How Effective Inventory Management Can Boost Your Profits

September 2017

By André Nel

In any industry that relies on inventory stocks for daily operations, even the smallest mistakes can quickly build to the point of doing serious damage to your profit margins.

If you haven’t reviewed your inventory practices in a while, or you’re confused about an unexplained drop in profits, it may be time to examine your operations and ensure you’re still running under optimal conditions.

The High Cost of Poor Inventory Management

In most inventory-reliant industries, average carrying costs can run as high as 30 percent of overall inventory costs, leaving a lot of room for mistakes to be magnified and leading to significant—and unnecessary—losses.

For many companies, the mistakes start adding up at the very beginning of the procurement process, as poor inventory visibility leads to under- and over-ordering that compounds over time. Take the retail sector—research consistently shows that most companies struggle to order appropriately, resulting in significant profit losses as the mismatch between inventory levels and market conditions resolves itself.

In North America alone, retail companies lose an average of $123 billion every year by ordering more stock than they need. An additional $129 billion is lost because of under-ordering, resulting in reduced sales and a larger, unquantified loss as customers look to competitors to find the products they want and shift brand loyalties accordingly.

Poor processes cause even greater losses in the retail sector, with an estimated $284 billion sent down the drain due to bad shipping practices, ineffective personnel training procedures and inefficient cooperation with vendors and other third-party partnerships.

All told, it’s estimated that the retail industry loses more than $1.1 trillion globally every year because of mistakes in inventory management. It’s likely that proportionate losses occur in every sector that relies on stock in some way, marking a clear need to ensure your company’s inventory management is running at top form.

Why Inventory Management Is So Hard to Get Right

In many ways, inventory and procurement are destined to be two of the greatest risk factors for your company, seeing that no organization can predict the future with perfect accuracy. Market conditions are often volatile, accidents and mistakes are inevitable, and inventory systems usually involve thousands (if not millions) of moving parts and personnel touch points, each one representing an opportunity for error.

Further complicating the issue is the fact that no company is an island, and dealing with inventory guarantees you’ll need to rely on consumers or third-party partnerships to either buy, sell or ship your inventory. Volatile factors like shifts in supplier lead times can quickly compound mistakes, especially in the modern economy where just-in-time shipping schedules have become the norm.

Indeed, the global supply chain is now so ubiquitous and complicated that every company is impacted by shipping conditions around the world, even if its own inventory is an entirely domestic affair. Problems in one part of that chain will inevitably ripple into other chains, amounting to a constant source of risk that must be managed appropriately.

Analysts consistently say that poor visibility is a problem plaguing most inventory-reliant industries, with inventory assessment processes that are either out-of-date or simply overwhelmed by the complexity of the supply chain.

If you’re still doing things the way “they’ve always been done,” or even the way they were done five years ago, chances are your company is experiencing hidden losses that won’t be discovered without an update to your processes and procedures.

Improving Inventory Management

In many cases, companies are making mistakes with their inventory management system from the ground up, with errors like operating in a decentralized framework when a centralized system would be more appropriate. This is significant, as research shows that companies well-suited to a centralized inventory hierarchy can save as much as 10 percent on overall ordering and manufacturing costs when switching to such a model. Conversely, companies in highly volatile industries may be hurting themselves by relying too much on a centralized system—a looser network of semi-autonomous local nodes might be better equipped to react to changing conditions rapidly.

Such fundamental errors can thrive when inventory is poorly monitored, so it’s vital that your technical and personnel procedures maintain a high level of visibility on your inventory levels. Once you achieve that visibility, performance monitoring should become a standard component of your daily operations, with audits and inventory reviews performed as often as is necessary to keep an accurate accounting of your inventory’s activity throughout the supply chain.

With increased visibility, you can ensure you’re prioritizing the essentials and stop making mistakes such as assuming the most expensive products in your inventory are the most profitable, when the reverse may be true instead.

Improved visibility also means you’ll be able to make better procurement decisions, and you can more accurately assess the interplay between sales or distribution activity and the behavior of purchasers in your market.

Whatever your industry, the ideal scenario is one in which all components of your inventory management operate in sync. With technology that’s capable of accurately tracking your inventory, personnel who are adequately trained in managing it and procedures that respond to shifting market conditions, you can ensure losses are kept to a minimum. To learn about which type of inventory control method may be right for your business read our June article on this topic. Contact Goldin Peiser & Peiser for additional information on this topic or to discuss other ways to increase revenue in your business.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.

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