How not to tie up your cash in stock

Silk Road 061Looking at the benchmark data for 2008-9 for those of you who make ‘stuff’ it looks to me like quite a few of you hold substantial amounts of stock. We reckon that holding too much stock is bad for cashflow, is a whole load of risk (there’s no guarantee you’ll sell it) and is not an efficient use of scant resources.

Whilst there is no single right answer to the question of ‘how much stock should I hold’ there are a few questions you can ask of your business to see what answer is right for your business, your customers and your suppliers.

  • how soon do your customers need their orders fulfilled? 2 days, 4 weeks, 12 weeks? ie do you need to hold stock or can you order it in response to their orders
  • how big are the orders? if they are small you will have to hold stock because your manufacturer won’t want you placing tiny orders but if they are large i.e. big enough to justify a production run of their own then there’s no point holding lots of stock
  • can you separate out main line products where you need volume vs. made to order items … really you need to build this in to range planning so that you have as few constituent parts to main products as possible, this means you’ll hold more stock of fewer things rather than have a couple of each of a gazillion parts or products
  • what are the sensible minimum order levels with your manufacturers and how long does it take you to sell this amount of stock?

There are also a number of stock related traps you should plan to avoid. These include:

  • buying in quantities far larger than you need in order to get a bit more discount … this just reduces your working capital and changes your money from a flexible asset (ie cash) into an inflexible risk (ie stock is only worth what you can sell it for and there’s rarely a guarantee that you’ll sell it)
  • buying parts that you ‘might need at some point’ or ‘will find a use for ‘ … chances are that if you don’t have something in mind it could be years before you find a use for such things! … again this just ties up cash into inflexible assets you can’t use in other ways
  • allowing retailers to hold substantial amounts of stock on a Sale or Return basis … instead you want to allow the minimum of SoR and if retailers want volume of any item (even two pieces of the same pair of earrings) then they should buy this … after all they want it because they believe that they’ll sell the second piece before you have time to restock with them so they’re wanting to avoid loss of sales due to lack of stock.
  • holding on to old stock with a plan to sell it for full price at some point … instead just sell it at a discount and release the cash

So:

  • work out how many units you sell of your main products per annum and don’t buy more than a year’s stock of anything … preferably hold 3-6 months stock
  • talk to your suppliers about your planned orders for the coming 12 months … see if you can negotiate pricing scales based on total annual order levels rather than individual order volumes
  • do sell off old stock, discount as necessary
  • limit the volume of SoR stock any one retailer holds, limit the number of SoR retailers you work with

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