Reordering Inventory can consume copious amounts of time
There are several scenarios which can create the need to order stock. These can include impending special events such as Father's Day, a seasonal occurrence like Easter, ordering stock to supply customer orders, or to simply restock your shop or warehouse.
For these and other reasons, businesses with high Inventory counts can spend a great deal of time generating supplier orders, while taking all these sales demand driven factors into account.
Then there are the supply driven factors such as your supply chain and its reliability. This adds even more complexities to the decision about what to order, how much to order and how often. Recent Global events, I'm referring to COVID, mean these supply chains are stretched even further, requiring more buffer stock and longer lead times.
Now all the above can be calculated, simply feed the data into a good MRP system, and out comes the numbers, or do they. Any computerised system relies on existing data such as Supply and Sales statistics to be correct, so if you lack the data or an agile inventory system to analyse it, then the calculations just cannot be trusted. This is scenario which is more common that one might think.
It's no wonder the business owner can potentially spend hours on each single supplier order, trying to walk the fine line between spending too much on Overstocking or too little and missing Sales, turning away customers, more about that later. No doubt the more complex your Inventory System is and the more accurate your statistics are, the faster this process can become and the longer you can put off employing that $100,000+ per year purchasing manager.
Let's consider the downside of getting it wrong
As much as you try, your business will always have a little too many or not quite enough of what you're customers want, since demand and supply are somewhat uncontrollable variables. The target however is to minimise both extremes, finding a happy medium. We all know the consequence of too much stock.
- Cash Flow
- Storage or Shelf Space
- Obsolete Lines
- Replacement price falls
- Devaluation of your stock
- Become uncompetitive & suffer Sales Losses
Healthy cash flow is like the blood running through the arteries of an athlete, it's what keeps your business alive. With Healthy cash flow comes the mental strength of the business owner to feel they can think and act above the day-to-day operation of the business, challenges that bog down owners under financial pressure are magically trivialised, leaving them to enjoy a bigger and better experience of managing the business from high. The luxury of generous cash flow lifts the morale of all participants and stakeholders of the business, from the Cleaner to the CEO. Cash flow makes the sunshine, it's the oil to a squeaky wheel that is your business. Have I brought home the message yet? Well, let's look at how poor reordering can affect this precious commodity…
Imagine you have a product in 5 sizes. It's a new product to market and you think it will be in high demand, so you're willing to put some money behind it and order 100 of each size. This will mean you will have the best representation of the stock in your area encouraging customer count and sales growth. It's a hefty $15,000 investment but your confident that the combination of the product launch and healthy margin will be in your favour. A Month goes by, and you have sold out of 2 sizes, but the rest have not performed nearly as well. There are two issues here 1. You've lost some sales of the popular two sizes, but the other 3 haven't moved, and 2. You still have a fair chunk of your investment wrapped up in the remaining stock, basically you're less than halfway to recharging your available cash to purchase more and based on the sales statistics you should be doubling down on the popular sizes. This is a classic example that if multiplied over hundreds or thousands of line items, you can see how quickly money can be frozen in stock.
Replacement Cost Falls
Doesn't sound too disastrous until you consider your competitor can now get the same product for half your cost.
Often the cost and selling price of a product reduces over its lifespan. This is due to innovation and competitive forces. At the products launch there is a lot of hype and expectation that the product will fill a market void perhaps replacing an inferior method or it's simply Bigger, Faster or Better. Add to this the production ramping up so the cost of production is temporarily high, and the competition is low. Take a 55inch TV for example. When the 55” TV hit the market, it was as we say, the bee knees, Mr & Mrs Smith just needed to have one, it was bigger, blacker and wow what a refresh rate!. So all this adds up to the product being able to sustain higher costs, healthy margins and a big price tag. That is until the 65” hit the shops. By now, not only the selling price, but also the replacement cost of the 55” model have crashed considerably. Now you have 10 x 55” TVs in stock with a falling replacement and sale value, now worth a fraction of what you paid for them. Your cost on those 10 x 55” TV's is now higher than the online retail price. The stock has quickly become obsolete and you're going to lose some money. It won't be long till you see 55” TVs on the side of the road on your way home. Although this is a worst-case scenario, it's realistic and even if your product range isn't quite so time sensitive, multiplied by the many lines of products you have, it can quickly end up being an expensive weight for your business to carry.
Protecting your business from Stock depreciation
Identify product trends using long- and short-term comparisons. Although a product can have a short term slow down due to seasonal changes, the medium- and long-term trends need to be monitored alerting you to products that may be heading for the side of the road. After you identify these, you need to act quickly
- You may have an arrangement with the supplier to return them and redeem some credit since they may have customers still purchasing them
- Run some specials to re-energise the product line
- Sell out at cost or even at a slight loss turning stock back into cash “SUNSHINE”
Whatever your action its crucial to do it quickly. If it turns out that you need a few more because of these actions then that's fine, just don't get stuck with them or else the sun will stop shining and your money will be frozen.
Space is another precious commodity. Have you noticed that a business with ample Shelf or Warehouse space looks clean and well organised? The store person stands there, proud and delighted with their clean and meticulously well organised space. They can tell you where everything is and can retrieve it for you at a moment's notice. Space allows you to organise your Shop or Warehouse to optimise processes such as Receiving and putting stock away, conduct rolling stocktakes, minimise picking times, consolidate groups of products into common areas and keep your stock in good saleable condition. So, it's no surprise that space encourages an organised environment, and organisation saves time and time is money. Simply check stock that has not had a sale or purchase in 6 months. Now get the storeman to mark that stock with a sticky dot, then walk around and consider how much extra space you may have if you moved or dumped these slow-moving lines. When you go to work tomorrow, before you sit down at the desk, walk around your warehouse, or shop and take a hard look, being critical about stock taking up space and visualise how it could be if you started identifying and moving that frozen money. Consider the slow and obsolete stock and make some plans to un-freeze that cash. Even if you get a fraction of what it's worth you've achieved two things. You've banked the money and freed up precious space to help streamline your business and save time/money.
- In Summary
- More Space
- Cleaner and more organised
- Less Mistakes
- More accurate data
- Faster dispatch times
- Stock in better condition
- Safer and higher staff moral
- Cash in the Bank
Remember $100.00 in cash is worth $1,000 in dead stock
Supposing you're holding too much stock, causing both cashflow and space to suffer. This can be the catalyst for missed opportunities. When a supplier brings new product lines to market or advertises a special, will you have the cash flow to range the products? if you have, do you have the space. Often when cash flow is tight you may be playing round robin with your suppliers. Paying each of them just in time to keep your supply lines open. Have you considered this may be harming your relationship with your supplier? Perhaps when they want to promote a product by heavy discounting, they may be discouraged buy your payment habits or consider your representation of their products not to be satisfactory if your premises is disorganised and poorly presented. To some degree most businesses have their limits causing them to offer settlement discounts from time to time. Will you be the smart business in a position to take up their settlement discount further lifting profits and positive cash flow?
Some suppliers may offer great value through forward orders and drop shipments but often they need to be paid in advance. How are you placed to take advantage of this?
It's almost a given that the stock you run out of during the month is the most saleable stock. I guess missing one or two sales may be acceptable, but do you think about where that customer is going to go when they're walking out the door frustrated? Will they re consider shopping with you next time? Missing a sale is missing the opportunity to keep the customer that took you so much Money, Time, and effort to attract. Understand and categorise the fast movers and never run out, in fact if you have some spare cash do a bulk deal with your supplier and lift those profits.
Shipping Costs skyrocket
If you're continuously running slim on popular movers, you're going to need to get more deliveries, so up go the freight costs and it's not just this, it's the time spent placing the order and then receiving it. Add to this that you may need to get emergency stock from another supplier who's price is higher. If you're an importer the problem gets even worse with shipping times forcing, you to air freight some stock sending your profits plummeting.
If none of these problems ring true for your business, then you're the exception. Otherwise here are some tools available within Peach Business Software to clear the haze…
- Generate Reorder levels based on Granulated Algorithms using Supplier Performance, Variable Sales History periods, Usage, Product Groups and Categories within a supplier which can be recalled, tweaked and re generated as often as required. This allows for some triggers to be generated more often when the products are in the growth or diminishing phase of their lifespan.
- Automation to identify and categorise products by sales consistency or velocity. Products can be tagged with a Category colour allowing staff to identify fast and slow moving stock lines in all lookup screens. This automation can be run as often as required to cater to fast moving trends.
- Function to write down the value of slow moving and obsolete stock to minimise your tax liability
- Multiple Bin locations to allow for more organised warehouse and bulk stock space. Also allowing for multi bin picking to streamline and speed up picking times
- Paperless warehousing speeds up all processes from receiving to dispatch, selling, and stocktaking reducing costs and increasing accuracy
- Lost sales register each time a product is dropped from an enquiry
- Promotional sales function which can be product, date and customer focused with the ability to bulk text or email specials
- Peach B2B to promote specials and clearance stock
- Unlimited Alternate suppliers for each product with a record of the last purchase price from each, allowing for discussions about price competition.
- Reports identifying slow moving and obsolete stock with the ability to bulk tag based on your parameters.
- Function to import Supplier price and product file updates so you always know the replacement cost of your stock and when new products come to market.
If your interested in learning more about Peach Software, then please reach out to us at Sales@peachsoftware.com.au