As both the pandemic and recent global events have revealed just how fragile supply chains are, any business reliant on one has had to first, scramble to maintain supply, and second, examine how to avert future interruptions. Shortages have made the usually straightforward practice of tracking and maintaining inventory become a matter of just trying to get inventory, not to mention managing the downstream impacts.
This kind of planning is traditionally driven by the cost of keeping inventory on-hand to help businesses avoid getting stuck with product they cannot sell. Additionally, prior to 2020, inventory and sales planning were based on seasonal trends, which sounds like a novelty today as it has become virtually impossible to predict lead times for various vendors. Inflation and changes in prices have further compelled new considerations in pricing. If a customer is pre-ordering a product that may be stuck on a boat off Los Angeles, is your business prepared to cover the cost if the purchase increases?
Today, integrating inventory planning with financial planning is more critical than ever given the ability accounting has to properly steer planning, ordering, and ultimately profitability. The businesses that are thriving today despite the turmoil in global markets have gained greater visibility into and leveraged their business financials, using modeling and actual data, successfully eliminating the guesswork.
Get some metrics
For years, my advice has been for clients to automate accounting with the proper software so the business can get more accurate information. The right system will depend on the size of the business and the complexity of its sales. More recently, I have been helping clients move to Zoho. Designed for small to midsize businesses, Zoho Inventory offers incredibly helpful reporting and analysis tools, as well as vendor-managed inventory and lot traceability. Businesses that use it can gain line of sight into shipment estimating, tracking, and delivery, including serial number and batch tracking.
There are other tools that can perform these tasks, but the key information you should be able to glean from your inventory management system are tracking inventory and reorder points, lead times, and location-based inventory tracking.
Watch cash flow
First COVID, then the stranded Ever Given, and now Russian sanctions have forced businesses to order more inventory than they might have otherwise to avoid shortages and shipping delays. Instead of guessing at what and how much to buy when, businesses can harness the metrics from an inventory tool so it does not impact cash flow but still meets the end goal. Knowing exactly how much inventory is currently on-hand will help determine whether it is enough or not enough in the current fulfillment environment. What might have been enough before may not be enough now, but too much next quarter. This continuous monitoring of and attention to your inventory levels can help protect cash flow by helping you recognize when you have too much, not enough, or just the right amount of inventory on-hand.
With current wait times, companies are having a hard time getting deliveries out on time. The smart ones will be taking this opportunity to look at why those delays exist. If lead times have climbed beyond a reasonable level on a regular basis, it suggests it might be worth exploring new sourcing options. Now may be the time to source a part or product you usually purchase from Asia at a discount from Mexico instead, even if at a slightly higher price. Three weeks in delayed shipping may be costing your business far more than the cheaper part, not only in time, but in actual costs incurred as that delay trickles through your sales channels.
Sound inventory planning allows a business to track the metrics that can reveal how many project or billing milestones are getting delayed simply because the inventory wasn’t there. When there is significant demand for goods but uncertain availability, the market will support pricing to offset a slightly more expensive end price because you can actually supply it.
Wear client goggles
Try to assume your customer’s point of view – your business is not alone in trying to manage inventory during uncertain times. The right analysis can help you understand where clients may be trying to hedge against their own supply chain delays and allow you to plan your own ordering and pricing accordingly. They may be buying more now to prevent against future interruptions, which could potentially create a reduction in demand for you down the road. Looking at what inventory clients have, how much they have ordered, and what their historic patterns have been means your business can be less transactional and more strategic. While seasonable trends may not be reliable anymore, a business that can look down its supply chain and predict fluctuations for customers that are also trying to overcome those challenges will gain huge advantages with planning inventory.
A close look at pricing is always a good practice, but with sourcing and shipping premiums, as well as inflation, many businesses are likely underpricing products and have no idea. A company may not have a clear understanding of what its most profitable or highest selling product is, or even its bestsellers that maintain consistent and strong demand. If they know these top sellers, then owners can consider adding some margin, especially when adjustments to your supply chain have incurred extra expense and clients are desperate. A change like moving sourcing to a company where shipping and time are shortened mean your product can be competitive at the premium price for the sheer sake of being available.
It can be tricky to ask and address some of these deeper questions, especially in the midst of a a shifting landscape and the demands of marketing a business. Tapping outside expertise like a business coach or fractional accounting team for either a temporary financial house cleaning or on a long-term engagement can introduce the right thinking and predictability – freeing time and increasing strategic profitability – making you less reactive. Incentivized to find the best solutions, these teams can dig deeper to identify and help establish best practices to help achieve numbers that support any current conditions.