|
Practical. Applicable. Inventive. |
|
Hill Management Consulting |
|
A Few Thoughts on Inventory
Many economists are suggesting that the current economic slowdown will begin to reverse in the spring of 2002. While there are still a number of months of careful management ahead of us, every economic downturn sees its share of businesses that not only survive but thrive. One area for small business to watch is inventory management. In response to current conditions, many companies have scaled back inventory. Excessively lean inventories now mean that some companies will not be able to fulfill demand when the economy heats back up. How can you turn this into an opportunity for your business?
Managing inventory is like walking a tightrope. Too much inventory and your cash will be tied up when you need it. Too little inventory and your sales suffer because you lack what your customers want when they want it. Here are a few guidelines and ratios to consider as you prepare yourself for the opportunities inherent in the coming year.
Improve your replenishment strategies A retailer’s biggest investment is inventory. When you improve your replenishment processes you enhance your in-stock positions, which increases customer satisfaction and generally leads to sales growth. If you do not currently track inventory movement, now is the time to do so. Categorize your inventory, and then develop a spreadsheet of your sales over the past two to three years. You are likely to notice that you have some dependable trends. What types of jewelry do your customers buy at which times of year? When do they buy consumables? Do you have trends related to repairs and service? Another important trend to monitor is your own purchasing behavior. Do you tend to under-project sales, over-project them, or do you react differently to different types of sales opportunities? By analyzing your customer behavior and your own behavior, you can develop self-correcting strategies to ensure that your inventory management in the future improves upon past performance.
Manage your supply chain Your supply chain consists of your company, your vendors, and your customers. If any one of those elements is not performing to expectations, you will not be able to maintain satisfactory inventory levels. The following checklist for implementing good supply chain management will help you identify areas where your supply chain can be improved.
· Identify and prioritize the links in your supply chain · Manage all the basic links in your supply chain – your company, your suppliers, and your customers. · Make sure the links in your supply chain align with – and support! – your company’s strategic goals and initiatives · Be flexible enough to meet market demand · Develop long-term thinking – have a goal. If you can articulate the goal clearly, you can give your suppliers information they need to help you meet your goals. · Be proactive – not reactive. · Get beyond thinking in terms of cost per unit. Think in terms of quality, service levels, in-stock positions, and support. Sometimes the cheapest option is expensive in terms of time, quality, or hassle.
Develop a cash flow forecast In any economic climate it is critical to understand cash flow. When business is slow, understanding the magnitude of cash deficits and when they are likely to occur can mean the difference between being in or out of business. A cash flow forecast should cover a period of six to twelve months. You may be wondering, “Is developing a cash flow forecast really any better than looking in a crystal ball?” Actually, the answer is yes. A reasonably developed forecast, based on your business’ historical cycles and trends, will highlight periods when you can expect cash shortfalls. While it won’t be perfect, it will give you more information than you currently have. Once you have developed your forecast, you will be able to A) analyze your assumptions to ensure they are correct, and B) take actions to reduce the impact of anticipated shortfalls. A little additional insight can put you ten steps ahead of your competitors.
Profitability and cash management are the two critical aspects of your business you need to manage. Your Operating Profit Margin indicates how efficiently you run your store(s), corporate infrastructure, and gross profits. Another simple ratio, called the Flow Ratio, is a quick tool that will give you a good idea how well you match your inventory and accounts receivable with your accounts payable. Here is the formula for Flow Ratio, which is best used to illustrate a trend over time:
* Cash = cash and equivalents, marketable securities and short term investments. ** STD (shoft term debt) = notes payable and current portion of long term debt.
Another important ratio to look at is “Days Inventory Outstanding.” This measures how many days, theoretically, it would take to sell your entire inventory. Here is the formula:
* 90 for a quarter, 360 for a year.
As mentioned earlier, managing inventory is a lot like walking a tightrope. These four activities will help you get from one platform to the next without falling off the rope. · Improve Your Replenishment Strategies: Know your customers’ purchasing behaviors so you anticipate their needs better than your competitors can. · Manage Your Supply Chain: Don’t leave anything to chance. · Develop a cash flow forecast – anticipate the slow times so they don’t catch you off guard. · Know your business ratios. Good financial analysis doesn’t have to be difficult, and it can point out opportunities for improvement that would have remained hidden otherwise.
© 2002, Andrea M. Hill
Originally written for Rio Grande’s “News & Product Review,” Spring, 2002 |
