SMEs often ignore the need for inventory systems because
they are too complex to handle within the usual accounting software and they
feel they can't justify the costs of an enterprise software package that takes
time to implement, learn and tailor to their business, according to Maxell Consulting.
Poor inventory management increases the costs of carrying
value of stock, storage space costs and handling and management costs. It also
impacts gross profit in any particular reporting period.
But the biggest impact inventory has on a business is the loss
of cash for the period the items are sitting on shelves.
Cash is king in any business and cash tied up in inventory
simply reduces opportunities to expand sales in other areas or requires
companies to have increased short term finance requirements. Cutting inventory
costs gives a business back the hidden cash in their
inventory.
Maxell Consulting has developed
a business program that assists SMEs to reduce the costs of inventory on their
business and become more systematic in how they manage a valuable
resource.
After identifying opportunities
for clients to reduce costs through better management of inventory, Maxell
Consulting developed a simple business program, including software, to enable
SMEs to start managing inventory within two weeks of commencing the program. It
is based on the five steps that have been used to help other
businesses.
Step 1: Know your inventory
and prioritise
No important decisions can
be made without knowing what is in inventory and ideally how long it has been
there. A simple inventory system can track what is in stock, its carrying value
and the trends of movement in stock value.
A system then allows for easy prioritising of what are the
fastest and slowest moving items and what value is locked away in inventory.
This also means a stocktake is required.
Step 2: Reduce supplier lead time
The basic premise of inventory is to provide a buffer to allow
variation in either customer requests or manufacturing. If there is no lead-time
in getting inventory, then managers must pick what they want and use or sell it.
Looking at ways to reduce lead-time can also reduce demands to carry stock.
Ideas to consider include identifying the
suppliers that can assist with fast turn-around or provide consignment
stock.
Lead time reduction is also
assisted by understanding when items are needed and what is the history of usage
on key items. This forms part of projecting demand for inventory items - the
next step.
Step 3: Project inventory
demand
Having a system for monitoring and
tracking inventory should also allow managers to predict what will happen in the
future. Usually demand projection is reviewed for the next 3-6 months, but even
regular projection over a 4-week period allows for improvements in inventory
control. This helps suppliers to reduce lead times as well as allow cash flow
planning.
Step 4: Eliminate
stock-outs
Quite simply stock-outs can
cost businesses big dollars. When a customer wants a product that a business
can't supply, there is the risk of losing the sale.
In manufacturing, raw material stock outs can hold up
machinery, meaning reduced capacity and less coverage of fixed costs. It can
also mean higher costs to obtain the items urgently in both delivery charges and
spot pricing rather than negotiated supply agreements. In a service business,
stock-outs can grind a business to a halt
Step 5: Systemise control
A system for inventory management is not just about cost
control. It is about managing information that impacts the cash flow of a
business. Inventory systems must include:
1. Policies and procedures that spell out how people within
the organisation use inventory and how it must be accounted
for
2. System for recording and tracking
stock and usage
3. Regular management
reviews of stock levels, trends and key financial performance indicators. These
should include:
* Stock value (current and
moving totals)
* Inventory
turnover
* Number of
stock-outs
* Breakdown of inventory
items
4. Regular action plans to extract
the best value from inventory.
Inventory
systems also allow other people within the business to make correct decisions
when it comes to meeting customer requirements.
In an engineering business, inventory systems support accurate
and profitable quoting by indicating to managers what is in stock, how long it
will take to deliver and what has been used for similar jobs in the past. The
more accurate the quotation system is the more likely the business is and making
a profit.
Within a manufacturing
environment, inventory systems form part of the entire supply chain making sure
raw materials are always available.
For
the customer, inventory usually means the finished products they buy. In this
case inventory management is all about being able to meet customer demands and
respond to market changes.
The Maxell
Consulting Inventory Impact program progressively takes a business through
implementation of an inventory management system, starting with an audit of the
inventory systems and stock on hand and a simple effective spreadsheet based
system for tracking inventory levels.
The
company helps write the specific policies and procedures that form the basis of
a successful business system, tailor the software to suit the business and
facilitate the action plans that deliver real cost savings to the
business.
Inventory is something that
everyone in a business "shares" in some form, and hence everyone must be
involved in managing it.
Inventory
management is not just keeping a list of what is on the shelf, but encouraging
everyone to find ways of adding value to the business through better use of an
asset already paid for.
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