What role does inventory play in your company's financial health? If you don't know the answer to this question, you may be overspending by up to 12 percent each year on stagnant or outdated inventory.
"When it comes to supply chain management, there is a crucial difference between companies that succeed and companies that fail," according to Nadeem Mazhar, CEO of Custom Technology Solutions LLC, a provider of asset/inventory management solutions. "Successful companies understand the link between inventory management and financial management and treat inventory as a significant asset line item on the balance sheet."
Mazhar identifies three key performance indicators that will provide a snapshot of how well a company is managing its supply chain: the balance sheet, cash flow and EBITDA. Just as company leaders rely on these to indicate overall financial health and viability, they must also include them as signs of sound inventory management.
"Inventory holding costs have a negative impact on overall financial performance, not just operations," he explains.
In short, if you want to correct a drag in your cash flow, a review of your supply chain management practices is as good a place to start as any.
And, company leadership is not the only group seeing a need for balance sheet improvement through inventory management. The shifting economy has led asset-based lenders to scrutinize the composition, quality and velocity of inventory to determine advance rates. In fact, the composition of slow-moving inventory as a percentage of total inventory is becoming a criterion for determining reserves and ineligibility. Companies that fail to grasp the necessity of proactive inventory management will be left with few options.
Forecasting and goal-setting are fundamental to companies in every industry, but these activities are traditionally linked to revenue projections and sales. Company leaders must break with tradition and learn to associate these practices with proactive inventory management, as well. And, while it is established that incremental liquidity can impact long-term strategy, many leaders fail to make the connection between the cash tied up in stagnant inventory and the company's ability to execute even short-term or tactical objectives.
"Most people understand how inventory fits as an operating cost, but very few make the connection between inventory and profitable revenue generation," says Mazhar. "Once you cross that bridge, you will open up new avenues of profitability."
A big part of this comes with the ability to link procurement to demand forecast and product velocity, which becomes possible when companies take a proactive approach to asset/inventory management.
Additionally, companies can use sound inventory management techniques to overcome challenges with customer service levels and budgeting, as well as demand and supplier management.
"Just imagine how effective customer service would be if your sales organization had access to accurate and complete inventory data such as fill rates, customers product velocity, and a forecast projections by [stock-keeping unit (SKU)] of their next month's sales at the time of each customer call," proposes Mazhar. "Those indeed would be some very satisfied customers., Helping customers with proactive business intelligence and enabling them to become more agile have mutual benefits for both trading partner, and the benefits in customer loyalty alone can be phenomenal."
Along with satisfaction and loyalty, customer service improvements include on-time and on-quantity delivery, leading to improved forecasting and planning. Collaboration increases as sales and operations teams support each other's efforts to forecast based on demand planning, trend analysis, seasonality and promotional initiatives.
Poor inventory management can be felt at each link in the supply chain. Suppliers, manufacturers, distributors and retailers can all be impacted by the failure to properly address inventory. A point-to-point approach helps optimize inventory each step of the way and ultimately benefits all the players.