What are the best practices for managing inventory costs during Company growth?
Forecast Demand Accurately
One of the key factors that affect your inventory costs is the demand for your products. If you overestimate demand, you will end up with excess inventory that ties up your capital, occupies space, and risks becoming obsolete or damaged. If you underestimate demand, you will lose sales opportunities, disappoint customers, and damage your reputation. To avoid these scenarios, you need to forecast demand accurately using historical data, market trends, customer feedback, and seasonal variations. You also need to update your forecasts regularly and adjust your inventory levels accordingly.
Technology and methodology. This approach differs from traditional Demand Planning in that it utilizes real-time data, AI, and sensors to monitor current market conditions and adjusts forecasts on the fly. This agile approach is especially valuable for industries with rapidly changing demand.
Optimize Inventory Turnover
Another important factor that affects your inventory costs is the inventory turnover ratio, which measures how often you sell and replace your inventory. A high inventory turnover ratio indicates that you are selling your products quickly and efficiently, while a low inventory turnover ratio indicates that you are holding too much inventory or selling too slowly. To optimize your inventory turnover, you need to balance your inventory costs and your sales revenue. You can do this by setting optimal reorder points and quantities, applying discounts or promotions to clear slow-moving items, and sourcing from reliable and cost-effective suppliers.
High Inventory turnover can help improve cash flow. When you sell inventory more quickly, you generate cash faster. This can help meet financial obligations and invest in new growth opportunities. When you have a high inventory turnover ratio, you are more likely to have only products that customers want in stock when they want them.
Implement Inventory Control Systems
A third factor that affects your inventory costs is the accuracy and efficiency of your inventory control systems. Inventory control systems are the methods and tools that you use to track, monitor, and manage your inventory. They can help you reduce errors, waste, and theft, as well as improve your visibility and decision-making. To implement effective inventory control systems, you need to use appropriate technology, such as barcode scanners, RFID tags, or inventory management software ( ERP ). You also need to establish clear policies and procedures for inventory counting, recording, and auditing, and train your staff accordingly.
Identify the importance of accuracy and consistency. Train your team accordingly on proper inventory SOHs. Conduct daily and weekly monitoring to ensure that your business remains in line in conjunction with its demands. Set appropriate pricing and monitor product sale performances often.
Analyze Inventory Performance
A fourth factor that affects your inventory costs is the performance of your inventory. Performance refers to how well your inventory meets your business goals and customer expectations. To analyze your inventory performance, you need to use relevant metrics and indicators, such as inventory turnover ratio, gross margin return on investment, stock out rate, fill rate, or customer satisfaction score. You also need to compare your performance against your benchmarks, competitors, or industry standards, and identify your strengths and weaknesses. Based on your analysis, you can take corrective actions or make improvements to your inventory management.
Be realistic and understand your business demands. Hold your team accountable by implementing repetitive inventory audits to ensure your cost of goods remain in line. Analyzing inventory performance is crucial for making informed decisions, optimizing processes, and ensuring that the overall business goals are aligned.
Seek Continuous Improvement
A fifth factor that affects your inventory costs is the level of improvement that you seek in your inventory management. Inventory management is not a one-time activity, but a continuous process that requires constant evaluation and adaptation. To seek continuous improvement, you need to adopt a proactive and flexible approach to your inventory management. You also need to solicit feedback from your customers, suppliers, and staff, and implement best practices and innovations that can enhance your inventory efficiency and effectiveness.
Seeking continuous improvement is a mindset and a process that involves regularly evaluating and refining your operations to enhance efficiency, quality, and overall performance. By incorporating these practices into your organizational culture, you can create a dynamic and responsive environment that is committed to continuous improvement across all facets of your operations.
Here’s what else to Consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
Here is what our first experimental client went through in his business.
Client Scenario: Sales shot down, Customer count increased, Spending increased, became unfocused and unclear about his directives. Invoices became lost/ were unfollowed or simply not imputed. Staff became disillusioned.
Learning Stage with Client: Allocate tasks, Ask for clarity and help, Simplify and share knowledge, Set goals,
Lesson Learnt: Client could not see the forest from the trees. He now understand that he could not control everything. They needed a stepping back approach to see the whole picture or the unseen transactions.