Is Your Inventory Eating up Margin and Profit? 

Inventory can sound pretty boring until you learn that it can be eating up all your profits, causing you to lose sales or leading you to pay hefty commissions on purchases which actually lose you money. That’s before getting to some of the obvious factors such as unnecessary warehouse and inventory carrying costs and liquidating unsold goods which have grown obsolete while overlooked in storage.

Treacherous stuff, inventory.  But look on the bright side – getting inventory management right can generate improved margins, lead to higher fill rates on orders and improve warehouse efficiency.  Jon Schreibfeder of Effective Inventory Management, Inc. suggests focusing on dead stock first – items which haven’t sold at all over a specified period, such as the last 12 months.

 This is inventory which is tying up working capital and space. Clearing out dead stock and improving purchase processes to avoid future dead stock can lead to substantial gains.

Schreibfeder says that a lot of dead stock was dead from the moment it arrived because it was part of a larger shipment meant to fill a delivery to a single customer.  If a company special orders 15 pieces to sell five, the apparent profit on the five can be completely eaten by the cost of the remaining 10 unsold pieces. Add in the commission paid to a sales person and the losses mount further. The solutions are pretty simple – order no more than you have sold to the customer or charge the customer enough to cover the entire order, not just what he needs. To impress the point on sales people, charge the cost of unsold stock against their commissions. And make it a point to check inventory monthly to make sure customer-specific stock is turning over and the customer hasn’t moved to a different item or another supplier.

When new products enter the warehouse, look to see if they make existing products obsolete and then liquidate the old items quickly. In ordering, weigh discounts against carrying costs to determine the proper amount to place in each order. This is the first step toward measuring inventory turnover. Procuring in smaller increments can increase ROI by moving capital from inventory to more productive uses. The best examples of this are companies which can stock and sell items before they have paid the invoices, so they effectively have no carrying costs at all.

Adjust your stocking locations to demand. Place the items which turn over most quickly close to packing and shipping so warehouse staff can pick them quickly. Slow-moving items can be placed in the depths of the building or on high racks, but keep the fast-moving items where they can be stocked and picked most efficiently. At $15 an hour, a small reduction in the number of steps required to pick popular items can translate into significant savings.

Finally, measure and reduce shipping errors. The cost of replacing a mistaken shipment at least doubles the cost of filling an order, not to mention the negative impact it can have on customer satisfaction. Bar coding linked to an inventory control system allows sales people to check inventory before taking an order while reviewing bar codes at point of packing catches errors before they go out the door.

Inventory isn’t such a dull topic when you understand what it does for the bottom line, and your business reputation.

Learn more about how to manage your inventory levels here: Inventory Control