How Can Keeping High Inventory Help You Make More Profit?
Inventory is one of the essential assets of a business. It directly impacts a company's profitability, so its management needs to be proactive, precise, and efficient. For businesses, the primary objective of holding inventory is to ensure that customer service targets are consistently satisfied without compromising cash flow or running out of stock. But in reality, determining the optimal amount of inventory to keep might not be as easy as most people think.
Some businesses have few items, making them unable to satisfy customers' expectations by supplying enough available products. It often results in driving customers away, sometimes to another business, and sometimes for good. On the other hand, if your company holds too much inventory on your shelves or in your warehouse, you run the risk of obsolescence and being trapped with goods you can't sell.
So how can you effectively manage your inventory investment to optimize your profit and cash flow while at the same time lowering costs? Is it possible to maintain a large inventory count and still make more profit? Read more to find out.
The 80/20 rule
In business, there is an unspoken 80/20 rule that may apply to a variety of circumstances. When it comes to inventory, businesses typically earn around 80% of their sales from 20% of their stock. There may be some outliers, but usually, there will always be high-demand items and slow-moving items in a company. And it is these high-demand products, together with their complementary goods, that will create the majority of your business profit.
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Keeping a large volume of inventory of your high-demand products will earn you more profit in the short term, but not in the long run if you don't have an effective inventory management system in place. Inventory management is what goes on behind the curtain of any successful business. Since demand is constantly changing and can be affected by many factors, holding a large number of your high-demand products will gain you more profit. If you also will use effective inventory management that will allow you to react quickly to market demands and ensure you don't have too much or too little stock.
Maintaining a high inventory count also has other advantages. And these are just some examples:
- Sales Volume Discount- Holding large amounts of inventory usually means that you can benefit from supplier discounts if you purchase wholesale. These reductions will lower your expenses and allow you to profit more from your sales. But although discounts are available, owners/managers should know which type of inventory is best purchased in bulk and which should not.
- Fast Order Fulfillment- When things are in stock, customers get products in hand much quicker, and you can ensure that customer fulfillment times are always met within the time frame they are requesting. And as customers will receive their product in hand faster, they will have a more positive experience working with your business which is a fundamental aspect of quality customer service and loyalty.
- Full Shelves Display- Fully stocked shelves or promotional displays also contribute to effective in-store merchandising. The appearance of full shelves sends a positive message to the customer that the business is excellent and has a wide range and assortment of products. Extensive inventories also allow you to place items in various locations around the company. You may also strategically put high-demand things towards the front of the shop or in checkout lanes to encourage impulse buys.
Keeping a high inventory count has its pros and cons. And it is up to each business owner to review the financial health of their business and decide whether maintaining a high or low volume of products is the best option in the long run.