How to control your company's inventory
For product companies, inventory is usually the biggest silent consumer of working capital. Controlling inventory is first and foremost a financial decision.
Inventory control needs four elements: a single item registry, recording every movement, an ABC curve by value and turnover, and a safety stock and reorder point policy. Idle inventory is trapped cash — every extra month of coverage is money not in the bank.
Registry and movement
Without unique item codes and disciplined recording of receipts, issues and losses, no turnover report is reliable.
ABC curve and turnover
Classify items by capital tied up and by sales velocity. A items deserve tight control and frequent purchasing; C items, larger and rarer orders.
Safety stock and reorder point
Reorder point equals average daily consumption times lead time plus safety stock. This simple formula prevents stockouts without inflating tied-up capital.
Cycle counting
Instead of one traumatic annual count, count one group of items per week so discrepancies surface early.
A few minutes, no cost.
Frequently asked questions
How do I know if my inventory is too high?
Divide inventory by average monthly cost of goods sold to get coverage in months. Above lead time plus safety, capital is trapped.
How does inventory affect cash?
Every unit of currency in stock is one outside the bank. Cutting excess coverage is one of the fastest ways to free working capital.