Inventory asset management doesn’t have to be complicated. Unfortunately, one of the biggest problems for small and medium sized businesses is how they give their sales and inventory departments conflicting objectives. Sales professionals are incentivized to sell inventory and inventory professionals are incentivized to limit inventory exposure. In most cases, these conflicting departmental objectives force one department to succeed at the other’s expense.
However, what if businesses adopted a different approach to inventory asset management? What if businesses managed inventory from the mindset of first bringing value to the company, instead of acquiescing to either sales or inventory’s demands? Is there a position that can balance the needs of both?
When companies are faced with this issue, they turn to the trusted expertise of the inventory analyst. Before explaining how an inventory analyst can help narrow the gap between sales and inventory , it’s important to review the individual constraints encountered by both these departments. This will provide the reasoning behind why a company should consider using the inventory analyst position.
Inventory and Purchasing Constraints
Because most companies don’t properly assess their true inventory costs, they assume that the inventory manager’s job is to keep inventory levels low, or at the very least, limit a company’s inventory exposure. To these companies, low inventory typically means lower costs. However, this isn’t always the case. Companies that believe low inventory is always a good thing, likely aren’t tracking their company’s lost sales as a result of not having inventory. In addition, they are probably ignoring, or are unable to track, all the expedited freight charges to get parts in and out of their warehouse when they are caught with inventory stock-outs. Contrary to popular opinion, low inventory can be extremely costly.
Sales and Marketing Constraints
In terms of sales, a number of companies forget that inventory is made available based on sales forecasts. When the sales team forecasts products and don’t sell them, it is ultimately the responsibility of sales to find a solution. It’s the duty of the sales department to sell these slow moving or dead stock items, regardless of the low gross profit on the sale and lower commission. However, some companies allow their sales departments to avoid their responsibility when it comes to liquidating slow moving and dead stock items.
When two departments have such contracting objectives, they can develop a narrow view of their overall responsibilities, and allow their individual actions to impede the other department's ability to do its job. Inventory may be so overwhelmed with controlling inventory costs, that they put their own objectives ahead of any sales objectives. Sales may only concentrate on those high gross profit products, and completely ignore those slow moving or dead stock ones.
An Inventory Analyst’s View of Inventory and Sales
In most small and medium sized businesses, only the owner has a vested interest in both sales and inventory and can make a calculated decision to benefit the company. Unfortunately, owners are rarely involved in day to day decision making.
Granted, operations, sales and inventory should work closer with one another, but those in business know that individual pursuits sometimes lead people to make decisions that are not in the best interests of the company. What’s needed is a position that is responsible for measuring a company’s true cost of inventory, and its true cost of sales, and is able to use this knowledge to make decisions on behalf of both departments. This is the ultimate function of the inventory analyst.
How Can an Analyst Help Find a Balance Between High and Low Inventory Counts?
Proper inventory asset management should measure a company’s true cost of inventory. The inventory analyst can track lost sales as a result of not having inventory. He or she can track the per-unit freight costs of inventory for incoming and outgoing shipments. Per-unit freight costs are a huge cost of inventory. He or she can track the monthly holding costs of inventory, the incidence of damage to inventory, and the monetary impact of slow moving or dead stock.
The inventory analyst can quantify inventory in a way that speaks directly to its real costs, and will never allow sales to ignore their responsibility when it pertains to dead stock. The inventory analyst’s main responsibility is to balance the demands from both departments and make decisions in the best interest of the company – the way the owner of the company would.
In essence, the inventory analyst is treating inventory as an asset – the way inventory is suppose to be treated. When assets under-perform, the way slow moving stock does, they must be liquidated. When assets grow, the way products do when they have a high inventory turn-over rate, they must then be cultivated.
The above video explains the bell curve of inventory management and the two main costs of inventory: Lost sales costs of inventory and high holding costs. If you want to learn more about these costs, please read: The Customer Demand and Inventory Gap: The Bell Curve
When small and medium sized businesses look to improve their approach to inventory asset management, they must first start by understanding the conflicting objectives they provide to their sales and inventory departments. Most of these objectives are tied to performance bonuses, which only exacerbates the issues between these two professions.
Sales and inventory can work together, but sometimes they need someone who has the ability to measure the demands of both departments and come away with a decision that puts the best interests of the company, ahead of any individual pursuits. In the end, it's about finding that aforementioned balance, one where the company doesn't incur high carrying costs and doesn't lose out on sales.
The above video explains the difference between high inventory costs due to low counts and high costs due to lost sales. You can read more by going here.
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