Companies run risks by cutting stock levels

Companies that have cut down on stock in an effort to preserve working capital and preserve cashflow risk permanent damage to their reputation and revenue if customers become dissatisfied.

Jim Storey, head of Coffee Machine Express, which supplies coffee machines to businesses, says he was forced to switch suppliers after he could not obtain a crucial product for his business.

“I had my water filter supplier, but it ran out of stock and that means we can’t install a water filter on our machines, putting the machines at risk. So we swapped suppliers – not having enough stock is just not good enough,” he says.

But Storey says it is not only his industry that is cutting back on supplies, and that if businesses from all industries cut back it creates a flow-on effect that hurts everyone.

“I had two of my company vehicles get into accidents, and each had to wait a month for parts. You might think that’s inventory control, but we’re talking common parts like an axle. Our insurer said that to have to wait a month is very unusual,” he says.

“Having vans off the road hurts my business. Another customer is waiting on a spare part and they’ve been waiting for six weeks – that means their coffee machine has been out of business.”

Brian Walker, managing director of consultancy firm Retail Doctor, says businesses need to preserve capital but must keep vigilant in keeping healthy levels of stock.

“It has been the case that over the past year, retailers would invariably be carrying too much stock on average – that costs working capital and is affecting cashflow. Other retailers then have been caught with too much,” he says.

“It depends very much on the sector. When you talk about electronics it’s quite clear that there’s quite a demand for LCDs, and JB Hi-Fi is saying they’re having trouble keeping up with demand.”

Walker says that it is essential retailers find the right inventory balance, and that it is “entirely possible” that retailers are missing out on crucial sales by not holding enough stock.

“The key to it is absolutely review histories, sales and forecasts very closely at a granular level to absolutely understand the replenishment cycles they need to reorder on,” he says.

“It’s important they have a good IT system and merchandise management systems linked to sales so they can analyse it all.”

Sales and marketing expert Colin Benjamin says businesses should employ the “80/20” rule – concentrate on the 20% of products bringing in 80% of revenue and always keep those in stock.

Relying on the top products will allow the retailer to cut inventory in other lower-selling products, he explains.

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