How Businesses Get It Wrong
In the world of stock control, achieving the perfect equilibrium can feel like a high-stakes tightrope act. Many businesses rely on manual process which are prone to bias, or human error. Here, we uncover some common missteps and pitfalls that lead to stock control nightmares and what that can mean in real terms for different industries.
Finding the balance
Striking the right balance between holding enough stock to meet customer demand and avoiding wastage or excess is difficult to manage and maintain without processes or controls. Inadequate processes for purchasing stock can lead to inefficient procurement and without a structured approach, businesses often find themselves ordering too much of one thing while not enough of another, resulting in financial strain and missed opportunities. Without finding the right balance and incorporating effective processes, businesses incorrectly value their stock due to a lack of control, thus making decisions on overstated values.
Do you have good cash flow? Or a liquidity problem?
The fear of running out of stock leads to over ordering, which results in having too much stock that ties up cash. Many of these businesses could benefit greatly from having that cash used elsewhere, to help grow the business and deliver returns. In the most extreme cases, a mismanagement of cashflow could result in failure to meet supplier and debt obligations and could result in insolvency.
This is why cash flow forecasting is so important to a business. It helps you understand what you need, and when. But how do you work out how much your unused stock is costing you?
Stock Days = (Stock Value / Cost of Purchases) x 365.
A stock days calculation is a great way to look at how much your stock costs you when it’s unsold. And with a stock days ratio, you can then see how long it’s tied up. When you get this process and calculation right, your days should be lower, as your processes and technology is working as it should.
Looking at industry averages is a helpful starting point for benchmarking within your business. What you hold is relative to the industry you work in.
Stock obsolescence and the ticking clock
Depending on the nature of your stock, the clock is ticking, and time waits for no inventory. Failure to move products promptly can lead to obsolescence, rendering goods worthless and eroding profits. This grim fate is often the consequence of overstocking and failing to align supply with demand.
While most resellers know they have dead inventory, many are unaware of just how much. As much as 20% to 30% of business’ inventory is obsolete at any given time, and they may write off most or all of those goods as a loss.
There are a variety of factors that contribute to product obsolescence, for some it’s technological advances – as new technologies emerge, products using older tech become outdated and less desirable. Then there’s changing customer preferences – what was once popular may fall out of favour due to shifting tastes or trends. For example, fashion companies constantly face the challenge of keeping up with changing styles over the seasons. Apparel giant Asos, for example, was sitting on £1.08 billion of unsold stock in 2022, up a third on the year before.
Couple that with competition from newer or more innovative products and some of your stock can be pushed into obsolescence. Businesses must continually monitor their competitors’ offerings and adapt accordingly to stay relevant.
Stock outs hinder customer experience, as well as your business
The flipside of obsolescence is stock outs. Running out of stock costs, on average, 4% of revenue each year. For many businesses, that puts them at a big risk of missing out on sales all together, or at the very least, disappointing a regular customer. Be mindful of that fact that estimated 4% of revenue doesn’t take into consideration future lost sales where customers go elsewhere. Depending on the product category, 7% to 25% of consumers faced with a stock-out will continue shopping but won’t buy a substitute for their desired item at the store; 21% to 43% will actually go to another store to buy the item
Demand forecasting is a common cause for stock outs. Predicting how much of a certain product you need can seem like a big, and complex job. As a business, you’ll need a good handle on historical sales data so you can make accurate forecasts. There’s also the issue of seasonality which can affect businesses, particularly the retail industry who face changing trends every quarter, meaning stockouts are 8% higher than other industries. On top of that is proper cash flow management. Even if you had effectively predicted what stock amounts you’ll need, when it comes time to placing the order, you can’t buy it without sufficient funds.
Going, going, gone. Is shrinkage affecting your bottom line?
Shrinkage, which is the loss of inventory stored in a warehouse, can be the result of a number of things. Whether it’s theft, not enough visibility between teams, accuracy of tracking, or a process of your business which stops you from using all of your stock. On top of all of those possibilities, worst still is the fact that many businesses don’t have clear visibility of stock, meaning it isn’t possible to know when stock is being lost, broken, stolen, or not in stock or going out of date. Of 1,200 retailers, a survey said they lost 1.45% of stock value; and when you consider an industry like retail, where your margins for clothing are 5.04%, that number can be very significant.
The 2020 National Retail Survey found that shrinkage is at an all-time high, accounting for 1.62% of the average retailer’s bottom line. That’s costing the entire industry £49.7 billion per year.
Perhaps one of the most concerning aspects of poor stock control is the scope of the problem often remains unknown. To put it into perspective, consider this eye-opening statistic: Tesco, a retail giant, loses approximately 1% of its stock, which is roughly 60,000 tonnes, due to overstocking versus demand. Now image you’re a manufacturing company, who works on 1-2% profit margins – what does that 1% of loss mean for you? A great deal more that it would a retailer like Tesco, which is why it’s so important to understand how to value your stock first. The aforementioned stock days calculation is a really useful tool for getting better clarity; we’ll dive deeper into improving visibility in the coming pages, too.
In summary, many businesses don’t have the processes and controls in place to make sure all of the above can be managed and avoided. When businesses don’t make the association between stock control and cashflow, they create a risk to their business or at the very least, missing out on opportunities to do something better with that cash. In the pages that follow, we’ll delve deeper into some of these challenges and offer actionable strategies to help your business steer clear of these costly traps.
So, What Can Be Done to Improve Your Business’ Stock Control?
Take control through stock counts
Every business that holds stock is familiar with stock counts in some capacity. It’s the way in which you perform your stock count that really makes the difference between ineffective and a good use of your time, helping to spot errors and prevent them happening in the first place. Stock counts give you an understanding of your numbers at a given time and can highlight any process issues in certain areas of stock lines.
Let’s explore the key elements of this control strategy:
Stock counts are not just a box to tick; they are your gateway to uncovering the truth about your inventory. They reveal shrinkage issues, discrepancies and provide an unvarnished picture of your stock’s actual state. This insight is invaluable for businesses aiming to keep their operations finely tuned.
There are two essential levels of stock counts, each serving a unique purpose.
Complete stock counts: A complete stock count, also known as a full inventory count, is a process of counting all of the inventory in a business at a specific point in time. They are the more common of stock counts, and whilst they have a place, particularly for those small businesses, or businesses with low sales volume, they don’t always paint a full picture. They includes all products in stock, regardless of where they are located, such as on shelves, in warehouses, or in transit.
These should ideally take place, at least, once a year. It primarily tells you what has happened after the issues have occurred. It’s essential for historical accuracy but may not prevent problems in real-time.
Perpetual stock counts: A perpetual stock count is a method of tracking inventory levels in real-time. They are regular, partial counts based on a criteria e.g. they can be conducted by product line, sections of the warehouse, or any other manageable subset.
These are the real game-changers. They function as a proactive control measure, identifying issues before they escalate. Instead of waiting for an annual audit, perpetual stock takes allow you to take immediate action based on real-time data. If it does identify a significant issue, then we recommend a complete stock count once the issue has been rectified, to get comfort over the scale of the issue.
Then there’s the topic of seen vs blind stock checks. These two approaches offer distinct advantages and understanding the differences between them is essential for effective stock control.
Seen stock checks: They are the traditional approach to inventory audits. In this method, those conducting the count have full visibility of the items they are tallying. They can see the product, its label and any associated details. These checks are straightforward and work well for validating the accuracy of inventory records and provide an opportunity to identify discrepancies between physical stock and recorded quantities. However, they are more susceptible to human error, as counters might rely too heavily on visual cues or overlook subtle discrepancies. This approach may also lack the element of surprise, potentially allowing staff to adjust inventory figures before the audit too.
The key risk with seen stock checks is bias. A seen count will allow the counter to know how many units of stock the system is showing – so they have a number as a starting point. It can lead to a quick visual check that it looks “about 100” so the system must be right, rather than individually counting. It’s the expected quantity that’s the key detail hidden in a blind stock check.
Blind stock checks: On the other hand, these counts add an element of surprise to the process. In this method, the individuals performing the count do not have access to the product information or any visual cues. They rely solely on count sheets or digital records. These checks force greater attention to detail and accuracy. Without the crutch of visual confirmation, counters are more likely to focus on each item and count meticulously. This method is also effective at uncovering discrepancies that might otherwise go unnoticed. The drawback is they can be more time-consuming and require careful planning to ensure that count sheets are accurate and up to date, but that’s a small price to pay for accuracy in our view, and why we recommend blind stock checks to anyone.
Stock counts are not just about tallying numbers; they’re about maintaining control and safeguarding your business from costly errors and inefficiencies. Through perpetual stock takes and strategic blind checks, you can stay ahead of the curve, catch discrepancies before they snowball and ensure that your stock control is accurate and reliable.
With 98% of UK businesses saying that digital transformation is important to their future strategy, it’s no surprise that more and more businesses are turning to technology to support them when it comes to managing their stock, and ensuring that links back to their financials. When you adopt technology, you can streamline and automate many otherwise manual, error-prone processes. That means faster ways of working so your teams can turn their efforts elsewhere, better insights and reporting for effective decision-making and better visibility when it comes to stock, means improving your bottom line.
Match, match and match again
From an accounts payable perspective, one of the most challenging jobs is managing large volumes of supplier invoices. It’s vital that they’re verified properly, then paid on time each month. Given the importance, staggeringly organisations still lose an estimated 5% of their annual revenues to fraud.
One method that we recommend is three-way matching; the accountant’s dream. This method helps to mitigate any risk involved with this process.
Three-way matching is matching the purchase order (which sets the agreed cost, quantity and stock details), goods receipt note (which confirms did we get the stock and was it what was expected?) and the purchase invoice (did it cost what we were expecting, based on what we ordered and was delivered). This happens too late in most businesses which means they can no longer get a refund or return and causes inaccurate stock.
The important thing here is making it easy to happen at the time that they happen, not afterwards. When it works, fine…there’s no problem. When it goes wrong, you need to identify it early and then deal with the issues and have an agreed process of dealing with under deliveries, over deliveries, damaged goods, or missing documents, as well as dealing with quality control and speed to match (i.e. by the time we’ve checked it the driver has left). We give people the information they need, when they need it.
To get a more detailed explanation of how the process works, here is an example using Company X and laptops:
- Company X needs 10 new laptops for their employees to use.
- Company X raises a purchase order (PO) for the requested goods, which is approved by management, or the budget holder.
- They receive the goods into the business, along with a Goods Receipt Note (GRN) that can be checked against the original PO to ensure the correct quantity and specification have been provided. The GRN indicates the parcel’s details, like contents, date of order and delivery and delivery address. If a laptop is missing or damaged during the delivery, the receiving department can refer to the GRN for solutions.
- If everything is at it should be, they then receive a Purchase Invoice that can be matched back to both the GRN and PO to ensure consistency between what was ordered, received and ultimately invoiced to pay for.
- Ultimately, all documents must have the same information. If the three essential documents (purchase order, goods receipt note and purchase invoice) coincide with the actual delivery, then it’s a three-way match.
Visibility = control
Forget cash; when it comes to stock control, visibility is king. Unfortunately, many businesses suffer from the fog of uncertainty, without clear insights into their current stock levels, both in terms of total quantity and location. That lack of visibility impacts decision-making, hindering efficient procurement and order fulfilment. This is where reporting is important and your system plays a big part.
With effective reporting and visibility, you can better understand what stock you need now and in the future. What’s here now and what’s coming in the future. Where stock is and how long it has been there. What’s due to leave and when. When you have this information, you can better manage and monitor wastage. It’s also imperative for tracking – this is why tracking by batch is great, especially when it comes to stock that can become obsolete.
We recommend accurate and timely reporting across a number of areas in the business process:
- Demand forecasting: pipeline forecasting, historical sales analysis
- Stock forecasting: current stock + pending purchase orders – forecast demand
- Stock quantity reporting: stock quantity by location and bin where necessary
- Stock ageing: batches or items reported by age
- Stock valuations: stock values at the lower of cost and net realisable value
Many businesses struggle with uncertainty about their current stock levels, which hampers decision-making and efficient procurement and order fulfilment. To address this challenge, effective reporting and technology can play a crucial role in simplifying these processes and ensuring transparency and consistency.
By leveraging technology for reporting and visibility, businesses can gain better insight into their current stock levels, locations, and future requirements. This allows for more informed decisions regarding procurement and stock management, ultimately reducing wastage and improving efficiency.
Keep scrolling to see some practical steps for future-proofing your business…