Inventory management is an integral part of your companies’ bottom line, especially for a growing business. By definition an effective inventory management system allows your company to react swiftly to changes in market demand and improve cash flow through optimal inventory holding.
Depending on the type of product your SME produces, there are various ways to effectively manage inventory.
Inventory Management – Pull System
For goods that have a shorter production cycle, you can implement a pull system which means to start production cycle once you receive the purchase order from your client. The largest advantage of a pull system is that there is a little extra inventory that would need to be stored in your facility. By reducing opportunity costs associated with tied up inventory, there would be more available cash to be used elsewhere in your business. Drawbacks include the potential loss of contracts due to immediate demand from a customer and your purchase order lead time taking longer than expected. Thereby this halts the production cycle.
Inventory Management – Push System
If you can accurately predict the future demand for your product then a push system might be in your favour, but be weary of storing unsold inventory that might become obsolete if you continuously update your product.
Inventory Management – Push/Pull System
Most companies today use a push-pull system, also known as lean inventory management, where raw materials are purchased ahead of time and stored but not assembled into the finished product until a purchase order is received. By having raw materials on hand, it practically eliminates the drawback of purchase order lead time.
Online Tool to Support Your Growing Business
Using proper supply chain/inventory management software is an incredible tool that uses historical data to help you determine the probability of future demand, support your growing business.
As stated earlier, the purpose of a good inventory management system is to help your bottom line. Freeing up cash flow from inventory makes money available to fuel growth in other parts of your business. While effective inventory management can increase working capital, it is also important to look at other ways to increase short term capital, like invoice discounting. This can help with managing early or late payments with customers, and properly setting up credit terms with clients and suppliers.