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August 8, 2006 Cutting Excess Fat From Your Inventory I am sure almost all of you have heard people in business say “We can’t sell it if we don’t have it” or “We are committed to our inventory.” When I hear people say this, I think to myself that these people assume that they have to carry every item possible and make their inventory the most important concern of their business. As said in prior articles inventory is the largest investment made by an owner but if you are more concerned about stocking everything possible then stocking what your customers actually need then you have some problems. Again we go back to the golden rule: 80% of your business comes from 20% of your products.
As orders come in seem to come in faster and faster every year it is very easy to see how inventory levels can get out of control very quick. As time goes by and you go though your normal works days and all of the sudden you can find your self holding a lot of excess inventory that has been accumulated by over buying. In today’s world there is a huge challenge of trying to bring inventory levels in line with customer demand without affecting your customer support levels. Let’s take a look at an average food distributor that used to have the attitude that he had to stock everything that he could buy. This worked fine for a while until the owner had realized that they had lost $200,000 worth of inventory. When looking deeper into the problem he found that the company had thrown out $200,000 dollars worth of expired items because they didn’t sell before their “sell by date”. The company had even, in some instances, stocked enough inventory to last them the entire year!! If you don’t want this to happen to you take into account these few ideas: · You Don’t Have To Stock Everything A Salesman never wants to say “no we don’t carry that item” to a customer, but stocking everything isn’t the right answer. Having Inventory won’t generate sales, Customer demand will generate sales. You can carry all of the products in the world but if no one wants them then what is the point. All this ends up doing is creating a lot of Dead Inventory, which only collect dust and cost you tons of carrying costs. · Get Rid Of Dead Inventory Immediately Dead inventory is a problem for everyone. The best way to fix the problem is to try and recover the cost as quick as possible. If you can’t recover all of the costs then take the hit and get it out the door. For everyday it sits on the self you are paying to keep it there so turn it into cash as soon as possible. · Stock Less Items I am not saying to carry fewer items just stock less of them. In the example above the company had the stock for the entire year available, this is unnecessary and is cost you money. If you know a company buys an average of 600 cases a month from you only really need to stock the next 3 months. (This is an example only. Only you can decide how much of a stock you need on hand.) Stocking 1800 cases has a lot less carrying cost than stocking 7200 cases. As I have said in past issues the less you can stock the lower your carrying cost. The next logical question is how do I know which to shave off and how do I know what to stock. This is where having food software that monitors your inventory really comes to play. With the software tracking your inventory you can print out reports such as sales reports, invoice history, inventory status report, and inventory movement reports just to name a few. With these reports in hand you can see exactly how much money you are making or losing on a product, how fast or slow it is moving though your warehouse, and also a report that reminds you to reorder the products your running low on. Here is a good example of how software can help you maintain a level inventory: Let’s take the same company as before. They know that their customer buys from 600 cases a months from them. To help maintain the inventory the software establishes a minimum order point of 600 and maximum of 1800. (Remember they want to 3 months stock on hand) If their inventory falls below 600 the software will let the owner know that he needs to order more. For us older guys this is called reordering against PAR, Newer Reordering Reports check your sales consumption against what you have on hand to dynamically create a Purchase order for you. This is a great way to stop having dead inventory lying around your warehouse. The other reason these reports are great is because if you look at your inventory movement report you can see which items are your slow movers. These items may be necessary but should be kept to a minimum. Food Software allows you to look at this and decided which items are not worth having. CUTTING COSTS BY CUTTING DEAD INVENTORY To Unsubscribe
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