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Maintain Profits Through Better Inventory Control
Part five of the SEMA Recession Survival Series, entitled “Inventory Management: Stop Storing Cash in the Warehouse,” presented by Tom Shay of Profits+Plus, demonstrates how building your inventory in the face of recession, rather than retreating, will lead to an increased return on your investment.
“When you can increase the inventory turn in your business, you are going to take an increase in your return on investment by very substantial numbers,” said Shay. “More so than if that money were to simply sit in a checking account. More than if you can take and just drop that money at the bank and let it sit there.
"You can take and do a whole lot more for your business. With 2%, you can’t even pay a bill on 2% return on your money. It’s got to do a whole lot more for you.”
Shay invites specialty-equipment companies to visit the Profits+Plus website and access a ROI calculator to analyze their business. In one example, Shay demonstrates that by moving the inventory turn up one time, a business' ROI increases from 42% to 53%.
“I am going to increase the return on investment by something like 11% by just being able to increase the inventory turn one time. And yet people are looking at taking the money out of their business, storing it in a checking account and saying ‘I’ll be happy with a 2 1/4% that the banks can give me,’” said Shay.
He advises businesses to ask themselves if their current inventory level is too high, just right or too low. For businesses who think that their inventory is too high, Shay states that they first need to examine the concept of velocity coding, a computer term that helps understand what products are selling.
Shay states that most everything that businesses sell has at least one, if not multiple, seasons during the course of the year. What businesses need to know is the variation. You can track it by individual products, certain categories or departments in your business, but you need to know something about how things are going, Shay says.
He reveals that businesses that track their inventory based on some sort of velocity coding begin to show some gain. In the presentation, Shay outlines a velocity-coding process based on an A–E scale.
To access the entire presentation and for a complete overview on how to track your inventory by velocity coding, download a PDF or audio version here.