Inventory Control

Saves millions with scientific inventory management

What priority does your company’s management give inventory management and purchasing systems? The answer to that question is pretty depressing. Most don’t even take advantage of this opportunity. According to one survey, only 35 percent of medium-sized manufacturing companies in Sweden use some form of inventory management. The rest, about two-thirds, don’t use it at all. And the 35 percent that actually use some type of inventory management most often do not utilize this tool in a scientifically proper manner.
Another study shows that basing order points and order quantities on GUESSTIMATES rather than CALCULATIONS increases tied-up capital, on average, by 110 %.
For companies whose core activity focuses on inventory or goods flow, there are few projects that can increase profitability as much as correctly implemented inventory management.

There are three powerful arguments for working with inventory management:

• Reaching the service level desired (service level management). It’s simply a question of mathematics. A higher level of service = fewer shortages of goods = increased sales.
• Optimizing (decreasing) tied-up capital – because inventory levels are calculated rather than guessed at. 
• Savings of time and money in acquiring and replenishing goods because automation dramatically reduces the amount of routine work.

Fewer shortages of goods mean increased sales. Let’s take an example. Company X has annual sales of SEK 500 million. Seasonal fluctuations and other factors create a 10 percent shortage of goods, leading to the customer choosing a similar product from another supplier.

Now assume that we reduce the shortage of goods by five percentage points. Conservatively speaking, this can increase sales by 2.5 percentage points. That means an increase in sales of SEK 10 million. With a margin of 40 percent, this would result in an increased annual profit of SEK 4 million. In addition, the company would most likely have saved a considerable amount through decreased tied-up capital. And all this can be done merely by improving control of inventory and flow of goods.

A purchasing system for distribution centers and wholesalers or a central replenishment system for a chain of stores linked to inventory management can reduce the sub-ordering costs by at least 50 percent, compared with conventional business systems. Assume you are dealing with a chain of 50 stores. Each store devotes two hours a day to ordering items (i.e. a total of 100 man-hours a day). Using a central function for replenishing the stores would require a single full-time employee, and result in a 92 hour daily reduction of working hours.