Best practice of the week: 3.6 Inventory

An inventory depletion shock is coming to Western business inventories as Chinese exports have declined by over 18%. Retailers and businesses that traditionally build 20-day stock levels will run low until Chinese production returns to 100%. No one knows when that will be. How will you be able to buy or sell inventory, even when orders are shrinking?


Definition of Inventory: “The material needed to be on hand to fulfill promises to customers.”

Practice Summary

Types of inventory

  • Materials and components
  • Goods in transit
  • Work in process
  • Finished goods – warehoused
  • Consigned goods – at distributor
  • Merchandise goods – purchased to be resold
  • Maintenance and repair supplies

Identification and tracking best practices

  • Unique item identifiers (descriptive names, part numbers, SKUs)
  • Logical, well defined, clearly labeled locations
  • Inventory management software (with staff trained in it)

Standard metrics

  • Items mix
  • Number of days left
  • Annual inventory turnover (Cost of Goods Sold/Average Inventory)
  • Inventory shrinkage rate
  • Cost of Carry (Carrying cost/Total cost)

3 Good Questions (discuss in a management meeting)

  1. What is the cost of losing an inventory turn?
  2. What are our purchasing and inventory benchmarks?
  3. Why do we have inventory at all?

In the face of supply chain disruptions, take steps to increase sales of slow moving or perishable stock to generate more cash.