Distribution businesses are built around inventory, but what happens if it’s not streamlined? If you have too little inventory on hand it may delay you from servicing your customer in a timely manner – potentially damaging that relationship. Conversely, having too much inventory on hand can tie up your cash and prevent you from being able to make timely strategic investments in other parts of the business. Whether you’re a million-dollar company or a one hundred-million-dollar company, this can and probably does affect you. Here are a few simple practices to mitigate this problem and streamline your inventory.
Cycle Counts
Cycle counts are a simple concept – count small portions of your inventory every day/week so that over a set period of time you’ve done a full physical count. A good place to start is to try and achieve 4 full physical counts per year – which requires you to set your cycle counts so that you count the full warehouse every 3 months. Ensuring accurate inventory allows you to better service your customer, and it will allow your purchaser to more accurately determine what to buy.
Par Levels
While grit and intuition may have served 15th century explorers well, modern businesses must be data-driven to stay competitive. Depending on what inventory management software your company uses you may already possess features to run these calculations automatically. If that is the case, I strongly recommend leveraging these features to the fullest. If you don’t have that built into your system – you can use the following basic formula to calculate par level manually (keeping in mind this won’t exclude opening orders):
M: Number of Months to evaluate the Usage for
U: Total Item Usage/Movement
T: Number of Desired Inventory Turns
P: Suggested Par Level Based On Usage History
SS: Safety Stock Percentage
((U/M)*(1+SS)) * (12/T) = P
Ex: If we exported 6 months of Item Usages for a single item with a total use of 60 units, and we want to order this once a month with a 20% safety stock | ((60/6)*(1+.20))*(12/12) = 12
Solid math like the formula above coupled with intuition and experience will allow for the most efficient purchasing – ensuring that you don’t tie up too much cash flow in unnecessary inventory levels without effecting your ability to service your customers in a timely manner.
Moving Dead Inventory
Now that we’ve successfully stopped the bleeding, we can worry about moving our dead inventory. Sometimes with smallwares, you can do give-away/prize driven marketing to bring people in the door and offload dead inventory. If you can’t move it in the showroom, sell it online. A common problem is that not everyone in your area needs what you have in dead inventory, but someone somewhere in the country might. If you put it on sale on your website you stand a much better chance of clearing that space in the warehouse and adding a bit more cash back into your business. If you don’t have a website – consider selling on Ebay, Amazon, or even Facebook Marketplace.
These are all practices I’ve observed during my years of consulting and software implementation. While all of these concepts seem very simple, when put into practice your inventory will be tighter than ever before.
Do you have any ideas to add to this list of ways to reduce your inventory? If so, comment them below!
