This is the number of days, on average, that goods for sale are sitting in your storeroom, from when they are delivered by suppliers, to when they are shipped out to customers. Where goods have to be paid for before they’ve been sold, it means you have had to spend valuable working capital for the stock sitting there waiting!
If you can manage this situation well, and reduce the number of Inventory Days*, it has a big impact on your bank account and working capital situation. It’s very tempting when a salesperson calls and offers you a discount to buy more stock, but try not to be tempted, because it could cost you more than the discount in the long run.
Consider the amount of working capital that will be tied up in that stock, compared to the discount being offered. If you are borrowing funds, a bank overdraft say, think of the amount of interest payable on those funds tied up in slow moving stock.
Are you in a service based business? Then “Work in Progress” (WIP) Days is very similar to Inventory Days, in that your ‘stock in trade,’ is the labour and materials you have to sell. Slow WIP days can be just as dangerous to cash-flow and working capital as Inventory Days. Anything you can do to tighten up your WIP and speed up the time work is ready to be invoiced, will pay dividends in your bank account and reduce your interest expense.
Here are eleven (11) ways to reduce the number of days stock sits on the shelf waiting to be sold:
- Stock system. Have a good system for managing stock
- Research lead times. Understand customer needs/lead times and forecast sales and requirements.
- Re-direct to customers. Get suppliers to deliver direct to customers if possible – avoid holding stock.
- Buy for immediate use. Where possible purchase materials for jobs rather than for stock
- Because it’s cheap! Don’t ‘impulse’ buy when offered discounts.
- Track stock movement. Report regularly on what stock is doing and measure your inventory days to give a target to work at reducing.
- Assign responsibility with targets. Make someone responsible for managing it and incentivise them.
- Seasons. Take into account ‘seasonality’.
- Industry Benchmarks. Check your industry benchmarks to see how you compare.
- Neat ‘n Tidy does it. Have a tidy stock room to avoid over-ordering
- Are you a stock hoarder? Get rid of obsolete stock, so you can use the funds to buy faster moving lines.
We’ve also compiled ten (10) ways to reduce the time jobs are in progress costing you money:
- Job management system: Seek out a good quoting/estimating system and measure actual costs against each job, to see which jobs were the most profitable.
- Follow up system: Have a system for following up quotes and tenders – the quicker you get started, the quicker you finish. Review operations for efficiency and ask yourself “Am I getting deals over the line quickly?” Create a sense of urgency.
- Just one person: Have one person managing jobs, who has a good understanding of status and progress to ensure jobs get finished.
- Manage labour: Manage resource allocation and track staff/contractor time spent on jobs. Schedule jobs and travel for efficiency.
- Cost for variations: Make allowances for variations to material prices on jobs.
- QC: Have good quality control to avoid rework and investigate write offs to avoid them in future.
- Checklists are vital: How many people do you know who don’t use checklists and even worse rely on memory. Use checklists and templates to maintain standards and improve customer satisfaction.
- Allow maintenance time: Keep equipment well maintained to avoid down time.
- KPIs: Have ‘Key Performance Indicators’ for jobs such as number of quotes versus jobs won and lost.
- Job management system: Use a job management system to keep information easy to access and provide information for improving job profitability.
Note: In our QuickCall business example – every single day improvement here would improve cash flow by $2055!
| *Inventory or Work in Progress Days
This is the number of days, on average, that stock sits in store ready to be sold or jobs are in progress prior to invoicing. Example Inventory/Work in Progress $ 80,000 Direct Costs of Cost of Goods Sold $ 700,000 Time Period 365 days 80,000 / 700,000 x 365 = 42 days |
If you’re keen to get started improving your Seven Key Numbers right now…
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