The Price of Inadequate Inventory Control

Do your warehouse staff pick up an item lying in the middle of a warehouse aisle and place it in its right area when they walk by? Do they act as if they aren't aware of it? Do they believe they are too preoccupied with it to deal with it? Is it pushed out of the way?

This question's response gives you a fair idea of how your staff feel about your inventory. Employees must understand the clear link between inventory and their pay in order for a firm to be successful. Inventory is purchased with the same "pile" of money that is used to pay employees. 

Furthermore, inventory must be converted into cash (by sales) in order for the company to pay its employees in the future. You won't be successful (or even survive) unless all of your employees are aware of the connection.

Everyone must understand that a material loss of $1,000 results in a loss of more than $1,000 for your firm. Material losses owing to poor inventory control, whether from theft, breakage, or misplaced warehouse items, must be compensated for with gross profit dollars, just like any other expense. 

If a company's typical gross margin is 25% (a fair figure for many businesses), it makes a quarter-cent profit on every dollar of sales. All of your other expenses, including the replacement material, must be paid for with these 25 cents on the dollar.

As a result, your company doesn't need $1,000 in new sales to make up for a $1,000 loss; it needs $4,000 in new sales! A quarter of a thousand dollars is twenty-five percent of four thousand dollars. If we slightly alter this equation, we may get a formula that shows the true cost of lost material:

Needed Additional Sales = Value of Lost Material x Average Gross Margin Percentage

Any inventory that cannot be: 1) sold to a client or 2) used to manufacture other goods or services that will be sold to a customer is considered lost material.

Materials that have been misplaced include:

• Incomplete inventory

• Inventory that has been stolen

• Inventory borrowed by sales and technicians that is not recorded and never returned

• Stock that is broken or damaged

• Products that are no longer in use (less any liquidation value)

• Unsellable or unusable remnants of an item (sometimes known as "orphan inventory" or "drops").

• Non-stock product quantities bought for a specific customer that are greater than what the consumer actually purchases (an inventory management issue)

Post the worth of lost material each week, as well as the additional sales required to make up for the loss. The first step towards solving an issue is to make everyone aware of it!

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