How to Trim the Fat From Your Inventory

Inventory is expensive enough as it is — that's why the leaner, the better. Businesses that carry inventory need to view managing it as a process of continuous improvement that adapts to changing economic conditions and customer preferences. Here are some ways to trim the fat from your inventory without compromising revenue or customer service.

Good Counts

Effective inventory management starts with a physical inventory count. Accuracy is essential to knowing your cost of goods sold, as well as to identifying and remedying discrepancies between your physical count and perpetual inventory records.

inventory management

The next step is to compare your inventory costs to those of other companies in your industry. Trade associations often publish benchmarks for:

Your company should strive to meet — or beat — industry standards. For a retailer or wholesaler, inventory is simply bought from the manufacturer. But inventory management is more complicated for other businesses, such as manufacturers and construction companies. For them it's a function of raw materials, labor and overhead costs.

The composition of your company's cost of goods will guide you on where to cut. In a tight labor market, it's hard to reduce labor costs. But you may be able to renegotiate prices with suppliers.

And don't forget the carrying costs of inventory — such as storage, insurance, obsolescence and pilferage. You can also improve margins by negotiating a net lease for your warehouse, installing antitheft devices and shopping around for less expensive insurance coverage.

Product Mix

To cut your days-in-inventory ratio, calculate product-by-product margins. Your goal should be to stock more products with high margins and high demand — and less of everything else. Whenever possible, return excessive supplies of slow-moving materials or products to your suppliers.

Product mix should be sufficiently broad but still in tune with your customers' needs. Before cutting back on inventory, you might need to negotiate speedier delivery from suppliers or give suppliers access to your perpetual inventory system. These precautionary measures can help prevent lost sales because of inadequate inventory.

Keep It in the Shuffle

It's easy for inventory to get lost in the shuffle when you and your leadership team are facing down big-picture issues such as strategic planning, innovation and compliance. Your CPA can help introduce an element of objectivity to the counting process, as well as offer assistance in minimizing errors and fraud.

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