- Why inventory balance is important for your company, customers, and bottom line.
- How to avoid the pitfalls of overstocking and under-stocking, which can negatively impact cash flow.
- Strategies for accurately predicting future demand and optimizing inventory levels.
- How cycle counting and regular audits help manufacturers maintain accurate records and minimize losses.
Managing inventory is a balancing act for small manufacturers that want to avoid the negative impacts of stock-outs and overstocks. When you don’t have inventory to fulfill customer orders, those buyers may go elsewhere for what they need. Alternatively, too much product on the shelves may tie up working capital and increase storage and insurance expenses.
Ideally, manufacturers want to have enough product on hand at any given point to ensure the right items get to the right place at the right time without going over. This helps companies avoid problems like lost sales, unhappy customers, and cash flow challenges. And because anywhere from 25% to 35% of the typical manufacturer’s operating budget is dedicated to inventory spend,[1] managing those assets requires special care and handling.
6 Ways to Assess Your Inventory Management Practices
Here's a checklist that manufacturers can use to assess their current inventory management practices, identify areas for improvement, and optimize inventory levels:
- Factor in the bigger picture. Inventory expenses include more than the direct costs of making and packaging products for sale. As you assess your current inventory optimization strategy, you’ll also want to factor storage, labor, insurance, the potential for theft/shrinkage, and product obsolescence into the equation.
- Hone your demand forecasts. Analyze past sales trends, consider any external factors (industry trends, new competitors, etc.), and discuss their future wants and needs with customers. Use a combination of informal conversations or customer surveys plus demand planning applications, both of which can help you generate an accurate prediction of upcoming inventory requirements.
- Establish reorder points and adjust accordingly. These thresholds inform team members when to order more inventory to avoid a stockout. An inventory management application can automatically establish reorder points and create alerts based on this basic formula: average daily usage × lead time in days = desired reorder point. You may want to revisit these reorder points regularly to ensure they’re still accurate. For example, a product that’s suddenly in big demand may require an upward adjustment to avoid stockouts.
- Use technology to your advantage. You can use an enterprise resource planning (ERP) system to manage inventory, create demand forecasts, and improve supply chain visibility. In the warehouse, barcode scanners and radio frequency identification (RFID) devices help streamline identifying and tracking stock. Inventory management systems (IMS) help centralize data, automate tasks, and provide real-time information about stock levels, reorder points, and other metrics.
- Put cycle counting to the test. Manufacturers can use cycle counting to gauge and verify a small portion of their inventory monthly and then do the full physical inventory counts annually. This helps companies ensure accurate inventory records year-round, enhance operational efficiency and save money.
- Conduct regular inventory audits. These audits may help ensure accurate records, identify any discrepancies, and help you quickly address issues like data errors, theft, and product obsolescence. For example, if a routine audit turns up six products expiring soon, you can get out in front of the issue by marking them down or putting them on a special promotion now—versus having to dispose of or recycle the goods after the fact.
- Engage with a financial partner that provides access to inventory management systems and funding for efficiency-enhancing technologies. PNC Bank offers merchant services, inventory management software, and equipment financing options that support small manufacturers’ inventory management needs. It also offers business checking accounts with cash flow management features.
Strike the Balance of Optimized Inventory
Optimized inventory management helps small manufacturers strike the delicate balance between supply and demand. It also ensures that they have the right products in the right quantities and at the right time. This not only helps avoid stockouts and lost sales but also helps companies reduce storage costs and avoid tying too much capital into unsold goods.
For help optimizing your inventory and managing your cash flow, contact a PNC Small Business banker today.
