Inventory management is both an art and a science, but once you get your stock levels in line with your sales cycle it can be a significant source of cost saving and a great benefit to your cash flow.
Having the correct stock levels means you’re not paying for slow-moving stock to sit on the shelf and you can therefore invest in the items that are bringing you better sales. On the flip side, it means you don’t run out of your best sellers and risk losing customers. Getting the timing of this right does require some forethought, so here are the things to consider.
Find the best time to buy
Work with your suppliers to figure out the best time to buy stock. To do this you need to consider the credit terms of your suppliers’ accounts. If a supplier invoices you on the 1st of every month, for example, buying stock on the 2nd of every month gives you almost a full month in addition to your regular credit terms—usually 30 days—to pay. Another supplier might invoice you on the 15th of every month, so you need to juggle their cycles with your inventory management.
Some suppliers also offer discounts for early invoice settlement or timely payment, so you may well be able to enjoy both a period of credit and invoice bonuses. Considering you’ll probably have more than one supplier, being able to do this across the board can add up to significant savings.
Improve your estimation
To make sure you buy the right amount and only restock when necessary, you need to monitor your stock levels on a regular basis. Many inventory management programs that synchronise to your sales system allow you to do this in real time, but if you don’t have this layer of technology, do this at least weekly, or daily if possible.
Look beyond the number of units sold and see if there is a buying pattern. Is it regular? Do you reliably sell an item or a segment of items at a particular time of day? For example a newsagency might have a buying pattern that looks like newspapers in the morning, magazines during the day and lollies after school.
If it’s irregular, is that significant? The newsagency might have sold out of its coloured cardboard one week, but that could be an anomaly, for example one person buying up supplies for a specific project. Make sure you look at sales over time.
Take a look also at your best-selling and worst-selling items. Here’s where you need to judge what to keep on the shelves. If you don’t have a best-selling item in stock, will that just be a missed sale today with that person prepared to wait, or a customer who may never come back?
Similarly, your worst-selling item might cost you a bit of money to keep on the shelf, but it might be important to have it there to attract or retain customers. Jewellers, for example, often have a signature item that makes a great marketing tool but may never sell many units.
Collaborate with other businesses
Buying in bulk can also attract discounts from suppliers, but what if you don’t have the sales volume to make this viable? Buying groups are one way to take advantage of volume bargains without having to hold excess stock in storage.
Find an established buying group that deals with your segment of products or create one yourself by approaching like-minded businesses. Even if you don’t set up an official buying group, simply being able to combine your orders with other businesses means you can split shipping costs, which can save you quite a bit of money.
Evaluate your tail spend
Using the Pareto Principle (the 80-20 rule), most businesses will source 80% of their stock from 20% of their suppliers, which means the remaining 80% of suppliers account for 20% of their stock. Careful management of that 20% of your spend, also known as tail spend, can actually reap better savings than focusing those efforts on the 80% of your budget alone.
Being lax with 80% of your suppliers means you might be missing out on bonuses, discounts and efficiencies for most of your supply connections. Collectively, that spells a huge opportunity to address potential wastage, so make sure you keep track of your tail spend as well as your main suppliers.
Good stock management comes from a solid understanding of your sales cycle and your supply chain and knowing these can give you opportunities for cost saving and a better way to manage your cash flow.