During these tough economic times, it is not unusual to incur an excess of inventory because of low sales.

Excess inventory can have a very negative effect on your bottom line. For example, cash tied up in inventory not only restricts funds available for other uses but also reduces profit margins. This is especially true if you have to lower the selling price of your excess products in order to move them out of inventory.

To minimize the problem, you must know what you sell from stock and how much of that product you’ve sold in the past.

To begin, you should start with a three-year history of your sales from inventory. Rank your sales in descending order in two separate ways: in dollars and in units sold.

Once you have this completed, meet with sales and marketing to weed out those one-time sales, special promotions, etc., that can distort your dollar and unit sales history used for planning purposes.

The end result of your final list will usually reveal that 20 percent of your stock products will account for 80 percent of your sales. This 20 percent will become your “A” list, and these products should a) take top priority if you either purchase or manufacture them and b) never be out of stock at any time!

After the “A” list has been determined, you should classify the next 50 percent as “B” products and the rest as “C” products, the slower sales group.

You are now ready to start managing your inventory through the ups and downs of economic cycles. Managing your inventory effectively is not a part-time job. One person should be placed in charge of the inventory so that you can have accountability for its results.

That person must work with sales and marketing in order to know when future sales promotions will be scheduled, when seasonal sales take effect and, most importantly, to establish a rolling three-month sales forecast.

Why three months? Because it avoids the volatility of one-month forecasts, where actual results can swing wildly up or down and create instant problems in manufacturing and in customer service. A three-month forecast offers a smoother end result.

It is important to note that if actual sales for the three-month period are higher or lower than the forecast by 10 percent, then it is essential that sales and marketing should be consulted and decide if the sales projections for the next three months should be adjusted accordingly.

You must also determine the lead times from the time the stock order is placed until the time the order is completed. For example, you want to know the lead times for products purchased or manufactured; staging; transportation, etc.

Once this has been established, they should be audited, at least on a quarterly basis, by comparing them with actual lead times.

Obviously, a significant deviation in any or all of these segments can have a very negative effect on sales and customer service goals being met.

The optimum time to implement any computerized inventory system is during your physical inventory of goods.

The reason for this is so the book and physical numbers can be reconciled as accurately as possible. You don’t want to delay shipments to customers because of inaccurate stock balances.

In short, then, the basic steps are as follows:

• Know what you sell, when you sell and plan your inventory accordingly.

• Assign responsibility for inventory and make sure that sales and marketing is involved.

• Determine lead times and audit actual vs. planned at least quarterly.

• Always install a system after you have taken a physical inventory.

Attention to your inventory levels dictated by your sales results will minimize the possibility that you will have excess stock during economic downturns.

 

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