The global pandemic has thrown every business into unmarked territory. From start-ups to well-established organizations, almost everyone has had to at least adapt, if not blaze a completely new trail.
If times are feeling particularly lean, remember that product inventory ties up cash—and access to cash during tougher bouts could mean the difference between making it through an economic downturn and going down with it.
See the Forest Through the Trees
Tap into your survivalist instincts to get through these times.You’ll need to take a holistic look at your inventory catalogue in order to drill down to what really matters. And, if your business is feeling cash-strapped, the good news is that there are proactive measures any product-based company can take to intelligently manage inventory in order to free up cashflow when you need it most.
“It takes more than pure willpower to navigate through a global pandemic wilderness. It also takes cash”
Furthermore, a proactive approach never hurts. Even if your business isn’t feeling the squeeze, you never know if an unforeseen lion, tiger or bear may change up the landscape. Working with a supply chain management expert can help ensure you’re always on your toes.
Three Ways to Unlock the Cash within the Back Country of your Inventory Stores:
1. SKU Rationalization: There exists an inverse relationship between the number of SKUs you have and supply chain efficiency. More SKUs make response times and inventory management capabilities less nimble, and your supply chain less resilient to disruption, all while reducing overall liquidity.
A recent industry article cited that consumer product giants like Mondelez, Procter & Gamble and Cocoa-Cola, all world-renowned for their immense supply chains, have each made moves to reduce the complexity of their supply chains due to the stress factors triggered by the Coronavirus pandemic—namely, they have all cut back the number of SKUs in their product lineups to improve efficiencies.
While it may sound counter intuitive to give customers less choice, doing so could actually deliver huge benefits. Not only can you focus on what’s selling and profitable, and rationalize out whatever is weighing you down, but you may help combat the paradox of choice phenomenon—where consumers simply walk away from a potential conversion if they feel overwhelmed in the decision-making process.
Aim for simplification. SKU rationalization leads to better inventory management and planning, generally improves purchase power and pricing, focuses and accelerates supply chains, and releases cash that had been assigned to lower-performing products.
2. Shorten lead times and/or supply chains: On average, sourcing materials from overseas takes 12 weeks and requires a 20%-30% downpayment. Translation: A lot of your company’s cash may be allocated towards goods you can’t even sell for several months.
Solution: If you can find a domestic source that can produce at a comparable price, you will shorten lead times, as well as the overall supply chain, freeing up more cash which can then be used in more helpful, or even pressing ways (e.g., meeting payroll without shrinking staff, improving eCommerce capabilities).
3. Make a Plan: What materials and goods are you purchasing and why? If you have some inventory that never seems to move, that’s a signal your current processes could benefit from a fresh analysis, potentially resulting in new areas to find cash in your business.
Aggregate demand is the planning process that companies use around buying and selling goods. It represents the total amount of money spent on your goods and services at a specific price level and point in time and also takes into account all consumer goods, capital goods (factories and equipment), exports, imports, and government spending.
For example, if you currently use three warehouses, you should scrutinize the overall demand for each SKU at each site. Taking a critical look at your warehouses will help ensure you don’t overbuy in the future (if that’s what you’ve been doing). This exacting approach means you should also be able to reduce the need to carry as much safety stock at each facility. And, any good aggregate demand analysis can even reveal harder-to-uncover truths, such as the fact you may only need two warehouses, not three. Yes, fewer warehouses generally result in higher shipping costs, but who knows, by rationalizing outless critical products, your business may save a ton on reduced rent and by carrying fewer inventories.
The Right Map is Key
Inventory management is a complex undertaking, but it isn’t magical. By activating the best methodical approach, the cost savings will reveal themselves one-by one.
For example, while you may technically carry 250 SKUs, and you know that only 50 are active, a thorough analysis can tell you if the potential profits of carrying all 250 SKUs outweigh the costs, or if it’s time to let some of those items go for good.
Back on the Trail
The tension between providing choice and creating supply chain simplicity is difficult to reconcile, but if freeing up cash is the name of the game, a careful analysis will reveal many of answers to your questions on where to start and what to do. No two businesses are alike, but there are basic processes that can be implemented in order to get to the solution.
While the slowdown of consumer spending and overall economic uncertainty have been difficult to navigate, the global pandemic may just prove to be the best thing to have happened to your overall approach to inventory management in the long run. When times are good, we all get a little more relaxed, and our operations can suffer unintended consequences. Companies collect SKUs without much forethought, rather than scrutinize every decision as they should.
Use the Buddy System
It never hurts to be prepared no matter how sunny the forecast. Consider tapping into the expertise of a supply chain management expert to analyze your inventory management systems as well as optimize your overall supply chain. Any seasoned outdoors man (or woman) will tell you that being prepared is paramount to survival.
Now that every dollar counts, a thorough look at your inventory management can help you find the cash you need today, as well as help you to continue to run a more efficient and profitable business tomorrow.