A Case about Inventory Management

We had a Business Compass session this week that I think readers might find interesting. We met with an existing MacGillivray client, the owner of a Canadian distributor for several international manufacturers of hi-tech instrumentation.

Her company’s financial health was excellent – when we reviewed her results together, we found that in the past year she’d managed to keep her fixed costs under firm control, her gross margins constant (despite changes in the US dollar and Euro exchange rates) and had increased her sales volume by several hundred thousand dollars over the prior year. Much of this increase had fallen to her bottom line. As you know, its pretty hard to do what she managed to do.

She had a very specific question for us though. “Can I afford to carry more inventory right now?”. It turns out that she’d made big efforts on the sales and marketing side in the past year that are now bearing fruit in the form of increased sales orders and an increased number of leads in the sales pipeline.

Unfortunately, delivery times from her suppliers in Europe have slipped to 8 weeks on some of her biggest selling product lines and some prospects have balked about waiting 8 weeks for delivery.

Together we looked at how she currently manages her working capital, including her accounts receivable, inventory and accounts payable. We noted that she had 60-90 day payment terms with her largest suppliers, which gives her plenty of room to manuever. We projected that she could increase her inventory levels to carry an 8 week supply of her top 10 product lines with NO additional investment required in working capital. She was impressed. Really impressed.

They won’t go “out of stock” on key products anymore and should be able to sell to those customers that had a problem with the 8 week delivery timelines. The long timelines also gives her the opportunity to cut her inventory levels back if her sales slow due to the economic downturn.