LGT's Profit Sense
Poor Inventory Management: Just Another Woodstock’99 (Know what I mean?)
“By failing to plan, you are preparing to fail” - Benjamin Franklin.
“He who fails to plan is planning to fail." - Winston Churchill
Your manufacturing company's lifeblood is often focused strongly on supply chain management. Imagine driving through a drive-thru at your favorite fast-food restaurant such as Chick-fil-A and having the “runner” tell you their most ordered Chick-fil-A chicken sandwich was backordered and wouldn't be available for many weeks. Not only would that sale probably be lost, but also a customer’s trust, which would most likely affect the future sales as well. This is because customers may never share their trust in the same brand, to deliver what they promise with consistency again. Consequently, the future business would be placed in peril due to the long wait. These Chick-fil-A lovers are most likely to walk out without having anything else and might even consider visiting a Popeyes, McDonald’s, KFC, Zaxby’s or a similar establishment nearby.
Your customer base is similar to that of the drive-thru customer. They expect that you'll have what they need when they need it. Failing to meet that need can seriously shake their faith in your company's ability and may cost you their business down the road. It is transparent why poor inventory management is one of the main reasons why businesses fail or experience certain setbacks. Do you recall that J.P. Morgan Chase lost nearly $6.5 million dollars in 2012 because of multiple errors on their Microsoft Excel spreadsheets? What about that time when Nike lost nearly $110 million dollars in the early 2000’s due to their issues with the return tracking system?
The Resulting Impact of a Failure to Properly Plan
Poor inventory management, as mentioned, can cost manufacturing businesses significantly not just in terms of time and money but is also proven to be the difference between their success and failure. This leaves companies with decreased profit margins and an increase in certain types of expenses. Based on various historical events, disastrous inventory management has led to many process manufacturers closing their businesses and can even create a new problem eventually haunting them down the road. Given the importance and significance of inventory management, assessing the impact and negative effects from poor manufacturing inventory management processes should excite business owners as well as potential investors.
1. Losing out on sales from existing customers/potential new customers: With poor inventory management practices, manufacturing companies run into the risk of fulfillment failure due to low stock or just a flat out out-of-stock situation. This is often a direct result of having the lack of understanding of customer demand, sales forecast, supply chain analytics, and so on, eventually resulting in lower sales and profit margin.
2. Customers switch to the competitor(s): Missed sales opportunities may force your top customers to search elsewhere and could potentially ruin your company’s reputation. Having an out-of-stock situation, as previously mentioned, can have a long-term impact on your business operationally and financially.
3. Liquidity issues: Poor inventory management can also lead to a situation of overstocking, meaning higher than usual inventory on hand because of the money being spent on materials cost. Obsolete or unused inventory ties up money that could have been invested somewhere else, such as in expansion, investment in real estate, or reducing debt.
4. Inefficiencies: Poor inventory planning not only results in overstocking or understocking, but also causes inefficiencies at your business. With businesses not having accurate real-time information on their stock levels, there’s a possibility of inaccurate demand planning, errors in reordering inventory, and locating the exact location of the inventory in the warehouse.
Time to think about planning! Planning is great! To help mitigate these types of issues, you need processes in place to help reduce any negative effects that can happen when you have issues with poor manufacturing inventory management.
How to Reduce Negative Effects from Poor Manufacturing Inventory Management Processes
With situations such as those mentioned above, it's no surprise that poor manufacturing inventory management processes can be among the main reasons why these types of businesses fail. If you're in manufacturing, you already know about the fine line between having too much stock and risking being stuck with it, or too little stock and risking losing customers over poor fulfillment. Because the perfect inventory level is often a moving target, it can be difficult to impossible to predict, as demand can fluctuate wildly due to a wide range of reasons.
The Problem
When your company is not able to immediately fill orders due to an out-of-stock item, it's fairly common for the customer to use another company to meet their needs. That puts your company at risk to losing that customer to the other company for future purchases. For this reason, it's vital that you keep sufficient stock of your products, because your brand is how you stand out in the world. You don't want to get a reputation for being a business that even occasionally runs short of stock, much less on a regular basis.
Once a customer has gone elsewhere to have their order filled, they'll rarely go back, especially if the other company offers competitive pricing and decent customer service. That's a trend that will continue until they have a reason to go elsewhere. Because customers tend to be loyal to brands that can meet their needs, backorder issues in your supply chain causes you to lose a promising source of regular business for your company. This can have a significantly negative impact on your company, your sales, your revenue, and your business' reputation.
Unfortunately, simply having an abundance of stock on hand for all possible orders doesn't solve the issue either. Inventory that doesn't sell ties up money that you could be putting to better use in your cash flow. It takes up warehouse and production space that could be better used. If inventory has a limited lifespan, whether because of spoilage, changes in trends, becoming obsolete, or degradation of materials, you'll also face losses as it ages.
The Solution
For this reason, it's vital that your company determines inventory points with very close precision, so that you can avoid both under- and over-stocking by using an inventory management process. With a goal to keep optimal inventory levels through effective forecasting of demand, you'll need both historical data as well as external trend forecasts. To accomplish this, a solid inventory management system is needed to operate from portable devices with pervasive communications. Among these options are a range of Enterprise Resource Planning solutions which allow you to optimize IT, accounting, order management, and procurement while eliminating manual reporting systems and improving employee productivity.
As our world moves forward into digital transformation, progressive technology, operational efficiency, big data, and competitive business approaches can help you stay ahead of the pack.
Have Questions?
If you have any questions or would like additional information about anything mentioned, please comment below or email us at askus@lgt-cpa.com. We would love to help!
