Inventory is the very heart of our business – and much like the human heart – our business stays healthy with a low-fat diet. If PVF businesses had diseases – excess inventory would be one of the more deadly. Then, why do so many companies maintain ridiculous amounts of inventory?
We maintain high levels of inventory because it feels good. Take a walk around the warehouse. Look at all that stuff we have!!! We have got racks of most anything anyone would ever want! Inventory gives us that warm and fuzzy feeling of security. Whatever a customer orders – we have it, in stock and in quantity! Be careful - this inventory security blanket comes with costs.
Inventory is not an asset – it is a cost. You spend valuable capital and all it does is sit. You can’t collect on your investment until it moves (if it moves.)
Inventory requires me and effort. Inventory benefits from free rent, free utilities, free care. You manage it (cycle counts, FIFO, etc.) and after all that - it still may never move due to obsolescence, damage, changes in regulations.
Knowing all this – we still carry way too much inventory, because we don’t ever want a stock out. We never want to say, “Sorry – we don’t have that in stock.”
Here we are – on the horns of a dilemma.
Too much inventory is expensive – not enough inventory is fatal for good customer service.
It’s time to do some inventory homework.
1) Create a “stock out” report. Generate this report every day. I promise you - you will see patterns and get some surprises. Carry more inventory for items that stock out more than a few times a year or have long lead-times. Other items? Ensure your vendor can deliver items within 24 hr. Rush shipping is expensive – but it’s nowhere near as expensive as carrying inventory you don’t need.
2) Print out a sales report listing every item you carry. What sold over the last year? Rank items from the most sales to the least. Again – you will see patterns. What items do I sell the most of? Do I always have these SKUs on hand? Now look at slow movers. The bottom 20% of the items sold very few or didn’t move at all. That stuff is doing nothing for you but taking up space and time. Time for a garage sale – get rid of it.
3)
There is a lot of turbulence and noise in the market right now. Tariffs, trade wars, “Drill baby drill”, inflation, it’s anyone’s guess what the next 3 years will bring. Getting your inventory (raw, Work in Process, finished) under control and managed will help you respond to whatever might come.
Excess inventory has big hidden costs, costs that will do big damage to your bottom line. Stock outs are brutal too. Manage your inventory as though your company’s life depended on it. Inventory is the heart of your business – so be good to your heart!
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