By Jack DiMatteo
When asked why he robbed banks, the infamous bank robber Willie Sutton replied “Because that’s where the money is”. When it comes to troubleshooting problems at many businesses, the same can be said of using inventory as a starting point – it’s where the money is!
In my travels through companies of all sizes, industries and cultures there is one constant I see way too often – difficulty getting a handle on inventory. Depending on the industry, this may be the biggest ongoing investment a company makes. Then why do so many companies not have an effective, efficient and accurate process for tracking, costing, moving, marking up and recording inventory transactions?
Granted some inventories are more complex than others. In distribution, inventory comes in door A when received and goes out door B when sold – hopefully with enough markup to pay for all the administrative costs and return a profit to the company. Sounds simple, right? What about a distributor that does drop shipments? How many do you think don’t have a strong method for tracking drop shipments? What if drop shipments make up the majority of sales? Without strong inventory controls these transactions often go unrecorded. You may end up paying for something you drop shipped without recording the sale. Ouch! Not exactly a best practice.
Let’s move on to manufacturing. This adds more variables to the equation. You need to account for raw material costs, labor costs and overhead costs. If you underestimate the true cost of producing inventory for sale the results can be disastrous. How about lead times? Lead times can be anywhere from a few days to a few years depending on the industry. The longer the lead time, the more things can change. Material costs can rise faster than forecasted. Customers can experience downturns causing them to slow pay. Market innovations can cause inventory to go obsolete almost overnight. Remember what the Smartphone did to Blackberry?
Do you make inventory to stock? Based on customer specifications? Both? Do you ship inventory to outside vendors for processing? Do you have an accurate count of the inventory that exists off site?
The result of not getting a handle on inventory is a lot of money going down the drain.
What are some of the things you can do to start getting a handle on your inventory?
- Liquidate obsolete inventory. Get what you can for it. Turn that non-producing bundle of “stuff” with an inch of dust on it into cash. Do you think it’s going to get more valuable the longer it sits and the more obsolete it becomes? You may not get a lot for it, but it will free up space, will no longer have to be counted and will put some cash in the bank.
- Implement Cycle Counts. If you continuously have large write-ups or write downs of inventory, implementing a daily cycle count routine may be highly beneficial. It’s costly and disruptive performing physical inventory counts. That’s why most companies only do one annually. Performing random cycle counts on a daily basis gives you the opportunity to continuously gauge the accuracy of your inventory controls. It may uncover root causes to inaccuracies that will help you fix things before the annual count.
- Automate manual processes. You spent a good deal of time and money researching and selecting the right ERP system for your business. Then how come when you ask for an inventory valuation its takes 3 days and countless spreadsheets to get your answer? If you value, record or compile inventory transactions manually, then something is wrong. Either your ERP system doesn’t really have the capability of recording your inventory transactions accurately or it’s not set up correctly to do so. Either way, trying to grow a business with manual or semi-manual inventory tracking is almost impossible without adding large numbers of people to prop up an inefficient process. Either you get the ERP system you paid for to do the work or find a system that can.
- Consolidate/Centralize responsibility. Try this exercise. Go into any company and ask “Who is in charge of inventory”? If you get fingers pointing in every direction, there is a VERY good chance there are issues with the inventory. If nobody “owns” the inventory, then there is usually less time spent worrying about its accuracy. I don’t care if it’s the Inventory Control Manager, Purchasing Manager, Controller or any other Manager - somebody better take ownership of the inventory. Without clear cut responsibility, everybody tends to view it as not their problem.