I present here a simple technique for analysing your business’ inventory holding and identifying stock holdings that might be liquidated or reduced. It is a technique I learned from some Italian consultants which I have simplified a little to write this blog. The analysis should only take a couple of hours – turning surplus stock into cash may take longer!
Firstly, decide how you want to analyse your stock. You may be able to use individual stock items, but if you have a large stock holding, stock “families” or some other grouping may be easier for an initial analysis. In most cases it makes more sense to do separate analyses with raw materials, WIP and finished goods stocks
Secondly rank your stock items (or families) in terms of their inventory value – i.e. the total value tied up in that type of stock. List each stock item (grouping) in order of the value held from highest to lowest.
Thirdly, analyse the stock turnover of the same stock items (families). Work out the number of stock-turns for each item (group) and rank these from the highest number of stock-turns to the lowest.
Next compare the lists and look for anomalies. Generally you will want to eliminate stock lines with a very low stock turn (say less than 4 turns per year) – these should be bought as required. In addition, are their any stock items or groupings with a high value but low stock-turns? Can these be bought to order? Reducing your holding of such stocks will release a considerable amount of cash. What about large holdings of very high turnover items? Can these be purchased on a “just in time” basis?
Or course you need to ensure security of supply, particularly for items with a long lead time, or where prices fluctuate considerably. However, this simple analysis, comparing usage and value, should help throw light on those corners of your stock which don’t get much attention, but which are soaking up cash in these straightened times.
Try it and see.