Four strategies to optimise inventory management
One of the challenges facing stock-based businesses is meeting customer expectations while maintaining low inventory levels. Key to overcoming this challenge is efficient stock management to ensure the quick turnover of stock. Poor stock management can have significant impacts on your business: fast-moving items are regularly out of stock, resulting in customer frustration, while slow-moving items sit in your warehouse and eat up cash flow.
Regularly reviewing your average stock days is the first step toward optimising your inventory management. By employing strategies to reduce average stock days you can expect to:
- Improve customer service and increase sales due to less stockouts
- Cut costs and free up cash by reducing slow-moving stock
To calculate your average stock days, divide the annual cost of goods sold by the average inventory holding cost. Averages vary according to industry. For example, for electrical wholesalers the average is 51 days (according to Strategos Inc.).
How to improve your average stock days
Paying attention to reorder points can yield outstanding bottom line results. The potential to halve average days in stock is not an unrealistic expectation. Even if you improve your average by 25%, you can free up thousands of dollars in cash flow and save around 20% of your stock holding costs as well as improve customer service.
One of the best strategies to improve your average days in stock is to order the right amount of stock at the right time.
The first step is to calculate your stock turnover rate. Multiply stock on hand (at cost, as at end of last month) by 365 then divide by your cost of goods sold (COGS) in the past year.
For example: ($660 000 x 365) ÷ $2 million = 120 days.
In this example, if you reduce your stock days by 25% (90 days instead of 120), you will free up $198 000 in cash flow.
Strategies to optimise inventory
- Review reorder point (ROP): based on average sales per buying period, you need to set a base reorder point. ROP = demand x (delivery time + review time) + safety stock quantity.
- Negotiate with suppliers: many suppliers have a minimum order quantity or discounts based on quantity breaks; however, they may agree to accept an order on favourable terms, but with split deliveries.
- Return excess stock to suppliers: slow-moving items take up warehouse space and tie up cash. Depending on the returns policy, you may be able to send this stock back to your supplier.
- Ensure you have enough cash: as you get smarter with setting your ROPs, your stock holding in fast-moving items will increase. At the same time, your slow-moving stock will take time to reduce if you cannot return it. Therefore, you will need more cash on hand to finance the increased ROPs for fast-moving items.
With Attaché Software, you can easily create and access sales history reports and use this information to calculate an accurate ROP. This a great way to stay on top of stock control, allowing you to assess demand for goods and set and review ROPs accordingly.
Read more about Attaché's inventory management solutions.