Why Do You Need Inventory?
Have you ever thought about why we need inventories or stocks in business? I’m sure many people will say “If you don’t have stock, how are you going to sell your product?”
On the other hand, many business owners struggle to manage inventories and may have a critical impact to continue your business. As a business consultant, I have seen many business owners and senior management who do not know the importance of inventory management. From Sales, Product Marketing, to Procurement Managers, you needs to have cross organizations collaboration to optimise stock level. It is a corporate activity to maintain the correct level of inventory. Let’s think and learn about why we need inventory in the first place.
What are the advantages of inventory?
1. Product Lineup
Inventory allows you to show various product line up you have and the capability of providing the value to your customer. You don’t want to go to a shop and find just one or two products you can pick right? Especially for commodity products which are products you can get from various stores or companies, you will need to hold inventory to show the product line up you hold as that is one of the benefits that customer will be buying from your shop. Supermarket, department stores, glossary stores, electronics stores are some of the typical industries which sell commodity products.
Customer will have expectations on when they want to buy the product. Unless it is a unique product, you will not be able to purchase right away. The more product you have on hand to sell the more chance customer will buy your product.
Meeting customer expectations on delivery of the product will increase your sales as you have the product at the right time for customers.
3. User experience
Ultimately, you want to If you hold inventories for multiple product lines, that will also contribute to your client’s experience of purchasing products from your shop. For example, why do we go shopping to a department store to buy clothes? Why do we go to Amazon to buy books? Because there is various type of product, you can choose from the particular category you intend to purchase. That experience will generate a great experience that you would want to come back again and purchase although you don’t plan to buy now.
How Can Overstock Impact Our Business? (Disadvantages)
On the other hand, you have also heard that overstock or excess inventory have disadvantages. How does it affect our business?
1. Dead stock
Dead stock is an inventory which you are not able to sell in a certain amount of period. You need to financially book this as a cost if it becomes a dead stock. Increasing your cost will impact your profit because you are unable to convert your inventory into sales while your cost is rising. Therefore, it is important to consider which product has an opportunity to sell. Building sales strategies and proceeding marketing activities help to establish which product you will hold your inventories.
2. Space to hold stock
Holding stocks require a space to manage them. Unless your product is minuscule that you hardly need space, you will need a warehouse to store your product. You need to buy shelves, racks to store your goods, and you need people, forklifts to put away or pick your products. High level of inventory will impact your space and in some cases, your operational costs to manage inventory. The increase of operational expenditure or warehouse facility costs will increase your cost and impact your profit.
3. Cash Flow
You purchase your goods or manufacture products by cash, and it turns into inventory. Inventory is financially an asset, so you will proceed sales activities to sell your asset and gain revenue. Cash is a liquid asset, which means that company needs to use cash to settle liabilities, such as loans or account payables. Inventories are not liquid assets because it is not easy to convert inventory to cash. When you purchase a product to resell, can you just return the product and get you cash back? In most industries, it is not possible. Therefore if you convert your asset from cash to inventory, if you cannot sell the product, then your cash flow will have an impact. Negative operational cash flow can make a significant impact on your financial health and some cases you can go bankrupt by holding dead stocks.
Now that you understand the advantages and disadvantages of inventory it is time for your to reflect to your own business and explain why is it necessary for your business to hold stocks? What are the strategies you are taking to optimise your inventory?