The global COVID-19 pandemic has impacted all businesses in all industries over the last 2 years, however as business slowly goes back to normal, some businesses are facing a new challenge in relation to the management of their supply chain.
Businesses in the manufacturing and retail sector are experiencing new challenges with not just obtaining goods but also delays in transporting the goods to their customers.
These challenges require a business to rethink its current supply chain model and to consider an alternative approach to the common inventory management system of Just In Time.
Under a Just In Time inventory management system, goods are ordered from a supplier only as they are needed, generally, once an order is placed by a customer. This method has long been considered the preferred way to manage a business’s inventory system due to reduced holding costs and increase in inventory turnover.
However, due to the new challenges outlined above, the old way of buying and selling inventory may no longer be appropriate for the modern business.
Businesses may now need to consider the reverse of the Just In Time model and that is carrying excess goods to ensure it always has surplus requirements available to sell to its customers on demand.
Successful business owners always find a way to turn a threat into an opportunity and reorganising your supply chain management system so that your business carries excess supply to meet customer demand could lead to a significant advantage over your competitors.
Although this appears to be a simple solution to implement, a business should carefully consider the financial impact it will have on its cash flow and net profit.
Where a business wishes to carry excess goods a significant cash outlay ought to be required to acquire the goods which could impact the business’s cash flow if the goods are not sold promptly.
An alternative option to using cash to acquire the goods, to ease cash flow concerns, would be to use borrowed funds to fund the purchase of goods.
This could be structured by obtaining a Line of Credit facility with your bank or by negotiating a payment plan with the supplier.
Another factor to consider when acquiring excess goods as opposed to acquiring goods on demand is if the goods become obsolete and therefore cannot be sold.
Goods can become obsolete when an updated product is released that makes the original product redundant or when a good has a specified life expectancy that has since expired. When this occurs then it is likely the business will have to write off the goods which ought to result in a reduced net profit and further cash flow pressures since the business was unable to collect any cash from the sale of goods.
A great strategy for a business to avoid having their goods becoming obsolete and written off would be to offer discounts to ensure the goods get sold. So long as the business can sell the goods for cost price then there ought to be no impact on the business’s cash flow.
There is no right or wrong way to carry goods in a business and it is up to the owners to determine what best suits their circumstances. Whether a business decides to carry excess goods or use a Just In Time system we believe both inventory methods can work so long as they are being managed correctly.
Regardless of which inventory system a business adopts, we recommend that prior to implementing, a business carefully considers which system will work best for them to ensure their cash flow and profitability are not impacted.
Further, we also recommend processes be implemented to ensure the inventory system is continuously monitored and reviewed to ensure it is still appropriate as the economic climate changes over time.
Please contact Waterford Accountants to discuss your inventory management system and how we can assist you.