HomeOpinion & AnalysisColumnistsEfficient inventory management stimulates financial performance

Efficient inventory management stimulates financial performance


There are financial benefits derived from good inventory management. Effective satisfaction of customers’ demands will only be achieved if inventory is professionally managed. Many supply chains are ether lean or agile or a compromise, challenging a balance of responsiveness against efficiency in inventory management. There is need to comprehensively identify the tradeoffs and how these can be optimised in light of the market characteristics of cost in relation to availability, search and switch costs, etc. Optimum position is arrived at when customer satisfaction is achieved with the least possible cost. Concepts such as de-coupling in inventory control have been advanced as possible prescriptions to deal with issues of waste and minimise cost associated with holding inventory in the whole supply chain.

Such efficiencies are reflected in financial statements such as trading accounts, balance sheet and cash flow statement. Considering the cash flow statement with particular emphasis to determination of cash flows from operating activities, procurement activities as reflected by the creditors and sales activities closely related to stock of goods or services rendered, and the inventory, are significant in the determination of the net income of the firm.

The formula sums up net income, depreciation, amortisation and net change in accounts receivable (debtors) and changes in accounts payable (creditors) and changes in inventory and other operating activities. This requires that such activities related to sourcing and storage are effectively managed.

Considering inventory from the trading accounts, huge stock balances reduce the gross profit of an organisation. For those reasons, finance executives hate inventory, not only from the profit factor, but also for the reason that inventory makes an organisation incur huge carrying costs which ultimately reduce the net profit. Carrying costs are usually calculated as a percentage of the inventory value.

This implies the fewer the inventories held the lower the costs incurred. Good inventory managers need to ensure that they reduce inventory carrying costs by holding only stock of what is needed. No more, no less, but optimum levels of inventory are required. If your inventory management techniques are good, you will be able to communicate cost savings to your senior management.

The point of holding fewer inventories does not imply that an organisation’s shelves are kept empty. Instead, good inventory management increases sales by availing stocks to satisfy customer demands. In the fast-moving consumer goods (FMCG) industry, if an organisation does not have inventory readily available to sell, customers in need quickly switch to your competition. This implies that good inventory management balance the desire to keep low inventories with ability to satisfy customer needs in order to avoid losing a sale due to stock-out that promotes switching of customers to competition. To maximise sales, we need to optimise inventories.

Customer satisfaction through improved service level is enhanced by good inventory management. There is a challenge of balancing inventory optimisation and service level maximisation in order to delight customers.

Good oversight implies achieving lean inventory without jeopardising the ability to meet target service level. Note also that high service level comes at a cost and affect profitability.

Effective stock oversight requires employment of strategies that reduce cash investments in inventory whilst achieving the required level of service. This is achieved by a proactive procurement function capable of negotiating supply deals that delay payment of creditors’ obligations.

Too much inventory acquired on cash-on-delivery basis regrettably ties a lot of working capital. Good inventory management implies making business decisions that do not unnecessarily limit the ability to maintain healthy cash flows.

Good inventory management must therefore impact positively on company cash flows, profitability and service level.

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