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Wednesday
Oct052011

Inventory Management – 10 Guidelines To Insure That “Cash is King”

“Too much” or “not enough”, that's the balancing act required to effectively manage inventory. If you end up with “too much” it can mean discounting. This not only hurts your margins for the season, it can also hurt your brand image for seasons to come. If you “don’t have enough” you will lose sales and possibly “goodwill” with customers for future purchases. The art and science of good inventory management balances the two. “Cash is king”, especially lately. Strong sales produce cash and tight inventory management preserves cash.  The following guidelines help with both:

  1. Inventory levels are dependent on forecast accuracy. Forecasts will never be 100% correct. So, work to improve forecast accuracy. But, at the same time work to manage the “inaccuracies” or the “too much” or “not enough” caused by over forecasting or under forecasting. A wholesale client of mine was so intensely “sales driven” that they focused solely on “not” losing a sale despite inventory management or margin implications. I worked with them to better understand and balance all aspects of inventory management.
  2. Good inventory management cannot be done in a silo. Assortment planning and channels of distribution plans – store floorsets, catalog lay outs, e-commerce promotions, and wholesale customers – are all part of the equation and must be key input. I worked with a catalog client who had the inventory management function off by itself in a procurement department. They had tremendous excess inventory. The first thing I did was set up cross – functional processes and responsibilities. This helped to reduce inventory immediately.
  3. When buying inventory or forecasting, it’s good to remember that sales people and product people are optimistic. Clients and products are their “babies”. Each time I work on a reorganization with a client I always build in “check and balances” to address this.
  4. Strong cross-functional processes are crucial to solid inventory management. Skilled people are even better. A “new system” rarely solves your problems but is often required.  A straightforward calendar driven by lead times, with key milestones, owners, and dates has helped many of my retail and wholesale clients. An “Open to Buy” (MRP – wholesale/mgf equivalent) must be put in place and/or actively managed. Twice I have seen clients severely over inventory themselves by mixing up their cost basis inventory with retail basis sales – beware.
  5. “Tops down” and “bottoms up” - stores, catalogs, or customers - is the way to go. This is especially true for bricks and mortar retail stores at the sku level. Stores must have the proper skus to sell and they must have some sort of minimum presentation. One retail client of mine bought at the “total level”. When the goods came in they did not have enough skus to allocate to all stores. I worked with them on doing “bottoms up” buying and forecasting along with “tops down” giving stores better coverage for better sales.
  6. Always have contingencies. Things will never turn out the way you plan so have contingencies and “trigger dates”. These contingencies need to include the “upside” – dual sourcing and raw materials etc – as well as the “downside” - sales events, cancellations etc.
  7. Inventory does not get “better” with time. If a product or certain category is not performing deal with it now. It is not going to get better with time – unless it’s wine. A retail client of mine in the fashion business had kept so many styles around without discounting that their website had way too many skus. Customers never found the old product. I worked with them to clear out these styles and put a process in place to keep the assortment current.
  8.  “Inventory aging” is ok in fashionable, seasonal or perishable categories. My all time favorite example of mis-used aging is automatic markdowns taken on “men’s basic white shirts” simply because of an aging code. This makes no sense. As long as you have the cash to carry excess in basics – do it – you won’t miss a sale.
  9. Inventory metrics must be included in performance plans. Annual inventory turn is the primary measure at a category or company level. Sell through, sales stock (or stock to sales), weeks of supply (or days) works well to insure good management at the sku level. These metrics need to be included in product and sales people’s performance plans as well as the inventory management group.
  10. The shorter the lead time the better. But, don’t mistake this. It does not solve inventory management issues. It simply helps with reaction time. Many of my clients have implemented initiatives to shorten lead times – a good thing – but I also work with them to improve inventory management 1-9 above.

I’d suggest enrolling your entire team in the guidelines above to insure success. Good luck. I can be contacted at Janice@jlsearsconsulting.com.  I’d be happy to hear about your inventory management needs.

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Reader Comments (4)

Inventory software is something taking a job of knowing on the balancing of which you have. This means your success in depending on proper tracking as well as planing.

November 19, 2011 | Unregistered CommenterTouch Screen POS

Everyone should read this post and learn those ten guidelines. Following all of it is good for a business especially for growing small businesses.

An efficient inventory system is an asset in any business organization. Entrepreneurs need accurate and timely inventory reports to help them make sound business decisions as regards products on display and products on stock. Making sure there is a sufficient supply of products on hand is one way to keep customers happy.

Ethan Mudgett

February 22, 2012 | Unregistered CommenterEthan Mudgett

Thank you for posting this! I found out that warehouse management software is one of the core features for a business to succeed.

July 10, 2013 | Unregistered CommenterSam Mackay

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