In Part 1 of our 2 part collaboration “How frozen is your capital,” we explained how your cash flow can become frozen in the form of excess stock and we provided some suggestions on what to do to get your cash flow moving again. These suggestions merely treated the symptoms, and we indicated that to prevent excess inventory from occurring in the first place, one needs to have an inventory plan in place.
You can't manage what you don't measure, and you can't measure what you can't see. To avoid your iceberg of frozen capital from growing and to prevent the inevitable sinking of the ship, we have put together a few tips with our colleague and Inventory specialist
Classify your inventory
Classifying your items allows you to focus on your primary SKUs -- the ones that bring you most of your business. The 80/20 rule most often applies, in that 20% of your items give you 80% of your sales. Knowing that gives you the ability to focus on the most important areas of your investment.
Recognize your seasonal peaks and troughs
Through your sales history analysis, you will learn when your peak periods are and can ensure that you order accordingly. Seasonality can be tricky, so keep an eye on how demand affects lead times and your replenishment cycle.
Categorize your supplier's behavior
Through your supplier order history, you can quickly determine supplier performance. How often were they late? How often did they not supply the full order? Judge them on both quantity and time.
Understand your customers’ preferences
Popular items are the ones you can't afford to be out of stock on. For these items, you will want a high fill rate -- as close to 100% as possible. Your slower movers can do with a lower fill rate. The higher the target fill rate, the more safety stock you will need to buffer the risk.
Define your safety stock requirements
Now that you have classified your inventory, have a better understanding of your sales and knowledge of your supplier performance, you can analyze what type of quantities you need to keep as insurance or safety stock. Your safety stock is there to protect you when your supplier lets you down or when your sales forecasting isn't accurate.
As you read this, you might be thinking that this could get complicated. You'll need to classify your inventory, set your inventory stocking policies, and establish your safety stock criteria, and accomplishing all that will require a bunch of formulas and algorithms. Although companies try to do this using a mix of data dumps from their ERP into spreadsheets, it's incredibly time-intensive and hugely prone to human error. It's at this stage that you should be looking at tools that have been developed to manage this exact function.
Without an inventory management tool, your iceberg of frozen capital will continue to grow and grow, and that could ultimately sink the ship. At