There is a Season
A time to keep and a time to get rid of inventory
Many businesses state their computer system has a component which provides inventory replenishment. If that is so, that computer system needs to be turned off or ignored.
The concept of inventory replenishment is wrong. By definition it states that when you sell five of an item, that computer system will reorder five of that item for you.
If only the selling of merchandise would make it necessary for the business to need those five replaced. It may be that as the five replacement items arrive there is little need for them as the season for the item is winding down.
Another possibility is that the business needs ten as the season for the item has just started and the buyer has underestimated the need for the product for the season.
The season? Every item has a season. Take a look through your inventory files. Can you find any item that sells at a rate of 8.33% per month for twelve consecutive months? When you find there is nothing that fits this parameter, you will see that inventory replenishment is not the right solution.
Once you have determined the selling cycle, and there can be multiple cycles during the year, you can begin to build your plan for the proper inventory control.
The first consideration is knowing how many are needed for each of the next twelve months. This means looking at the sales history of the item over at least one year, if not multiple years. With that task completed, there are more necessary factors to be considered.
The first is knowing how many have to be ordered at a time. It is simple math to determine if you are ordering this item every week, month, quarter, or other period of time. Most likely you want to have a minimal number sitting on the warehouse shelf when the next order arrives.
That ‘minimal number’ comes into place as you determine what kind of lead time is necessary between when you order the item and when the item arrives on your shelf.
Outside of this pure math calculation, there are considerations for freight costs and total dollar or poundage minimum order from the vendor. Combining an order for this item with an order for other items could change the profitability of the item because of free freight or getting longer to pay for the item.
Being able to order, receive, and sell an item before the invoice is due adds another opportunity for extending the profitability on any and all items. However, these factors do add a degree of complexity of being able to maximize the profits as an order is written.
Without taking the time to give consideration to these factors of writing an order, a buyer might as well settle for order replenishment; the results would be about the same.
The Old Testament of the Bible gives testimony to the reason for understanding the correct way of ordering merchandise. The book of Ecclesiastes, Chapter 3 states ‘To everything there is a season; a time to keep and a time to throw away’.
The same is true for inventory.