Take a financial view of inventory

Inventory is the largest balance sheet asset in your business: If your margin is 50%, that means your cost of goods is 50%. In other words, 50% of your net sales are spent on inventory and inbound freight.

So why aren't merchants more aggressive in dealing with inventory? In particular, marketers need to do more to liquidate aging inventory, and look closer at how to achieve the optimal balance point between high order fill rate and increased inventory.

Most multichannel companies have plenty of room for improvement in how they manage inventory. These 10 steps will allow you to deal with inventory more aggressively and make more profit.

1. GET A HANDLE ON INVENTORY STATUS AND CONDITION

   Most direct companies use their order management system for inventory control. But top management does not use these systems: What they use to monitor inventory status may be a summarized or Excel-based report. Companies need to have a “single version of the truth” for all data: sales, inventory, purchases, stock on hand, etc., including plans and actuals.

   What's more, there can be dozens of system codes describing inventory status and condition. The inventory application needs to have status codes used in reporting that can accurately and helpfully describe inventory status to management — such as active product, inactive product, assigned to liquidation, discontinued, return to vendor, and so on.

   Sound basic? Sadly, it's not in practice at many companies. In fact, it's the root of a lot of inventory management issues and attempts to gain useful reports.

2. GET SENIOR MANAGEMENT, THE CHIEF FINANCIAL OFFICER AND INVENTORY MANAGER ON THE SAME PAGE

   Inventory management is not a clerical activity, but a strategic function. Come to agreement about which key inventory metrics you can do something about, and how to measure them. Then review this on a frequent, scheduled basis.

   There are lots of things you can measure, but many are meaningless. Just by focusing on these inventory metrics, you will see improvement if you can put in place the tactics to improve performance.

3. ANALYZE THE AGE OF INVENTORY

   Many companies either cannot report age of inventory, or they are less than proactive in dealing with it. What is old inventory to you? For some companies, the answer may be 12 to 15 weeks on average; for others, 25 weeks. There are two key points here:

   • Are you as active as you need to be to liquidate slow sellers? One of our clients said its goal was to turn the inventory at least four times a year, up from the current 3.15 turns. But when we talked about how long the company carried inventory before it deemed the stock as old, the response was 20 weeks.

     This is a classic example of where most small- to mid-size companies are from an inventory management perspective, and in using key performance indicators. By choosing to focus on inventory as it hits 20 weeks and older, they may end up doing only 2.6 turns annually. For this client to get four turns annually, the company needs to be concerned with inventory as it hits 11 to 13 weeks on average.

     Develop a strategy to liquidate inventory when it's obvious it's a slow seller rather than waiting. You need to develop long-term strategies and follow up with the actions or tactics needed to achieve them. You must also understand the goals, agree to how they will be measured, and report on them regularly.

   • Are you assigning inventory carrying costs? As with the managers who didn't think there were such costs because they “owned” the inventory, you must realize that there are costs you incur, including occupancy cost (space and utilities), cost of money or lost opportunity, taxes and insurance, and labor to maintain the inventory.

4. FREE UP CASH FROM INVENTORY

   Inventory turnover is an age-old retail inventory metric. It's surprising how many owners and business managers don't have it reported or use it, especially e-commerce companies that have started up in the past 10 years.

   Think about inventory turnover this way: How many days does it take to get your cash out of inventory? If your turnover on average is three times annually, then it takes 122 days on the average. If you are a b-to-b company selling wholesale and the customer negotiates terms that are 60 days, your average for a 3.0 turnover becomes 182 days — nearly half a year.

   Big-box retailers are the masters at this; they don't pay for anything until it's sold. Start measuring turns by product and meaningful product categories, and put in place liquidation and purchasing strategies. This will increase turns and improve profits.

5. DYNAMICALLY PROJECT END OF PERIOD INVENTORY

   Many companies can't project, to the end of the month or sales period, where the stock on hand will come out. To do this, you have to update the planned sales, stocks, purchases, etc. with the actuals for the month.

   If you can't do this dynamically, management loses a timely view of how sales trends affect inventory value. Retail companies are more apt to use a dollars open to buy (OTB) process (think of it as a purchase checkbook for inventory).

   But the key is that management of an OTB is dedicated to staying within the plans. How many companies have plans by month and can project month end?

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