Focus on what counts

Why Inventory Management is Critical to Your Company

Boston Business Journal
June 5, 2020

 

Dennis Finnegan 
Justin Provencher

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As Seen In The Boston Business Journal

As a manufacturing and distribution business, you understand that inventory is the core of your enterprise. In the midst of Covid-19, it is more important than ever to have an inventory management system in place to help navigate your business through this pandemic.

There are a number of different strategies a business can implement to ensure proper inventory management. The hard part is finding the ones that work best for your business. It is important to start taking the right steps to develop a plan, implement it, actively monitor progress and follow that plan throughout the remainder of your fiscal year.

Physical inventory management 

If your company received a loan under the SBA’s Payroll Protection Program (PPP) but sales operations have significantly slowed due to Covid-19, it’s the perfect time to perform some inventory housekeeping. While performing a full physical inventory count on at least a quarterly basis is a best practice, accelerating the timing of the count during the eight-week period under the PPP loan includes an element of unpredictability and reduces the interruption of possible selling activity once operations return to the new normal.

Prioritizing inventory during this period also gives your company a chance to organize inventory in a way that might not have been possible under normal circumstances. Organizing finished goods inventory into traceable bin locations, realigning conveyor systems for bulk products or re-tooling production lines will allow you to be more efficient once the new normal returns. Additionally, if your company has pivoted to a different mix of products to survive the pandemic, inventory relocation may help you service the new product mix more efficiently than your historical workflow would have allowed. Furthermore, these activities allow for productive use of payroll costs, which will provide your company the opportunity to utilize its PPP loan forgiveness.

Review slow-moving inventory

If you come across - product covered in dust from the turn of the millennium while organizing your warehouses, then it’s a great time to review your company’s slow-moving inventory. Moving forward, your business must have a well-thought-out and dynamic plan for its inventory procurement process.

Having excess product on hand consumes vital working capital, and slow-moving inventory presents a liquidity risk to companies that have a borrowing base calculation on your revolving debt. Typically, these agreements contain aging limits on collateral. When the inventory ages off the borrowing base, in addition to losing out on availability on the debt, your company still has to incur ancillary costs on the product; such as warehousing costs, liability insurance and state excise taxes. The first step in this process is to identify your slow-moving items and address them. How to address slow moving inventory will very much depend on the nature of your industry. It is not always practical, in some industries, to move inventory via secondary distribution channels, while other industries do commonly move inventory via discounted sales, secondary market distribution, liquidation, disposal or donation.

Management will need to do a careful analysis to weigh cash flow generation against maintaining your company’s brand in the market while remaining in compliance with license agreements or other restrictions on inventory. If not already in place, most enterprise resource planning systems with an inventory module allow for the creation of slow-moving inventory tracking. This tracking typically has adjustable slow-moving thresholds, such as monitoring items that have no sales in 365 days or no movement in 180 days. This data needs to be a part of the regular reporting package for management and applicable company leadership.

The hunt for slow-moving inventory shouldn’t be a rear-facing process; inventory procurement should be a critical component of your company’s budget and forecasting activities. Inventory levels should be compared to real-time sales data and sales forecasts to help identify problem inventory before it grinds to a halt. One of the ways this can be accomplished is by monitoring inventory turnover rate by item. This is done by comparing the rate a product is being sold, in the case of finished goods, or the rate the product is being utilized for production, in the case of raw materials, to the amount of inventory that your company has on hand. The next step is factoring in future production or sales to determine if your company has inventory on hand in excess of what it has and plans to utilize in the near future. Doing this on a monthly basis will allow key decision makers to spot negative trends and take action before the inventory becomes slow moving.

For active budgeting and forecasting processes to be effective, there needs to be buy in from all major stakeholders, including the sales, accounting, logistics and, most importantly, the executive and leadership levels. Inventory levels and turnover rates need to be compared to product sales on a regular basis. If your company appears to have an excess of a product, accelerated disposal methods, such as returning the product to the vendor, aggressive customer pricing, discounts, or distribution through secondary channels, is needed, to generate cash flow and reduce inventory on hand. Additionally, your company should consider just-in-time inventory methods – such as drop-shipments directly from vendors, for lower volume, high cost, and/or very customer-specific inventory – to manage the amount of inventory on hand.

Areas of opportunity to pivot, change or simplify your business model

In some cases, this pandemic gives you an opportunity to pivot the business and leverage core competencies in a different direction. When legislators forced many non-essential businesses to shut their doors, it left owners feeling uncertain about their immediate future. Some companies are trying to manage this situation by reinventing their business model to help them stay afloat in the short term.

If your business supplies produce to restaurants, you likely started to see sales drop in mid-March, and become nonexistent by April when restaurants were forced to shut down in-person dining services. You now have an overabundance of inventory, subject to spoilage, and nowhere to distribute it. One solution would be to find areas of low cost to entry. You could focus on reaching the consumer directly, adopting the farm-to-table concept or even selling directly to supermarkets and food retailers. Additionally, companies that produce products with similar functions and have the necessary resources, from a cost standpoint, can shift their production to reach other industries entirely. For example, a clothing factory that specializes in manufacturing t-shirts could potentially have the capabilities to start producing masks and other forms of personal protection equipment (PPE) rather easily. 

You may also have an opportunity to simplify your business model. Let’s say that, normally, your inventory is made up of 1,000 stock-keeping units (SKUs). A number of these SKUs contain seasonal items, specialty items and items that require a complex production process. During this period, focus on the products in your inventory that are your main source of revenue. Rework your inventory to allow for as limited SKUs as possible, which will help with slow-moving inventory management and cost reduction. Limiting your company’s product offering and focusing on the items that drive revenue will help ensure accurate inventory purchasing. Keep in mind, this is not a typical year for operations, and prior year’s sales trends and product purchase history may not be the best indicators to use when discussing procurement.

The pandemic is a fluid situation. To be operationally effective, you must work with stakeholders to continually engage in forecasting activities and make adjustments when necessary. There are a number of different avenues for a manufacturing and distribution business to navigate through this environment. Carefully considering the most efficient and effective course of action to keep your business operating in the short term may ensure the success of your business in the long term.