The financial custodians of your business are complaining that the investment in inventory is too high. Cash flow is tight, there isn’t significant ROI, warehouse space is limited – whatever the reason, you are tasked to bring the investment in inventory down.
It is quite easy to do. Simply order less and gradually the investment will reduce. Unfortunately, this may also risk losing sales, as ordering less of the items that are moving could cause stock-outs. We have already addressed the stock-out crisis and want to avoid that as much as possible.
So where to start?
Simple! First, identify which items have excess stock. By definition, any item carrying more stock than that item’s maximum level would be identified as an excess stock item. Note that obsolete items would have a maximum stock level of zero. The amount of excess stock would be computed as the difference between the maximum stock level and the available stock. The associated excess stock value of all items identified as excess can be compared to a realistic stock reduction goal.
Now you have a powerful metric! No matter how painful it is, make it visible.
Regularly compare your excess stock value to the stock reduction goal to ensure that:
1. You are continually focussing on shrinking excess stock
2. Avoiding creating “new” excesses.
With a few simple inputs, NETSTOCK can quickly present this information to you and the app makes it easy to monitor your progress.
Notice that five items are presented ranked by their excess value. These would be the worst offenders and if you could action their excess stock, it would make the largest impact on your business. Start working through items and consider what options you have to minimise the problem – depending on the item and circumstances, you may be able to redistribute it, return it, re-engineer it, or promote it. In some cases, you might have to scrap it. And if there are any purchase orders for excess stock items, they should be investigated and either cancelled or delayed.
The hidden costs of excess
The point is that excess stock ties up investment – which could be better-used purchasing items that are stocking-out – and it adds to inefficiencies in your warehouse. Try to quantify the cost of unnecessary storage space and insurance, not to mention procedures like having to do stock counts of obsolete items. This might reveal that the “scrap it” option is not so bad!