Why is it important to control the amount of stock you hold?

Why is it important to control the amount of stock you hold?

-         Holding stock is expensive.  You have to pay for the room to store it and you have money tied up in it that is not generating a return

-         Holding stock consumes cash.  If the value of stock you hold is growing then you are leaking cash from the business

-         Conversely, if you can reduce your stockholding (through sales rather than write-offs) then you inject cash into the business

-         Any stockholding is a buffer and so indicates an imperfect process

How can you limit the amount of stock you hold?

-         Limit the range of items you sell as far as possible within the constraints of your market proposition.  Ensure that specifying or purchasing anything else (“off-catalogue”) is subject to a higher level of control

-         Set up consignment stock arrangements (you hold the stock but only pay your supplier when you sell the item)

-         Incentivise or constrain your salespeople to sell slow-moving or obsolescent stock

-         Beware volume deals unless you are sure you can sell the stuff quickly

-         Ship older stock first – adopt a strict first-in-first-out approach

-         Avoid limited-life stock as far as possible within the constraints of your market proposition

-         Control purchasing so that only certain people are allowed to raise purchase orders, particularly where items are being purchased for direct supply or off-catalogue

-        Use an effective purchasing and inventory management system that allows you to monitor key ratios and drill into the detail if they drift

-         Make sure van stock or equivalent is included

-        Enforce stock receipt and issue controls and recording  even if you don’t have a special storeroom or a storekeeper.  Make effective stock control someone’s responsibility

-         Carry out a monthly stock-check and reconciliation – don’t leave it for a year

How do you know if you are holding the right amount of stock?

-         The right amount will vary by industry, company and time of year

-         You need to track the ratios that tell you that you have too little stock (stock-outs, delayed fulfilment or service, lost sales) as well as those that tell you that you have too much (slow-moving items, obsolete items, write-offs)

-         Stock turns (annual turnover/stock value) is a good top-level KPI

Take a look at further useful briefings on my website