Executives tell me that after a decade of scrambling to meet consumer demand, inventory is scattered, the books feel inflated, and the true cost of holding this inventory is unknown. In response, I want to share five discrete inventory moves that can preserve cash and strengthen a company’s position in the face of uncertainty.
1. Limit raw materials to those that contribute only to core offerings
Exiting products that do not align with the business strategy will allow a more focused inventory, minimize carrying costs, and maximize utilization rates. Studies have shown SKU increases to result in corresponding decrease in sales per SKU, overall margin declines, changeover, and inventory write-offs. The increasing complexity results in a loss of efficiency, productivity, and end-to-end product management.
2. Optimize demand forecasting
High-fidelity forecasting will allow you to postpone conversion to finished good inventory until there is an imminent demand. The more accurate your forecasting, the longer you can postpone production and inventory purchasing.
3. Postpone conversion of raw materials to finished goods
Raw material inventory delivers more flexibility to the organization than finished good inventory. However, a certain amount of finished goods inventory (safety stock) may be necessary when production takes longer than customer fulfillment. In such cases, accurate demand forecasting will also minimize safety stock requirements and inventory service levels.
4. Incentivize distribution channels to hold finished good inventory
Keeping the product closer to the customer can work to your benefit as well as that of your distributors. Not only does it mitigate your carrying costs, but also it optimizes customer fulfillment.
5. Consolidate inventory locations and systematize inventory by utilization rate and family
Although fewer inventory locations can increase lead times for customer orders, a simplified footprint can lower costs and increase margins. Optimizing inventory location by product velocity (rate at which product is ordered) is also a quick way to reduce order fulfillment time by reducing order complexity and maximizing efficiency.
Diagnosing opportunities from within can be incredibly difficult. A healthy inventory will set your company up for significant opportunities to improve expense and asset effectiveness. Turner 360 Consulting can provide you with an inventory pulse check which can serve as a huge lever to improve the financial health of a company.
