Analyzing inventory to maximize profitability

Every company strives to improve profitability. Countless hours are spent in meetings devising ways to lower operating costs while increasing sales and gross margins.

Analyzing inventory

Unfortunately, management in many companies assumes that:

  • All material currently in stock is necessary to properly serve customers.
  • Costs can best be reduced by lowering wages, reducing benefits, and squeezing any possible amount from the operations budget.
  • Salespeople should focus on increasing sales dollars and gross margin profit dollars. Buyers should order whatever salespeople request to help them achieve these goals.
  • New warehouse technology is an expense that cannot be easily afforded.

In the quest to maximize return on investment many organizations fail to scrutinize their investment in inventory. This is unfortunate because improving the way you control and manage your inventory may have the greatest potential for improving your organization’s bottom line.

COMMON INVENTORY ISSUES

Distributors often simultaneously suffer from conflicting complaints concerning their inventory:

  • Lots of “dead” inventory in their warehouse.
  • Frequent stock outs and back orders of popular products.
  • Delays in filling and shipping orders to customers.

They have too much of the wrong products and not enough of the products necessary to provide a high level of customer service. Furthermore, the company’s warehouse(s) may not be designed and organized to minimize the cost of filling customer orders. How do these inventory challenges affect corporate profitability?

  • Dead stock does not provide a return on investment.
  • Money invested in excess inventory is not available for other opportunities to earn profits.
  • Stock outs result in lost profits since customers’ requests for products cannot be filled.
  • Inefficient warehouse operations require excessive labor and equipment.

Few would disagree that addressing these issues is very important. This white paper discusses several ideas to help you improve the profitability and productivity of your investment in stock inventory.

UNDERSTAND THAT DEAD STOCK IS ONLY WORTH ITS “SALVAGE VALUE”

When investors buy shares of stock in a company, they do not earn a profit on their investment. It is only when they sell the stock for more than they paid that a return on their outlay is realized. In the same way a distributor does not earn profits until purchased material is resold to a customer at a price that is higher than its cost. Dead inventory is comprised of stocked inventory items that have had no sales within a “reasonable” amount of time (often 12 months). It is the equivalent of shares of stock in a bankrupt company. Many companies have invested tens of thousands, hundreds of thousands, or even millions of dollars in material that customers just don’t want. The impact of dead stock on a company’s return on investment can be devastating.

It is unfortunate that management in many companies is convinced that the primary key to increasing corporate profitability is to encourage salespeople to increase sales and gross margins. This action is important, but not the only path to success. In fact, effectively managing your inventory investment can contribute as much or even more to your organization’s bottom line. You’ve got nothing to lose and a lot to gain by actively managing what is probably your largest asset. Why not take the first steps in initiating an effective inventory management program today?

Read More of Jon Schreibfeder’s article here

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