Driving Profitability by Managing your Biggest Asset
Published in LA/NTMA Newsletter, April 2013
by Lee Schwartz
How might you answer the following question – On your balance sheet, what typically represents at least 20% of your company’s assets? If you answered “your inventory”, you’re spot on.
Inventory as a percentage of your balance sheet can reach as high as 60%. So as the owner/ manager of your manufacturing company, where better to focus your operational energies than on management of your inventory? Imagine the benefits.
Several years ago a client of mine had a problem. Management believed that their facility could no longer handle their production needs. After assessing their state of affairs at the time, a startling realization occurred. Space truly wasn’t their issue. How they handled their inventory flow was the culprit.
Inventory is your business’ best friend . . . so treat it accordingly. It is both a good idea and a sound business practice to manage your inventory through the use of some form of inventory management software. It could be as simple as an ERP system or a more robust and sophisticated MRP package.
How do you benefit from using such systems? You gain . . .
- Real time visibility into stock levels for raw materials, work in progress and finished goods;
- Greater accuracy of inventory;
- Ability to predict and forecast inventory needs;
- Reduction of inventory overstock and/or obsolescence;
- And, most importantly, the ability to meet your customer needs.
By employing the software correctly, my client was able to reduce inventory by over 25% while sales grew 35%. And, as added bonuses, cash flow improved and backorders were reduced.
The benefit of cycle counting. Regardless of the tools or activities that you are using to manage your inventory, cycle counting will improve your management efforts. As an adjunct to annual or semi-annual physical inventories, routine cycle counting will hasten the identification of inventory problems and will increase your inventory accuracy.
A client was having inventory problems. Too frequently what the computer said was in stock was wrong. Sometimes more. Sometimes less. So a plan was hatched. Using velocity as the trigger, i.e. focusing on the most active items, every day we counted two handfuls of items. At first the effort seemed daunting, as we encountered too many variances and spent way too much time diagnosing the whys and correcting the causes.
But over time the benefits surfaced. The next full inventory was completed in half the time . . . with much less wasted time dealing with variances . . . and was significantly more accurate than ever before. While it generally takes several years to achieve, the ultimate reward for cycle counting can be . . . no more physical inventories. Wouldn’t that be great?
Inventory management is as much rooted in the cultural attitude of ownership/ senior management as it is in the tactical application of ERP systems and cycle counting. I can’t begin to tell you how many times I’ve faced these responses . . . “I can’t” or “I won’t” . . . when recommending that obsolete or slow moving inventory be disposed of. The thought of selling anything at a loss is simply unacceptable, or management’s judgment is clouded by the fear of “What if an order comes in.”
But consider the consequences.
- Your valuable space is being consumed.
- Your cash sits on the shelf or on the shop floor tying up money that instead could be in the bank or available to pay your bills.
- Your bank line of credit, many times tied to the real value of your inventory, can be compromised.
- If you’re thinking of selling, too much dead stock reduces your company’s value.
- And what about the hidden costs of dead inventory such as insurance, taxes and time lost by having to deal with the dust collecting product?
Inventory management requires commitment and resources. But given the benefits, how can you not commit the effort? Managing your inventory wisely, prudently and proactively will increase your competitiveness, productivity and profitability.
About the author: Lee Schwartz, Principal and founder of the Schwartz Profitability Group (www.schwartzpro.com), is a consultant, author and speaker who has been uncorking operational bottlenecks for manufacturing and distribution companies for over 11 years, saving them time and money, and boosting their bottom line. Prior to launching his consulting practice, Lee spent over 20 years with manufacturers and distributors, many in senior management positions of CEO and President. Lee can be reached by phone at (310) 210-8564 or by e-mail at moc.orpztrawhcsnull@eel.