Mastering inventory levels is a key to many successful and growing businesses. Here are four reasons why prioritizing your inventory management is something to consider for your business.

1. Good inventory management creates less shrink

Shrinkage represents the cash that goes to waste because inventory is damaged, stolen, or past the sell-by date. Shrink represents an opportunity to improve the inventory control process. Understanding the dynamics of shrink will help focus your attention in the correct areas and ultimately lead to money saved.

Action item: Create a shrink scorecard that shows the source of the shrink. For example:

• Are you experiencing theft? Is it occurring at retail or in receiving?
• What if your products are out of code? Is the problem in all products or a select few?
• Do you have damaged goods? Is it trackable to the supplier or a part of your production process?

Remember to compare waste to prior years and also against your goals to see how well you are doing.

2. Aligning inventory operations with sales gives you more cash

In a perfect world, you receive your inventory as soon as it is sold. Material or product that sits in the warehouse adds storage costs and risks turning into unsellable products. Therefore, aligning your inventory operation with your sales cycle plays directly with improving your cash flow. In addition, understanding sales trends will allow you to optimize your stock levels and save money in the process. When you spend less on unnecessary inventory costs you have more cash to invest in marketing, new product initiatives, or capital equipment that can bolster your bottom line.

Action item: Implement just-in-time (JIT) with key suppliers. Explore ways to deliver a product when needed rather than purchasing a larger amount and storing it.

3. Improved forecasting helps your business grow

The old saying, “garbage in, garbage out” applies perfectly when trying to forecast inventory demand. If you can’t trust your inventory process, it’s impossible to accurately predict future output. This leaves you flying blind when budgeting and preparing for future expenditures. Your forecasting will become more accurate with a firm grip on your inventory needs and procurement-to-sales cycle.

Action item: Create a rolling 12-month forecast of sales. The forecast should provide details on major product lines. Translate this forecast into lead times for your inventory procurement.

4. Prioritizing inventory management creates better customer relations

Once you’ve optimized your operation, the quality of your customers’ experience increases exponentially. You can cut prices without sacrificing margin, improve lead times, and add new product lines with your extra cash. While the effective inventory process you built is humming along, you can focus your attention on improving your products to better match the needs of your target market. This will help boost your sales!

Action item: Set inventory targets to shorten lead times. Measure your many back orders and note how often products are returned as defective. If your inventory management improves, then you should see positive results in both areas.

Inventory management will not take care of itself. Giving your inventory system the attention it deserves will pay major dividends both now and in the future. Contact our RRBB accountants and advisors if you have any questions.