Inventory is the most important aspect of any business. In today’s world of technology, maintaining profitability and growth in business can be a real challenge for any organisation whether big or small. With growing competition through startups and foreign inroads to our economic market, companies are facing numerous challenges like:-
- Lower rate new products
- Greater variety in products
- Complexity in customer needs and specifications.
- Quick turnout time and faster deliveries.
These demands often leave many unanswered questions for the company owners like:
What’s the easiest way to deliver quickly to the customers? What is the faster way to procure lower material costs? What is the fastest way to reduce the production costs?
Unfortunately, many businesses fall in the pray of adding more finished goods inventory, purchasing large quantities of raw materials and run large order quantities, which results in large quantities of in stock inventories. These large inventories have devastating effects on the investment costs, business margins, and often on customer satisfaction.
Instead of lowering costs, raising customer satisfaction and improving profits, answers for the above questions can often lead to obsolete stock, high production cost and reduced profits.
In real time scenarios, these material costs represent around 75% of the total business cost. Hence, in order to achieve success in a manufacturing business, we need to manage our inventory with utmost criticality.
Let’s understand further on the pros and cons of having a high inventory level and how to balance our inventory requirements to create a profitable business model.
What is High Inventory level?
Having high inventory levels in your warehouses generally means your company is struggling to manage its inventory and make proper sales. Inventory is the main source of our revenue, so it is essential to make smart decisions about how much inventory we have, how much safety stocks we should store in our warehouses, and how much we need to reorder to balance our demand supply chain.
Small-sized or mid-sized businesses don’t have time or human resources to address the challenge or right tools for the job. But high-level inventory is not only a challenge for small or mid-sized businesses, Big corporations are fighting for similar battles. Every size and every industry faces an imbalance of inventories. Most companies do not realize the costs that they could eliminate or the capital they release tied upon the excess inventories. Depending on the circumstances, there are also advantages of having a higher level of inventories.
Let’s understand the pros and cons of high inventory levels:-
Pros of holding excess inventory
- Quick response time
While comparing high inventory stocks and out of stock situations in peak customer demand times, obviously out of stock situations are definitely worst. In today’s world of a competitive market, if we don’t satisfy our customer requirement quickly, we will lose them to our competitors. Having high stocked warehouse definitely facilitates quick response to market requirements and avoid any waiting time due to shipment delays.
- Decreased risk of shortages
Updated stocks in hand, help you to satisfy your customer requirements even if the products are discontinued or out of stock at the movement. Also, in cases of demand shifts and out of stock competitors, we can meet the demands of the customers by providing our stocked products and give promotional offers to improve our customer relationships and increase sales.
- Protection Against Order Delays
Many business loose long term customer due to delay in supply from natural calamities and delayed shipments. In the peak demand times, we can supply our excess stock to the customers and gain their trust for a long term business relationship. In some cases, suppliers are delayed due to factors beyond their control and excess stocks help us to continue our business production without any delays and customer distress.
- Handles Uncertainty:
Companies stock up on the inventory to handle the uncertainties in the market. This type of inventory is called buffer inventory. Sometimes external factors affect the supply and demand in such a way that companies cannot anticipate. A company that will have a large amount of inventory can properly handle all the unexpected demands from the customer. Companies will also handle the mishaps from suppliers who will fail to deliver the inventories on time.
- Prepared for Increased sales:
Having a high-level inventory is a big advantage that allows the companies to increase sales. A company will have a high volume of sales during the holiday season. To prepare for this situation, companies will hold a large amount of inventory to meet the demand of the sales.
Cons of holding excess inventory
- Restricted Cash flow
The amount of inventory we have in our stock is directly proportional to the amount of business capital we have. With huge stocked up warehouses, our business cash flow also gets restricted and we have less money to invest on the new stocks and other business requirements.
- Risk of inventory becoming obsolete
In the current era of online shopping and constantly changing trends, the value and quality of products decrease the longer they are stocked up in the warehouses. With fast changing technology and customer requirements, products like smartphones and gadgets become outdated in every six months basis. We need to make sure we sell our perishable and fast moving products at the earliest to avoid any losses for the organisation. If any product is outdated and we have many unsold items, we might end up selling these excess products at lower prices than the produced one and incur a huge loss for the firm.
- Risk of item not selling
With the huge amount of stocks in hand, we increase the risk of misjudging the demand of the product in the near future and end up having the products not sold at all and keep it for next season or forever due to no market demands. This causes huge investment losses to the firm.
- Higher storage and maintenance cost
Huge stock means massive storage space and huge insurance along with a larger amount of manpower and warehouse maintenance cost. This also increases the overall price of the product which will again reduce our sales and incur a loss for the business.
With huge investment on maintenance and procurement of the products, the firm usually increases the cost of the product which ends up losing the market value to its competitors because the price of products will be high in comparison to other sellers. Also, labour cost involved along with warehouse maintenance, electricity charges, security and other changes increases the expenditures of the organisation for the upkeep of the huge amount of inventory stocks.
Also, the high risk of damaged goods due to natural calamities like fire, floods and other reasons also increase the overall business cost for inventory maintenance. The insurance premium for huge warehouses also contribute to high investment for yearly inventory maintenance.
- Shifting customer demand:
The inventory which you have on hand today may not be the inventory that customers want tomorrow. There is no way to forecast the demand of the customers with complete accuracy because the taste of customers changes constantly. Economic climate shifts, clothing styles go out of style, and making customers buy pricier or less costly items, depends on the economy. The more inventory you have, the more likely you lose the customers when they no longer want what you have.
- Striking a balance:
It is also an advantage to have a huge inventory and not have customers what they need when they need it. Successful inventory is when fulfilling what customers want and when they need it, but not having so much that it might cost you additional money to manage or to reduce the clearance.
So how can you keep the perfect inventory balance?
In many cases, we will probably feel that keeping additional inventory in stock is a good thing and there are different ways to get around many of the cons on the list. But it is important to keep in mind these issues may land your business into a serious cash crunch and cause an imbalance for the business workflow.
A good Inventory management software ensures that you always have a good balance of inventory in your warehouses at the same time never land up into out of stock situations. Many strategies can be applied through stock maintenance softwares and follow some of the following method to overcome the challenge of high inventory levels in your warehouses.
1. Supplier lead-time reduction
Higher lead times from the suppliers are one of the major reasons for delay in product delivery, which causes businesses to stock up the safety stock to avoid delay in production.
As businesses, we need to negotiate for a faster lead time from the suppliers to make sure both the inventory level and transportation costs are minimised.
Effective planning of current stock usage and reordering should be done to effectively reduce the overall cost of procuring and storing the inventory for the production cycle. Many effective ways of inventory ordering like partial and staged orders, strict cycles of inventory at the same time in each month, just in time ordering and many other ways can be implemented to improve the lead time of the items.
Read More – Efficient Inventory Management System
2. Eliminating obsolete inventory
Obsolete stock items are the products that are stored in the warehouses but do not have any current customer demand. Reducing these obsolete stocks is very critical for business growth. Removing the old stock may sound quite simple but isn’t always done effectively. Inventory prioritisation methods help in selling high quantities of obsolete items first by rotating old stock.
Obsolete items usually occur when newer product launches of an item or new releases of the products are launched in the market and customer demand changes the market demands for the old products. As efficient business planning, an organizations should make futuristics plans and understand the market trends before ordering any particular item.
Dynamically tracking demand patterns helps in demand forecasting and understanding the market trends and customer demands before procuring any particular item. Also, promotional offers and discounts on the old stock will help to clear out old stocks and free up the working capital to be invested in new stocks. Also, the holding cost and maintenance of the warehouses can be considerably reduced with regular movement of old and obsolete stocks and make space for fresh and more demanded products.
3. Optimizing order size and purchasing frequency
Accurate demand forecasting and just in time orders can help in ordering the approximate amount of inventory needed for production and keeping minimum safety stocks at the same time avoiding any excess inventory orders. Reduced Minimum Order Quantities (MOQs) methods can be implemented so that smaller, more frequent orders can be done instead of storing a large amount of inventories in the warehouses. Frequent and smaller orders allow organizations to increase ordering flexibly in cases of demand shifts for products.
4. Centralizing inventory control
With the help of centralised control of inventory through stock maintenance software like SalesBabuCRM, a cloud based database can be maintained to keep a track of every inventory coming in and moving out of the warehouses. Also, various metrics and stats generated can help to forecast customer shopping trends and product to maintain transparency in ordering and maintaining appropriate safety stocks.
5. Continuous inventory reduction analysis
SalesBabuCRM software helps to generate various analysis to create metrics in understanding the shopping trends and market demand which help in forecasting product requirement. With these proactive measures, proper ordering and product rotation methods can be implemented to reduce overall Inventory levels and storage cost for the business.
Inventory management can be a boom for the business but can turn into a curse if not managed properly. So with an effective management tool like SalesBabu purchase and inventory CRM, we need to strike a balance to maintain the optimal amount of stock in our warehouses.