It isn’t a complex science and no university degrees are needed but, managing stock to maximise sales, minimise stock loss and manage within working capital budgets does require a little planning and discipline.
Clearly to achieve maximum sales, your days supply must be higher than your suppliers lead time taking into account risk of non-availability, seasonality and economy of bulk purchases. When stock is current and fast moving this is fairly easy, you can use up to date sales history and predicted demand figures all of which should be available on your inventory management system. So the first key point has to be how often do you undertake a detailed review of your stock profile? I’m not just talking about a quick skim through the report but actually a serious work through your entire inventory. Not enough time? Review at least weekly the most costly 25 percent of line items and the others monthly.
Of course, demand changes over time and much obsolete stock arises due to line items that were popular sellers losing their demand but, the stock holding reflects its former “glory”. Again stock reports should be available on most systems to define slow moving parts based on a current (say the last three months) sales history. You set the report parameters, a good one is “Stock lines with no sales history for 30 days or more”. That is your early warning. If you have plenty of stock on this report, you need to act now.
Clearly things will go wrong and you will end up with obsolete stock. When that happens, do you have a policy and a strategy? To begin with, accepting the inevitability of some write off, you should make a provision. The write down, clearance and removal of dead stock should not be a cost in that month’s accounts. If it is, you will be deterred from doing it. So, make a provision each month either a small percentage of sales turnover (the provision increases month by month) or a percentage of your stock (the provision can go up or down) and use this when you need to clear dead stock. I prefer the first method since it is a known and easy to budget cost and at year end any unused reserve which is deemed not needed, can be added back to profit.
Do use the reserve and get rid of poor stock. I tend to categorise stock into three areas:
Current stock, purchased within the last 180 days and with a current sales history unless in category two below. Provision required zero percent.
Stock in excess of 90 days demand but with a current sales history. Provision required 50 percent
Stock with no movement for the last 90 days: Provision required 100 percent.
Clearly if you have a brand new line with no sales history, category three might not be right but this is the exception, and you should still be finding out why you decided to buy it but no one else wants it.
Once you have classified stock as being in this category of course don’t just put it in a skip but look carefully at what went wrong. Why is it not selling? Sometimes there are regional variations and one branch in the south west might sell many but in the north east, none. So if you are multi-branched, swap stock reports, you might find that your category three stock becomes someone else’s category one. Try to return it to suppliers for credit, some will perform a stock cleanse, make targeted offers to customers but, if all fails, don’t leave it on a shelf to gather dust for a year. My benchmark is, for anything to remain on a shelf for more than 12 months, there must be a really good reason.
Reports are the key, most stock management systems have loads. Read them, use them, talk about them with your teams, your peers and your boss. Stock management is straightforward but only if your management is effective.