Remember the supply chain chaos during the Covid pandemic? Whether it was shortages of essential items or overstocking to cope with uncertainty, we all experienced some form of inventory disruption. Stockpiling in the face of real or perceived scarcity is a natural human response—it’s one of the ways we manage risk. The same happens in businesses, especially in asset-heavy industries, where inventory levels tend to grow unchecked over time.
During Covid, many companies saw their inventory balloon, creating a new set of challenges. The issue with excess inventory isn’t just the capital tied up in stock; it’s the carrying cost that accompanies it. Depending on the industry, location, and labor costs, carrying costs can range anywhere from 18% to 25% of the purchase price annually. This is a significant expense that erodes profitability.
Reducing inventory and its associated carrying costs is one of the ways to improve financial performance. Inventory management is a group effort from many different functions. Here are a few key steps to help you get control of your inventory:
Measure and report total inventory value regularly. Visibility is the first step to managing inventory effectively.
Establish fit for purpose processes and criteria for adding and removing inventory. Involve key stakeholders to ensure you’re not overstocking unnecessarily.
Define who controls the inventory. Assigning responsibility ensures accountability for inventory levels.
Conduct regular reviews to assess risks and identify opportunities to optimize inventory. Look for opportunities by adding missed critical spares and removing inventory where supply chain lead time issues no longer exist, or the risk is now low.
By actively managing your inventory, you can reduce costs, improve operational efficiency, and better prepare for future uncertainties.
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