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Cut inventory costs in five proven steps

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SMEs often ignore the need for inventory systems because they are too complex to handle within the usual accounting software and they feel they can't justify the costs of an enterprise software package that takes time to implement, learn and tailor to their business, according to Maxell Consulting .

Poor inventory management increases the costs of carrying value of stock, storage space costs and handling and management costs. It also impacts gross profit in any particular reporting period.

But the biggest impact inventory has on a business is the loss of cash for the period the items are sitting on shelves.

Cash is king in any business and cash tied up in inventory simply reduces opportunities to expand sales in other areas or requires companies to have increased short term finance requirements. Cutting inventory costs gives a business back the hidden cash in their inventory.

Maxell Consulting has developed a business program that assists SMEs to reduce the costs of inventory on their business and become more systematic in how they manage a valuable resource.

After identifying opportunities for clients to reduce costs through better management of inventory, Maxell Consulting developed a simple business program, including software, to enable SMEs to start managing inventory within two weeks of commencing the program. It is based on the five steps that have been used to help other businesses.

Step 1: Know your inventory and prioritise

No important decisions can be made without knowing what is in inventory and ideally how long it has been there. A simple inventory system can track what is in stock, its carrying value and the trends of movement in stock value.

A system then allows for easy prioritising of what are the fastest and slowest moving items and what value is locked away in inventory. This also means a stocktake is required.

Step 2: Reduce supplier lead time

The basic premise of inventory is to provide a buffer to allow variation in either customer requests or manufacturing. If there is no lead-time in getting inventory, then managers must pick what they want and use or sell it. Looking at ways to reduce lead-time can also reduce demands to carry stock.

Ideas to consider include identifying the suppliers that can assist with fast turn-around or provide consignment stock.

Lead time reduction is also assisted by understanding when items are needed and what is the history of usage on key items. This forms part of projecting demand for inventory items - the next step.

Step 3: Project inventory demand

Having a system for monitoring and tracking inventory should also allow managers to predict what will happen in the future. Usually demand projection is reviewed for the next 3-6 months, but even regular projection over a 4-week period allows for improvements in inventory control. This helps suppliers to reduce lead times as well as allow cash flow planning.

Step 4: Eliminate stock-outs

Quite simply stock-outs can cost businesses big dollars. When a customer wants a product that a business can't supply, there is the risk of losing the sale.

In manufacturing, raw material stock outs can hold up machinery, meaning reduced capacity and less coverage of fixed costs. It can also mean higher costs to obtain the items urgently in both delivery charges and spot pricing rather than negotiated supply agreements. In a service business, stock-outs can grind a business to a halt

Step 5: Systemise control

A system for inventory management is not just about cost control. It is about managing information that impacts the cash flow of a business. Inventory systems must include:

1. Policies and procedures that spell out how people within the organisation use inventory and how it must be accounted for

2. System for recording and tracking stock and usage

3. Regular management reviews of stock levels, trends and key financial performance indicators. These should include:

* Stock value (current and moving totals)

* Inventory turnover

* Number of stock-outs

* Breakdown of inventory items

4. Regular action plans to extract the best value from inventory.

Inventory systems also allow other people within the business to make correct decisions when it comes to meeting customer requirements.

In an engineering business, inventory systems support accurate and profitable quoting by indicating to managers what is in stock, how long it will take to deliver and what has been used for similar jobs in the past. The more accurate the quotation system is the more likely the business is and making a profit.

Within a manufacturing environment, inventory systems form part of the entire supply chain making sure raw materials are always available.

For the customer, inventory usually means the finished products they buy. In this case inventory management is all about being able to meet customer demands and respond to market changes.

The Maxell Consulting Inventory Impact program progressively takes a business through implementation of an inventory management system, starting with an audit of the inventory systems and stock on hand and a simple effective spreadsheet based system for tracking inventory levels.

The company helps write the specific policies and procedures that form the basis of a successful business system, tailor the software to suit the business and facilitate the action plans that deliver real cost savings to the business.

Inventory is something that everyone in a business "shares" in some form, and hence everyone must be involved in managing it.

Inventory management is not just keeping a list of what is on the shelf, but encouraging everyone to find ways of adding value to the business through better use of an asset already paid for.

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