C4.5.2 Manage Stock Purchases

We have already spoken about completed Inventory and Work in Progress (WIP) in C4.3.3. This included the hidden destruction that it does to your cash flow and therefore your profitability. If you are in an inventory-intensive industry, like wholesale/retail and manufacturing, it is very important to manage stock purchases in the short term. This is to reduce the amounts you have to pay out and help your cash flow.

Do You Have Stockpiles of the Raw Materials For Your Production Cycle?

• Try to consume these stockpiles before re-ordering.
• Also, try to reduce the batch size of each inventory replenishment order.
  

The traps of quantity discounts when buying inventory:

• It is easy to get seduced by the idea of a quantity discounted price for your raw material purchases.
• You outlay cash on a stockpile of resources that you are not going to consume for several months.
• The money outlaid is tied up in the stockpile damaging your cash flow.
• Even worse: If you have purchased using a bank overdraft, or have a lot of debt on credit cards to pay for your stock, the interest associated with the finance will very quickly remove any financial benefit from quantity discounts.
• Also, keep in mind that your materials stocks can suffer from the same deterioration, life-expired and obsolescence problems that your final Manufactured Inventory can.

Immediately Develop The Following Discipline:

• Do not allow anyone to repurchase stock without your specific approval.
  • This immediately allows you to determine whether that stock is definitely necessary
    or
    if someone is ordering on autopilot
    or
    in a “just in case” scenario.

The concept of “Just In Time” (JIT) ordering is well known amongst larger, successful, businesses.
JIT ordering arranges for stock to arrive only when it is required.
It maintains as little as one or two days (and sometimes only one or two hours) of stock at any point in time.

Explore buying smaller quantities at more frequent intervals as a way to manage stock purchases. This allows a match between raw material orders coming in to products going out.

12Faces has several articles on Inventory Management.
Go to the list of articles: Inventory Management and Work in Progress.
For additional information, go to the Diagnostics System linked in the black box below.

Managing your stock is something that almost any business can do immediately.

For more help understanding any issues relating to this Section of the Turnaround90 Campaign, use the 12Faces Diagnostic System to drill down to root causes of problems and find our suggested Treatments.