How to reduce inventory risk in your business
Study the balance sheet of most retail or manufacturing businesses, and
you'll find inventory near the top of the asset list. Accountants define
inventory as raw materials, supplies, work in progress, and finished goods. It's
the stuff sitting on shelves, parked in the lot, or being produced in the
factory – merchandise that managers expect to sell in the normal course of
business. Buying, storing, handling, and insuring that stuff is expensive. As a
high-value asset, inventory often represents a significant risk, and mitigating
that risk is crucial to maintaining profitability.
To reduce inventory risk in your business, consider the following:
*
Too many or too few goods. Nothing beats a comprehensive and consistently
applied inventory tracking system for making sure you don't overbuy from
vendors or underestimate the needs of your customers. The best information
systems will capture detailed sales histories and forecast demand with
reasonable precision. In addition, regular contact with customers may help to
identify emerging demand or dissatisfaction with existing products. These
conversations, in turn, can influence your inventory purchase decisions.
*
Obsolescence. Most inventory declines in value over time. To mitigate this risk, a
manager should track revenue data and regularly move inventory via special promotions,
discounting, and sales. Paying to hold and insure obsolete merchandise drains
profits. Make room for fresh inventory by creatively moving the inventory that's
already on your shelves.
*
Damage. Managers should identify the causes behind frequent damage. Perhaps
employees need better training in handling goods; perhaps more stringent
policies need to be set. Some retailers, for example, limit the number of boxes
that can be stacked on pallets. Maybe the company's packaging is not sturdy
enough, or a change of suppliers is warranted. Knowing why your inventory is
being broken is the first step to reducing that risk.
*
Theft.
Establishing physical safeguards – locks, lighting, fences, cameras, and the
like – can help protect merchandise, whether it's housed in the store or
warehouse. Taking time to perform thorough background checks on employees may
also reduce fraud risk. Hiring an independent auditor to review inventory
levels is often a good preventive control, a control that sometimes ferrets out
theft. If employees know that management routinely checks the company books and
counts inventory, they may be less likely to shuffle goods from the warehouse
to their homes or engage in "creative" accounting.
