In his August 2014 article for Forbes Magazine, "Inventories: A Problem For Economic Growth and Individual Companies," writer Bill Conerly states that businesses that are carrying too much inventory are not only a detriment to themselves, but to "the entire country."
That may sound overly dramatic, but Conerly backs up his statement with data from the U.S. Department of Commerce's Bureau of Economic Analysis. Reports from the Bureau for two different quarters in 2014 show that inventory can contribute significantly to both upswings and downswings in the Gross Domestic Product.
Historically, Conerly tells us, the supply chain ratios between inventories and sales has been steadily dropping over the last 60 years. This trend, however, reversed in 2010, and more companies started increasing their inventories. This can be a dangerous trend.
When the economy slows, businesses tend to drop inventory which, in turn, lessens demand for those products. This reduces sales and further slows the economy. This is bad for everyone— especially those individual businesses who were simply responding to their own supply chain KPIs.
Closer to Home
Managing your inventory-to-sales ratio is just good business. As stated above, it's good for the nation as a whole, but, more importantly to you personally, it's good for your own company.
But just why does this matter so much? Because, carrying excess inventory is costly. Every excess piece of product that you have in your warehouse is costing you money.
That product has to be stored, cataloged and tracked. It can even slow shipping times by simply being in the way of warehouse workers. This can lead to lost sales as impatient consumers look elsewhere for what they need. Too large an inventory can even be an economic drain simply because you must pay for more warehouse space and upkeep than you actually need and that extra product becomes obsolete as it sits taking up space in your warehouse.
Too little inventory can be just as costly. Production can ground to a halt when key components are unavailable or when machinery cannot be quickly repaired because of missing parts. Customers can be lost when the products they order are not immediately available.
Striking a Balance
Traversing the delicate boundary between too much inventory and too little can feel like walking on a tight rope. Here are some things to consider as you try to find that perfect balance:
- Forecasting. The accurate forecasting of sales and delivery processes is key to optimized inventory management. Variables that must be weighed include shipping times from warehouse to customer, order processing times, seasonal demand and even the shelf life of products.
- Warehouse efficiency. An inefficient warehouse can cause negative effects that will ripple out into other areas of your operation. Sales are slowed when products cannot be found and shipped quickly and efficiently. Stocking and reordering processes can be hindered if inventory is not being accurately tracked and reported. Too large a warehouse is simply a wasted asset, while too small a warehouse can lead to product shortages and out-of-stock issues.
- Data management. Nothing is more important to your supply chain than accurate and up-to-date data management. Without up-to-the-minute figures on sales, incoming orders, backlogs, returns and inventory, there is no way to accurately predict future needs. The data must not only be accurate, but it must also be accessible to those in your company who need it to make the all-important decisions about your inventory ratio.
Track Your Progress
As you try to find that perfect inventory-to-sales balance for your company, keep a close eye on your supply chain KPIs. The figures that they reveal will be the best tools for tracking the changes you make, and refocusing your efforts if those changes do not give the expected results.