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The True Cost of Bad Inventory Management

It’s a frustrating situation. Most of the time, you should know your inventory management position well in advance. After all, you know what you ordered from your factories. You know what you sold. So why is it that you get surprised by inventory shortages when you are getting ready to ship?

Inventory management is one of the key processes in running a successful wholesale company. The cost of your inventory isn’t just the amount you pay for it. It represents much more. Your inventory represents the amount of potential accounts receivable in your business and the opportunities that free cash flow provides. Then there’s the warehousing, item handling, and potential inventory losses. If you’re managing all of it poorly the costs are high.

So ask yourself: How well am I managing my inventory?

The Power of Inventory Management

If poor inventory management can affect mega-companies like WalMart, Target, and H&M, the same can hold true for your wholesale business.

Proper inventory management is one of the most challenging aspects of a wholesale business. Failure in this area can result in business problems across the board. If it’s done correctly, you can see the results in improved sales, buyer satisfaction, cash flow, healthy accounts receivable, and profitability. If it’s done wrong, you can expect a large number of problems such as:

  • High costs of carrying inventory
  • Lost accounts and dissatisfied retailers due to short shipping
  • Chargebacks
  • High inventory to working capital ratio
  • Large opportunity costs
  • High amounts of obsolete stock
  • Significantly reduced sales
  • Consistent stockouts

Turn Bad Inventory Management into Successful Inventory Management

If you are in a situation where your inventory management is poor, there are ways to turn the process around. Here are some important do’s and don’ts you need to take on board right away:

  • Don’t oversell, or if you do, have a system in place to make timely allocation decisions.
  • Pad your factory ETD dates to account for production delays.
  • Pad your ETA dates to account for clearance and inspection delays.
  • Make sure your sales team knows when product delivery dates change.
  • Prioritize, segment, and marry your factory and sales orders. For example, goods for an FOB China order aren’t available to fill a landed goods order.
  • Maximize the impact of your software with keys alerts and quality reporting
  • Focus on key inventory ratios like average turnover, the average days inventory is held, and the average inventory conversion period.

Unexpected Areas that can Help Manage your Inventory

When you want to successfully manage your inventory, here are some key, often underrated areas that can help:

Master file maintenance

Maintain your master files. These files aren’t the most visible areas of your everyday transactions, yet they are the backbone of any successful software implementation. Focusing on these master files can take you a long way toward improving your inventory management.

Item master: This is also referred to as a style master. It contains the most relevant item information like style or item number, description, cost of goods (COGs), material, product category, SKUs, master carton quantity, weights and dimensions, UPC numbers and more. EDI processing is just one of many examples in how an accurate item master can help you get goods out the door. For domestic manufacturers the item master fields are likely much more extensive and the key to tracking the moving targets of cuttings, fabric and trim ordering, and much more..

Customer master: Your customer master will include basic customer contact info, billing and shipping addresses, delivery terms, payment terms, and credit terms. Keep the Ship to DC info up to date. For customers where you are shipping direct to stores you may be able to import ship to addresses from files provided by the retailer’s portal. Keep the customer master up to date so that you don’t face any delays when it comes time to ship.

Vendor master: The vendor master will include similar information to the customer master but for your vendors. Maintain your vendor master to avoid duplicate entries. Maintain payment info like wire transfer information carefully and in advance. Delivery schedules are tight as it is, so once goods are ready to move you really want to avoid losing a day because you missed your bank’s wire transfer cutoff.

Routing master: The routing master will include routing requirements for each vendor such as routing date, label requirements, electronic files required, and pickup or delivery terms. Because routing is extremely time sensitive, research and update routing requirements well in advance of start ship dates. Maintaining an up to date routing master can keep you in compliance and help avoid missing a deadline that results in aggravating, stomach churning, costly retailer renegotiation, a chargeback, or even getting stuck with the goods.

Even though these master files aren’t the files where you process everyday transactions, they hold information that is relevant to many other records and they are a key to maintaining accurate data and getting goods out the door quickly and efficiently.

Maximize your software

Design your database with the end users in mind. Organize your inputs with real world reporting as an organizing principle. Establish processes that take into account how the everyday users will be interacting with it, whether it be inputting data or accessing information. Make certain that your sales team gets the information it needs in a usable format. Most importantly, make sure that you, as a wholesale executive, get the vital information you need to make critical decisions in a timely manner.

Here are a few more specific tips that can help you maximize your software to manage your inventory.

  • Make sure your software helps you accurately forecast your Available to Sell for each item for both current and future time periods.
  • Make certain that production delivery date change information flows to the sales team
  • Review your inventory aging on a regular basis. Sell your old inventory quickly to maintain cash flow.
  • Set up system alerts to notify you when future orders will not have sufficient inventory.

End the Frustration of Bad Inventory Management

The true cost of bad inventory management spans across multiple areas like lost sales, buyer dissatisfaction, low margins, tight cash flow, missed opportunities, and chargebacks. Doing the groundwork of maintaining clean and up to date master files can go a long way toward improving inventory management. Waiting until it is time to move goods is already too late. Get ahead of the curve.

Software has a magnifying or multiplying effect. Organize your data properly and fully utilize your software. If it isn’t utilized properly it can magnify problems rather than solve them. When used properly, your software has enormous power to help avoid problems, increase sales, deliver transparency, and increase your margins.

Wholesale Executive Insider is a publication dedicated to helping owners of wholesale companies stay up to date with the latest industry insights to improve their operations and increase their bottom line.

Want to learn more about how to manage your inventory effectively? Book a free strategy session with one of our highly qualified specialists today!

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