If not managed efficiently, stock can be one of the biggest drains on profitability for a business.
Holding stock incurs costs in:
Above all, it ties up cash.
In an ideal world, every business would have no stock at all but would operate entirely on a well-tuned just-in-time (JIT) system with materials and parts arriving in the order and quantities in which they are needed for the manufacturing or assembly process.
But we do not live in an ideal world, and many small and medium-sized businesses do not have the resources or the sophistication to implement JIT. So if you must carry stock you need to be constantly on the lookout for ways to minimize the haemorrhaging it can cause to your hard-earned profits.
Reducing stock costs
Here are some suggestions for reducing stock costs:
- Identify those materials that contribute the least to product variety and differentiation - that is, those that are commonly used in numerous different products - and use them as widely as possible
- Check the quality and accuracy of goods received from suppliers. If you only spot the poor quality at the end of the process, it is too late...
- ...However, if you work closely with your suppliers and build up a relationship of trust, you may be able to cut down on the time spent checking the materials that come in
- Wherever possible, reduce the lead time for ordering materials, but take care not to unwittingly create hold-ups in production
- Constantly review sales trends and cross-reference them with stock requirements
- Make sure delivery schedules are neatly choreographed with production - try to avoid holding any more finished products than you really have to.
- Try to negotiate discounts on virtually everything that you buy and then negotiate terms for payments and interest rates.
Finally, a note of caution. Although it is generally best to keep stock as low as possible to avoid tying up capital, this might not always be the case if there are really significant bulk discounts available. Also, if you decide to make changes to your stock levels or procedures, be sure to do so within the context of the business as a whole: never make stock decisions in isolation.