How to make your inventory management profitable
February 2024 - Inventory management costs money. But those who are smart in the warehouse can reap commercial benefits from it.
In Belgium, the cost of stock for the average SME is estimated at 15 to 20 per cent of the financial value of the stock. Yet, the stock is indispensable in many cases. For three reasons:
· Fast delivery increases your service.
· Buying in bulk reduces the price.
· All kinds of environmental factors have an impact on stock strategy: the production process: complex goods that are produced in phases are placed in the warehouse while waiting for the next step in the process. Cyclical stock: seasonal products, such as ice cream, are produced and stored in advance. Speculative stock: extra stock that is stocked up because one expects to make a profit (e.g. during a supplier's promotional campaign).
How much stock should you stock up on?
How many items it is best to stock in order to have a profitable inventory depends on many factors, but keep this rule of thumb in mind:
· For items with a low-profit margin, limited stock is appropriate.
· For high-margin items, you can keep a large stock.
What is the cost of stock?
To know the cost of inventory, we take into account:
· Price: capital costs associated with inventory management (e.g. interest on bank loans) and business risk.
· Space: warehouse rental costs, but also depreciation on warehouse furniture, maintenance and energy costs, personnel costs, ?
· Risk factor: costs resulting from the risk inherent in inventory management. For example, goods in stock can age, go out of fashion or spoil, reducing the selling price. The total cost of inventory is +/- 20 per cent.
Tip to minimise your inventory costs: By always keeping the minimum stock required to meet customer demand, wholesalers can minimise their inventory costs. Manual stock optimisation plays an important role in this.
Defining your stock strategy: a question of balance
Efficient inventory management is about finding the right balance between service and cost. Companies must weigh up what is a feasible (and competitive) delivery time for their products, and what percentage of their orders they want to deliver on time and in full (On Time, In Full or OTIF). For critical items, an OTIF percentage of 97 might be desirable, while for fringe products, a lower percentage is acceptable.
Stock in the accounts
To record stock changes correctly in the accounts, the stock must be valued correctly. This can be done in four ways:
· Individual valuation of each element
· Weighted average prices method
· FIFO method (first in, first out)
· LIFO method (last in, first out)
You are free to choose a valuation method, but be consistent. You should not use a different valuation method every year. Moreover, companies are obliged to explain the chosen valuation method in the annual accounts.
Computerised inventory management: efficient and error-free
· Automation reduces human error
Stock counts done using a barcode reader, for example, contain significantly fewer counting errors than manual counts. An additional advantage of an automated count is that the stock can be scrutinised several times a year. With a periodic count, you get a much more accurate picture of stock movements, which allows the warehouse operator to be much quicker on the ball.
· Correctly recording stock movements
ERP systems play a crucial role in correctly recording stock movements. They ensure that all incoming and outgoing goods flow in the stock are covered and handled correctly. Barcodes or RFID systems offer a big advantage here.
· Stock optimisation and forecasting
Stock software looks for patterns in stock movements and suggests optimisations based on them. The software thus makes precise forecasts and anticipates the movement of incoming and outgoing articles. As a wholesaler, you will never be faced with surprises (or empty shelves). Furthermore, stock optimisations have a favourable impact on the cost price of stock.
