Unlock the Hidden Profits in your Inventory

Have you ever been to a business and been amazed at the amount of stock they hold?

I recently visited a regional town and spent some time walking the high street and went past one of the clothing retail stores that seem to stock everything – literally everything. If they stock a polo shirt, they stock a hundred – every colour and size combination possible. And when I looked at the combinations there were clearly a number – I’d estimate that at least 60% – that nobody would ever buy. So, in other words 60% of their stock was never going to make a return, but they, like many businesses, had been blinded by the need to cater of all combinations that they didn’t focus on their core and wasted their money and retail space.

And it wasn’t just the polo shirts, they had the same philosophy across every range they stocked. In a small retailer this is a recipe for disaster as tens of thousands of dollars of stock is invested in, displayed and never sold. And it isn’t just a financial challenge, customers see the same old stock for sale and think they are not stocking good products and they themselves start to question their decisions and lose confidence.

So, managing your stock can add dollars to your bottom line, and not just in retail, for manufacturers the same is true.

What aspects should you look at? Ask yourself the following questions:

  • First and foremost, what storage space do you have?
  • What is the sell through rate-how many times per month/per year is that stock turning over?
  • Is the stock a high value item?
  • What is the difficulty of obtaining any of the stock items?
  • Can you identify the slow-moving items and the real estate space they consume in your store-room / warehouse?

There are many factors that come into play as to the frequency and amount of stock being ordered, and it is important to take a focussed and analytical approach to stock – don’t listen to the sales reps, don’t listen to your inner desire to satisfy every customer, listen to your business brain and make smart decisions.

For example, it may be more cost efficient to order larger quantities, but if that is the case then you need to consider:

  • Your ability to hold that stock
  • The length of time that stock will be on the shelf (based on the sell though rate) and at what expense.
  • Will that prohibit you buying other necessary stock due to space shortage or the impact on your cash flow?

When we look at the effective management of stock control we need to look at the whole picture and evaluate which lines we want to bulk buy which lines we want to reduce as well as, the most cost-effective frequency to purchase this stock.

At the same time, we want to be able to identify and eliminate slow moving stock which is taking the storage space of stock that turns over frequently and makes us profit. Because we only make money from stock if the stock sells.

What are the main things to consider when analysing and planning your future stock? Here are the key things to consider;

Control and Systems

  • Having a good stock control system will help you to regularly identify these issues and be able to optimize your purchasing.
  • Depending on your type of business having a barcoded product and the orders produced in line with the warehouse layout will also create efficiency and cost savings. You need fewer employees when you have an efficient layout.
  • Cost of lack of planning and systems; lack of planning in both ordering and delivery of orders are costly both in time and productivity. A well-planned warehouse, stock take system, order system, picking system and delivery system will save time as well as money.

Warehousing and Logistics

  • If space is an issue, you may want to look at external warehousing vs frequency of purchase costs.
  • Management of raw materials; when you are manufacturing and requiring several raw materials to complete a finished product, it is crucial to be on top of your usage and the stock holdings of each component required for the finished product. Having an out of stock of even one component will stop production of that item resulting in lost sales, lost time, extra storage time on shelves for the other components required for the finished product.
  • Loss of production time allocated.

Cashflow and Capital

  • Cost of smaller more frequent purchases; possible quantity discount loss. Multiple delivery costs. Increased time factor for inwards goods offloading. More administration costs
  • Cost of Bulk buys: save money, save administration time in ordering once vs multiple times. Needs more warehouse space. How quickly will this bulk stock turnover? What is the impact on your cashflow (working capital). Cost of storing it verses savings gained on bulk buying and delivery. Shelf life of product with time sensitive products.
  • Cost of out of stocks: not being aware or on top of your sell through rate and current stock can result in late or unfilled orders. Do you know the lead times to procure each product? Do you have a minimum stock level that will trigger the ordering process? The cost of having out of stocks is more than just losing a potential sale, it opens the door for your client to seek out your competitors and jump ship.
  • Cost of terms: being able to negotiate longer payment terms from your supplier can give you the ability to sell a certain quantity of your product prior to having paid for it thus improving your cash flow as well as the flow on effects in reduced costs for storage.

Appropriate control of your stock can make a huge difference to your bottom line. From expenses to cashflow to profitability it can significantly alter the operation of your business. And if you are in retail or manufacturing, being unable to manage your biggest success factor is what will separate you from having your best year ever in business and operating on the margins.

About The Author

Marilyn Burton is a BBG CA Senior Consultant and founder of Burton Business Consulting. Unlike many business consultants Marilyn Burton talks the talks, because she has walked the walk, having done the hard yards growing multiple successful business In Australia, New Zealand and the USA, by doing what comes naturally to her; planning, developing systems and implementing processes focused on one thing; business growth.