Did you ever hear that phrase about “never work with children or animals”? Sometimes I think that short list of hard-to-control entities should be amended to include inventory. For something that sits on a shelf until somebody moves it, inventory seems to have a heck of strong will.
Why Prioritise Inventory Control?
Make no mistake; inventory is tough to control effectively. At the same time, failing to control your inventory levels is the surest way to bloat working capital to a truly unhealthy degree. In general, it’s easier to control other working capital factors such as accounts payable and receivable than it is to get a grip on inventory.
However, that’s no excuse for procrastination. It’s true that your company may make faster inroads into working capital reduction by focusing on collections and payments, but inventory can easily be the source of 40% or more of excess working capital. That should be incentive enough to try and tame the beast as soon as (or even before) grabbing quick wins from the payment game.
So What Can You Do to Control Inventory Levels?
If you want to stop inventory levels from bloating your working capital, the first requirement is to implement a process of ongoing analysis. Only by analyzing your inventory situation can you determine which methods of inventory control will be effective in reducing your net working capital. Analysis should be performed at SKU level and include raw materials, work-in-progress, and finished goods.
You have a number of inventory management methods at your disposal, including the determination of economic order quantities, product lifecycle management, and management of buffer inventories.
Additionally, you might want to consider some of the following options to contain inventory costs and begin to reduce working capital tied up in stock.
Centralise Control of Inventory Levels:
As mentioned already, inventory control is not easy. It’s even harder when you have multiple warehouses, which are all perhaps using different inventory management solutions. It may be worthwhile centralizing the management of inventory levels and working on a redistribution model, which can help to prevent overstocking at individual locations.
By centralising your entire buffer inventory at a single location for example, you should be able to achieve a reduction in the overall level of a safety stock.
Instead of holding some buffer inventory at each storage facility, you can distribute materials from the central location as and when required.
Negotiate Shorter Lead Times:
Your suppliers play a critical role in your control of inventory and working capital. If you can negotiate shorter lead times, at least from your key suppliers, buffer inventory can be further reduced.
Similarly, you should seek to reduce order sizes and receive deliveries on a more frequent basis.
This will help to minimise uncertainty in your supply chain and enable a more responsive approach to balancing supply with demand. You’ll find it easier to get the support you need from your suppliers if you cultivate close relationships with them, which means a strong supplier management program is important
Don’t Allow Inventory to Become Obsolete:
There is no more wasteful way to tie up working capital than keeping hold of obsolete inventory. In fact prevention here is far better than cure.
The lifecycle of each of your products should be monitored carefully to try and avoid obsolescence.
Not only does obsolete stock bloat your working capital–it also takes up valuable space and continues to incur storage costs with little hope of a decent return.
And Finally: Pay Attention to Unit Costs
As well as taking steps to slim down your inventory levels, remember to look for unit cost savings on inventory purchases too. One way to get unit costs down is to seek discounts on the volume of inventory you purchase in a given month, rather than receiving discounts on individual order quantities.
If yours is a larger organisation, you should consider investment in resources to help tame the inventory beast. There is probably a full-time role there for an inventory manager or two and you might also think about the deployment of inventory optimisation software, especially if you have an older ERP or warehouse management solution in place.
With inventory management, as with most facets of supply chain, it’s often necessary to spend first if you want to save. So don’t be afraid to invest in people and assets to help you with inventory level and working capital reduction.