Managing Inventory in a Supply Chain Shortage

Over the past few months Lamont Accounting has taken you on an in-depth journey all about financial management. We've covered cash, accounts receivable, and inventory. Today, we want to mix things up a bit. Rather than jumping into the next exciting topic, we're going to take a step back and revisit inventory. Specifically, how to manage it.

Given the circumstances in the last two years, there have been immense setbacks in supply chains across all different types of industries. Rubber, to-go containers, paper cups, aluminum, clothing, and even cars, are just a few of the items affected by supply chain issues. So, why are we experiencing these shortages and what does that mean for your inventory? Luckily, there are a few ways to mitigate challenges when dealing with unfortunate circumstances in supply chains, and its simple: effective inventory management!

What is a supply chain?

A supply chain is the link between companies and suppliers to produce and distribute different products and services. A supply chain serves many functions. This could include product development, marketing, operations, distribution, finance, or customer service. Of course, there can be many nuances to supply chains, down to the type of supply chain model. But what's important for today's topic is knowing what the supply chain's function is for businesses and how it affects your own.

What is causing the shortages?

Unfortunately, the reasons for supply chain shortages cannot be wrapped up in a bow. The causes are plentiful, but the current shortage can be partially traced back to pandemic related reasons. Covid-related factory shutdowns, labor shortages, and international lockdowns have all slowed production and shipping time. Panic buying in early to mid-2020 also affected availability of goods and products.

Some experts believe that people increased their demand for goods that can be utilized at home, rather than outside experiences. People are spending more time inside of their houses. Industries had to shift their supply chain focuses to meet these home-adjacent product demands, which often left other products or materials in short supply.

For example, when the pandemic hit, the demand for gaming consoles skyrocketed. These consoles use the same microchips that car manufacturers use to build new vehicles. So, when the car companies stopped ordering microchips during the shutdown, they were instead allocated to produce inventory that had a higher demand. 

What does this mean for my inventory? 

Inventory will need to be managed more closely than ever before. Especially if your business is dependent on items that are experiencing a shortage; properly planning for shipping delays and increased prices will make the world of difference in the efficiency of your business.

Effectively managing inventory: 

1.Don't rely on what's worked in the past.
In order to effectively balance your inventory, you'll need to stay on top of what is going on in the present moment, and how that affects the future. What has worked in the past may leave your business in high or low supply of items you need. Of course, sitting on too much inventory means you will have wasted product and loss of money. And not having enough inventory to fulfill sales will have the same result. Stay vigilant and prepared!

2.Understand your supply chain.
Staying on top of relevant news about supply chains and shortages is only half the battle. To properly plan, you'll need to take the time to completely understand your inventory's supply chain. If there is a shortage in X, how does that affect Y & Z?

A labor shortage in a factory that produces chemicals for synthetic fibers, like dyes and other additives, might not seem impactful to a company that produces toys. But if your toy company produces polyester clothing for dolls or colorful fabric plushies, that labor shortage will have a direct influence on your supply chain.

3.Employ automation when you can.
Having an automation system to check for trends that your eye doesn't catch can help your business avoid problems in fulfillment. If your automation system detects a trend of increased demand for cotton, for example, your clothing store will want to order products in advance to account for shipping delays.

4.Determine the type of inventory management.
Periodic inventory management, barcode inventory management, and RFID (Radio Frequency Identification) inventory management are three different methods that require three different processes. It's crucial that your business rely on one method that best benefits your management style and business type.

5.Ask for help!
It's a tale as old as time- many people believe that they can do everything on their own. Overloading your personal bandwidth and knowledge base can be dangerous when it comes to your business! Having an effective inventory management strategy in place before problems arise is key to avoiding major issues. Of course, things will happen that cannot always be accounted for. But the best way to cushion those problems is to have plans in place with help from a pro.

There are professionals who can assist in creating strategies and plans to put into action. Protect your business with a personalized inventory management plan! What works for everybody else may not work for your business, and that's okay. Contact Lamont Accounting to help ensure that your business is on the right track.

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