It will come as no surprise to hear that having control of your stock is critical to success and yet many in wholesale and distribution don’t go beyond the fundamentals of stock management and are losing out.
We know that the golden rule calls for the right product in the right place at the right time. But this can’t be achieved without the right stock. In this case let’s define ‘the right stock’ as the optimum level required to satisfy potential customer demands. (Rather than just endless excess safety stock from which to fulfil orders.)
Both asset and liability
Your stock is simultaneously your biggest asset and your largest cost. If you don’t have enough, your sales could suffer. If you’re holding too much, that ties up cash flow and has an impact on margins when trying to dispose of a product at the end of its life cycle.
When you’re managing your inventory by taking care of the basics via your ERP system, you’re missing an opportunity to improve not only cash flow but also your EBITDA.
You have the knowledge and experience to do the maths where stock is concerned and so you’re comfortable with a system of exporting data from your ERP, creating pivot tables and running scenarios. And this method is probably getting you to a perfectly satisfactory answer in terms of your inventory requirements so you just stick with it.
But what if you could improve your EBITDA by, say, 15%? That’s surely worth considering a new approach for?
Release more value
Rather than simply applying a formula for x weeks cover and applying it, consider the benefit you could gain from actually optimizing your inventory. Your planning processes rely on estimates for your sales figures but you ought to have total control over your stock.
A robust stock strategy delivers a positive impact on your bottom line but you can’t just hold a finger up in the air and hope for a friendly breeze. You need to do the homework.
- What is the potential demand for any single product?
- How do we improve the flow of stock rather than the quantity being held at any one point?
- Where is each product in its life cycle? Is it time to start managing it out to avoid large quantities of dead stock which eats into margins?
Holding less stock makes it easier to manage. Cash flow is freed up through reduced storage, handling and distribution costs. And by reducing the risk of overstocks, you minimise the markdowns and reductions required to shift dead stock that are so damaging to margins.
Balancing act
When you’re taking a deeper, more proactive approach to inventory management you must walk the line between keeping stock as low as possible without risk and avoiding large peaks and troughs of demand.
Using tools like the AGR software to dig deeper into the numbers behind your stock optimization gives you greater control and ultimately improves your EBITDA. Consider being able to run scenarios modeling the impact on service levels of reducing the number of weeks’ cover you are holding. If you find doing so is an acceptable risk, you can immediately release cash, improve margins and increase efficiencies.
To find out more about the importance of inventory management and how the AGR software can improve your EBITDA, catch up on our recent webinar:
