Are you effectively managing and monitoring your inventory?
In today’s competitive market, business owners are taking a fresh look at inventory management practices.
For many mid-sized companies (and quite a few larger ones) inventory represents one of their biggest working capital commitments. For this reason, inventory management improvements can be a valuable leverage point for hitting financial targets, meeting customer service goals and boosting sales performance.
Considering the raw dollar value of your inventory, it becomes easy to see how relatively minor oversights can build up, leading to expensive material or efficiency losses over time. The ripple effects can negatively impact your business, ultimately affecting product quality, customer satisfaction and profit margin.
Here are four strategies you can use to get more out of your inventory investment:
Strategy 1: Process audits
In general, the fewer times your inventory is touched, the more money you make. Consider running process audits that follow inventory items all the way through your system. How are they received? Where are they stored? How long do they sit before earning revenue for you? How far do they have to travel when you acquire them and between steps?
Detailed process audits can reveal inventory management steps that either no longer add value or cause costly wasted motion that you can eliminate. They can also uncover instances of hidden loss or spoilage that erode your inventory investment before you can turn it around. A process audit can also show you where inventory practices may cause downstream problems or friction in other parts of your business.
Strategy 2: Bill of materials (BOM) audits
A BOM gives you clarity about everything needed to support and/or deliver a particular product. Countless small engineering, design, process and supplier changes at any point in your value chain can shift a bill of materials out of date. The risk here is that people downstream may not know about the change and could be working on faulty and costly assumptions. Buyers or warehouse personnel may continue to stock a component that is no longer needed, or stage inventory in a way that no longer fits the needs of the people who use it downstream.
The remedy is to conduct BOM audits on at least a quarterly basis that check for changes in part configuration, units of measure, finished goods requirements (size, quantity or color, for example) that apply to different customers or markets, or differences between vendors. The best way to help ensure the success of BOM audits is to have a formal way to capture and share the findings so that everyone can make timely adjustments.
Strategy 3: ERP system optimization
Another key question to ask is whether you are getting the information you need out of your enterprise resource planning (ERP) system. Setting up an ERP can be a long and costly process, and few of them will be fully optimized for your company’s business case out of the box. Success depends on getting everyone in the company to use the system correctly as needed for their various roles.
The information you get out of your ERP system will only be as good as the information going in. Make sure that you have the right integration in place to get timely inventory updates — a daily refresh is ideal. At any given time, you should be able to get a complete view of what is coming into your inventory holdings, what is going out and when you are getting low on components that are essential to your product delivery needs.
There are still companies that track things manually and have not made the move to an ERP application. If you are thinking about investing in ERP technology, choose your vendor and implementation partner very carefully. Make sure they have experience in your market sector and that they can handle the integrations you will need with the rest of your IT stack. Introducing the system in carefully planned stages and fully training your people is also important.
Strategy 4: Monitoring turnover
One of the most common ratios to look at in servicing wholesale and distribution companies is inventory efficiency, or more specifically, turnover and days on hand. These ratios provide valuable insight into how successful a business is at managing one of their most significant assets.
In the broadest sense, turnover identifies how many times per year an average inventory clears out of a distribution center and is replenished. That figure is compared against the number of days in a year and speaks to how many days on hand of inventory you have, meaning if you weren’t going to place another order, how many days it would likely take to sell out of everything.
Generally, the higher the turnover, the better, as it would indicate that inventory is efficient and that owners are buying (and then selling) what the market demands. A lower-than-desirable turnover indicates lower sales in relation to carrying higher inventory, which further means cash is tied up in inventory. In some cases, cash is spent on higher interest costs associated with money borrowed to purchase inventory that isn’t turning over.
Turnover data should be compared to industry peers to both ask questions and, separately, understand your company’s performance. Through this objective comparison, it may become clear what can be optimized.
Understanding and regularly reviewing turnover ratios is the opposite of inventory opacity. Simply put, you’ll be able to influence how resources are performing so that you can more quickly adapt and respond to changes in the marketplace. It also frees up cash to be invested in more than just inventory.
How Wipfli can help
Starting an inventory-related audit regimen can be daunting, and it helps to get some guidance before you put your own processes in place. At Wipfli, our team of dedicated professionals has the industry experience and knowledge you need to have confidence in your operations. Our hands-on approach is tailored to your individual circumstances, so you can boost your operations with solutions built just for you. Contact us today to get started.
