How do you reduce your stock levels without risking running out of stock?
Managing your stock levels is a careful balancing act between holding enough stock to ensure availability to make the sale reducing stock to maximise cash in the business
How do you achieve this balance?
By understanding your forward sales forecast by product (or category) over at least your minimum restocking period. This provides you with your minimum stock levels. Practically you would want a margin of safety. This level depends on your business, your suppliers and the accuracy of your sales forecasting
Investing in stock management?
How much time and resource do you invest in managing your stock? This depends on the value of stock and the cost of running out of stock within your operations. If you are growing quickly or have a funding shortage, stock management is very important
Please contact us if you would like us to help you analyze your opportunity
Information and analysis
Applying a standard stock level to all products or even by category is likely to result in overstocking, and therefore reduce your available cash. The level is likely to be set based on the fastest selling product. A blanket approach leaves all slower selling items overstocked
Gathering information about each product line provides the tools with which you can then start analysing what stock is needed for each product or process
- Current stock levels (volume)
- Stock ageing
- Sales rates / drawdown rates
- Lead time for re-ordering stock (submitting the order to receiving physical stock)
- Rejection rates (stock not up to standard)
- Manufacturing timeframes for each stage of the process
- Marketing campaigns that impact sales rates
- Pricing changes that might impact sales rates
- Supplier consistency for delivering a set quality and to set timeframes
It is critical that the sales forecast (volumes) and therefore the stock forecast is regularly updated. This will avoid surprises and stock out issues
Sales and stock forecasts
Most businesses have some volatility in their sales volumes; sometime significant volatility. Market cycles, seasonality, marketing or promotional initiatives all drive different levels of sales volatility
Producing accurate and reliable sales forecasts (by volume) is very important to enabling a good stock forecast to be produced. The sales forecasts is the cornerstone of being able to manage your stock investment effectively
Setting up a sales forecast process to feed information into the sales forecast provides a framework. This requires good team work between Sales, Marketing, Operations and the team producing the sales forecasts (of the finance team). Driving accuracy and reliability in the sales forecast can be a considerable challenge and take time
Successful marketing campaigns should result in an increase in orders and therefore the need for a higher stock holding to meet those orders as they are placed
If the marketing team has run similar campaigns, estimating the sales is easier. Adjust your stock forecast according to the margin of safety you are comfortable with
Changing prices usually has some impact on sales volumes. Prices rises usually result in lower volumes and vice versa. This is not always the case so please investigate carefully the likely effects of changes in price on your sales volumes prior to making the price changes.
Try to factor in any other events or changes within your business that will have an impact on your stock requirements.
The greater the accuracy and reliability of your sales forecast, the less cash you will need to invest in your stock
Suppliers and the supply chain
The ability to reduce your stock holding will depend on your suppliers abilities and the strength of the relationship you have with them.
For example, the car industry has built very strong relationships with their key suppliers. Investing in the stock forecasting ability and then sharing the appropriate data with their suppliers allows minimal stock to be held by the manufacturer.
This “just in time” approach reduces stock holding through the supply chain, thus cutting costs. This could lead to lower pricing for you. The stock forecasting accuracy and the supplier reliability becomes very important with this approach
What opportunities do you have to replicate this approach or elements of this approach with your supply chain? If you are able to partner with a small number of suppliers that cover sufficient input stock value, your stock holding can be significantly reduced and you might get lower pricing. A significant competitive advantage
Less stock also means lower indirect costs such as storage space or insurance.
Supplier consistency / ability to deliver every time
Your supplier’s ability to deliver to agree order lead time on a consistence basis. The shorter the lead time and the great the confidence you have in your supplier, the greater your opportunity to reduce your stock
By ensuring your suppliers have the most accurate forecast of your stock requirements as possible enables your suppliers to plan and manage their production and stock ordering process benefitting you.
- actively manage your stock and supply chaing to minimise your cash investment in stock
- an efficient supply chain also reduces your overall cost of products
- accurate sales (and stock) forecasting are critical to reducing your stock holding without exposing you to running out of stock
If you would like help to work through the options to improve your stock holding, please contact us to book in a free initial discussion