It seems like the economy is a game of Red Light, Green Light right now. Companies keep getting mixed signals about consumer demand, which makes it difficult to plan ahead and keep their inventories at an optimum level.
In the Wall Street Journal article “Adjusting Inventories Get Harder,” the author notes, “The choppy U.S. economic recovery is testing companies’ skill at finding just the right inventory levels to maximize their profits.”
Businesses have wisely slashed their inventory levels for the past few years to respond to drops in demand and poor economic conditions. However, things started to turn around last year, and so many businesses increased their inventories. Unfortunately, some may have leaped too quickly.
“The stakes are high – produce too much and if demand falls, be forced to pare overstock at margin-killing prices; play it too safe with lean inventories and potentially miss out on additional sales.” I’ve been saying that for a year now! Inventory management is all about balancing inventory needs so you don’t miss opportunities by either having too much capital stuck in products or not having enough products to meet demand.
The great thing is that this isn’t an abstract discussion anymore. The article points out several real-world examples: Kimberly-Clark cut production too much, and it lost an estimated $20 million of potential revenue in the fourth quarter of 2010. Harley-Davidson is also struggling with falling inventory levels. 3M is increasing its inventory because it expects sales to improve. Hopefully they’re right.
Inventory management has a powerful effect on companies. They can either succeed or fail based on how well they manage their finances and inventory. That’s why it’s so important to use inventory management software. Inventory management software helps companies respond to changes in demand quickly, so they can seize opportunities whenever they arise.