what has to be spent on storage space and related insurance and other overhead costs. There’s also the risk of decreased demand for inventory already purchased.”
It’s a balancing act, notes Steve Martin, a cost-reduction and profit-improvement expert and the author of Instant Profits: Making Your Business Pay. “Too few of the right items will lead to empty shelves — a surefire way to lose customers. And too many of the wrong items will result in a surplus of hard-to-sell merchandise that results in deeper discounting, reducing the chance of earning a profit.”
Martin stresses the importance of using technology to improve inventory management. “These days it doesn’t cost much to acquire inventory-management software, especially when you see how much money a good product can make for you.”
The software should make it easier to implement JIT inventory-management practices, as Ambrosine did. In a JIT approach, inventory is delivered when it’s needed, rather than days or weeks in advance. The concept isn’t new, but modern software makes it more practical. “With JIT and our computerized system, we can keep better track of our inventory and reorder as soon as items get to a certain level,” says Ambrosine.
Another key to improving inventory management is monitoring what’s known as your inventory-turnover ratio, which measures how often inventory “turns over” during the course of the year. The formula is cost of goods sold divided by average inventory value.
Generally speaking, the higher the ratio, the better, though an exceptionally high ratio compared to industry averages could indicate lost sales due to inadequate stock on hand. A low ratio, on the other hand, usually means that inventory may be turning too slowly and impeding cash flow.
“Most companies can improve profitability and cash flow without growing sales by increasing inventory turns,” Martin says. “But this won’t happen if you don’t have specific inventory turn goals.”
Henry Ford was one of the first to recognize the value of inventory control. In 1923 he wrote, “We have found in buying materials that it is not worthwhile to buy for other than immediate needs. We only buy enough to fit into the plan of production.”
“Not in his wildest dreams would Henry Ford have envisioned what we can do today with controlling inventories via computerization and new business methodologies,” says Gindlesperger. His methodology applies to any goods or services that are specification-defined when ordered. These can range from commercial print, direct mail, and labels to machined parts, textiles, and even temporary staffing.
Using a computer-operated system, companies identify prequalified suppliers that can produce products or services on demand through a competitive pricing process. The computer system identifies suppliers that can meet the specification requirements and sends them a request for proposal, creating virtual pipelines to and from the company’s prequalified suppliers nationwide.
“This eliminates the need for excess inventory because it allows buyers to control precisely when and what to order,” Gindlesperger explains. “They know that there are always prequalified suppliers in their network that are waiting for the opportunity to deliver.”
International Construction Equipment has reduced its inventory levels significantly by using the Gindlesperger method. “We have a healthy pool of prequalified suppliers at our fingertips that we know and trust to meet our quality standards according to our submitted timeline,” says PollyAnna Cunningham, director of marketing and IT communications for ICE.
“For example, when the warehouse is down to two of a specific item, we can comfortably and easily place an order and will have the product on our shelves within one week or even as soon as one day, depending on what we specify in our bid request.” Another advantage is that ICE no longer needs to order in bulk. “This means we can order less at one time and still benefit from cost savings.”
There was a time when retailers spoke with pride about the thousands of units they had in stock. Nowadays overstocking is a certain way to lose money. “Find out what’s selling and don’t stock anything else,” Martin stresses. “And only stock as many of these best-selling SKUs as it takes to last you until you can get the next shipment in.”
Martin adds that you’ve got to see your inventory for what it is: cash sitting on your shelves. “Inventory represents a double-edged sword. By having adequate inventory to meet demand you can provide a higher level of service to customers. However, inventory represents a significant expense: as much as 30 percent of the initial value of the inventory per year when you add in storage and handling costs, plus obsolescence and damage.”
If inventory isn’t managed efficiently, “it doesn’t take long for profit margins to shrink and disappear,” Martin says. “This is why world-class businesses optimize their inventories with highly refined supply-chain management.”
Don Sadler is a freelance writer and editor specializing in business and finance. Reach him at firstname.lastname@example.org or visit http://www.donsadlerwriter.com.