Viewpoint -- Layoff Your Inventory, Not Your Employees

Nov. 20, 2008
Hard pressed to reduce inventory costs in a volatile economy, small and mid-sized enterprises should focus on the one aspect of their business that they can control -- the supply chain.

According to the Small Business Administration, smaller businesses employ about half the nation's workforce and create 60% to 80% of new jobs each year. With the current economic climate, SMEs or small and midsized enterprises -- like large businesses -- are looking for every penny of savings to shore up resources, so they can weather this economic storm. Before cutting jobs or conducting layoffs, one place organizations can look to save big right now is in their supply chain. How a company manages its inventory can help boost the bottom line almost immediately.

Between cost of money, variable storage costs and obsolescence, inventory carrying costs can range from 15% to 25% of total inventory value on an annual basis. On a million dollars of inventory, that translates to at least $150,000 of additional expense, potentially wiping out already thin profit margins. In fact, one of my customers told me that he recently was ordered to reduce inventory by $10 million to offset lower sales. Throughout my career, the only way I have seen that successfully done is through razor-sharp supply chain planning and execution. It can be done, though.

A Better Way

Historically, small and midsized enterprises have managed their supply chain through a fairly manual process -- tracking sales and inventory requirements on simple Excel spreadsheets. This approach is the most risky and, unfortunately, the most inaccurate. A great myth is that the sophisticated software to help predict and manage the supply chain is cost prohibitive. However, affordable tools are available to help even small and midsized enterprises manage inventory more accurately.

"Good" IT Spending

Despite the economic environment, the Computing Technology Industry Association reported that 51% of small and midsized enterprises plan to increase their technology spending in 2009. This reflects the need for them to automate operations and increase staff efficiency.

While IT spending may be an 'easy to cut' expense right now, software that can save 15% to 25% of margin on inventory costs can be a life saver. With sales pipelines more uncertain today, supply chain visibility and systematic sales and operations planning will be critical to a business' long term health.

Evaluate Carefully

When considering supply chain management solutions, you should evaluate three key factors. First, how quickly will the solution help reduce inventory -- obviously the more immediate, the better. Second, how much emphasis does the solution place on demand planning. Truthfully, this should be the centerpiece of the solution's deliverables. Finally, consider how easy the solution will be to use. Among other important factors to consider, the solution's breadth of functionality is imperative. Although some believe that small and midsized enterprises only need a "lite version" of traditional big software, I wholeheartedly disagree. Small and midsized enterprises face the same pressures as large organizations such as offshore manufacturing and product proliferation; therefore, they need just as much functionality -- not less! Other rules of thumb are that the solution should require minimal IT support and the return on investment should be within one year. Depending on the amount of inventory your business requires, some will be sooner.

With the government is focused on rescuing large corporations that employ thousands, small and midsized enterprises are much harder pressed to voice their needs during this unpredictable economic environment. However, as the employer of over half the nation's workforce, their contribution to the success or failure of the economy is equal. Therefore, small and midsized enterprises should invest in tools with the same robust functionally as their large counterparts to manage and reduce the one aspect of their business that they can control -- their inventory. And, they should be just as prudent in their decision about technology spend as they are their inventory costs.

Bill Harrison is president of Demand Solutions, a leading supply chain software company helping small and midsized enterprises reduce costs with robust and affordable SCM software since 1985.

Sponsored Recommendations

Voice your opinion!

To join the conversation, and become an exclusive member of IndustryWeek, create an account today!