Posts Tagged ‘order’

Look Up! Look Down! An Inventory Secret to Save Cash

April 24, 2010

by Doug Smith, President, The Woodhaven Group

The ability of a company to successfully manage levels of inventory of everything from raw materials to key component parts to everyday supplies can be the difference between a profitable and positive cash flow business versus a cash strapped company on the brink of going under.

There are many inventory management software packages and inventory management models to buy and keep inventories in alignment.

One of the oldest forms of inventory control is the Economic Order Quantity developed in the early 20th century.  Many other successful forms are in use today like ABC analysis and Vendor Managed Inventory.  The latter is often used by big box stores like Wal-Mart.  The automotive companies have been particularly successful over the years with Just In Time inventory management.  In my opinion, effective supply chain management has been one of the most important drivers of productivity and growth in America over the last 20 years.

The smaller business, however, has historically not been as sophisticated in assuring proper inventory levels are maintained regardless of the type of business. 

Most small and medium sized companies either have a home grown system or no system at all.  As a result I have seen a tendency for purchasing agents, buyers, and even owners to purchase a little extra of most inventory items so they are never out.  This mistake costs the business tremendous amounts of cash that should be used instead to drive sales or reduce debt.  On top of that many smaller businesses fail to calculate inventory turnover nor age their inventory.  As a result no action is taken on old obsolete inventory.

Will owners invest in some sort of inventory management software to free up valuable cash?  Often times the answer is no because the owner is satisfied with the “system” currently in use to buy inventory.

This tip is for these companies.

Most smaller companies I visit have stock rooms and inventory shelving filled with inventory ready to be used.  On the surface everything looks great.  However, when you look at top shelves and the lowest shelves and ask questions you will invariably find very old or even dead inventory.  The fast turning inventory is at eye level where it can be easily accessed.  The old and dead inventory is never touched.  In fact, sometimes there will be an inventory tag on this merchandise so if a physical inventory is taken in the future the count is already done!  All I see on these shelves is money not being used. 

Here is the solution for these companies.  Eliminate the top and bottom shelves.  Take them out.  Sounds crazy but it will work because now the purchasing agent will be forced to have a model inventory to fit the reduced space.  The luxury of overstocking is over.  Could the company error by having too little inventory.  I have not seen that occur. 

What does the business do with the old inventory?  Convert it to useable cash by returning it to vendors, having a Saturday garage sale, or selling to other companies.

Is this approach drastic and crazy?  Probably is, but I have seen it free up much needed cash.

Businesses run on cash.  Not on dead inventory.