6 Inventory Strategies for Boosting Working Capital

Ken Tornheim, CPA, CFE

Many businesses tie up working capital in inventory. Fortunately, there are inventory management and optimization strategies manufacturers can use to free up some of this capital and boost cash flow. Here are six strategies to consider.

1. Implement an Inventory Management System
   A good inventory management system monitors and tracks inventory in real time. This allows you to evaluate inventory key performance indicators (KPIs), optimize inventory levels, and react quickly to changes in demand, supply chain disruptions or other inventory trends.

   Integrate the system with your enterprise resource planning system so that it has access to sales forecasts and other critical data. This integration eliminates data silos and enables more accurate demand planning and resource allocation.

2. Monitor KPIs
   KPIs are useful benchmarking tools to track and evaluate the performance of your inventory management systems and practices. They help you identify opportunities for optimizing inventory levels and improving efficiency.

   Relevant metrics vary from company to company. But common examples include inventory turnover rate, days inventory outstanding, order cycle time, backorder rate, carrying cost, stockout rate, fill rate and return rate.

3. Adopt Just-in-Time (JIT) Inventory Practices
   There’s more to inventory costs than just buying or manufacturing it. You also must factor in “carrying” costs, such as transportation, storage, handling, insurance, financing, obsolescence and pilferage. In some states, inventory is even subject to personal property tax. JIT reduces carrying costs and minimizes waste by ensuring that raw materials and parts aren’t received until they are needed for production.

   To be effective, JIT demands meticulous planning and solid supplier relationships. Be sure to maintain a “safety stock” of critical materials or parts to protect against sudden spikes in demand or unexpected supply chain disruptions.

4. Classify and Prioritize Inventory
   When assessing your inventory needs, prioritize various parts and materials based on their value. For example, high-value items have volatile demand and long lead times from suppliers. Medium-value items include those with relatively stable demand and a wide range of uses. Finally, low-value items exhibit consistent demand and are readily available from local suppliers.

   High-value items would require higher levels of safety stock and less reliance on JIT techniques, while low-value items would allow for liberal use of JIT and low levels of safety stock. For medium-value items, the manufacturer should strike a balance between the benefits of JIT and the need for safety stock.

5. Shed Excess or Obsolete Inventory
   If excess or obsolete inventory is tying up your working capital and clogging your storage space, consider strategies for clearing it out. Possibilities include offering discounts to customers through promotions, bundle deals or clearance sales. You might also sell products or materials to a liquidator or scrap dealer (and write off the loss), donate inventory to charity (and claim a charitable deduction), or simply recycle or destroy them.

   Be sure to investigate the reasons you’re accumulating excess or obsolete inventory. For example, if it’s caused by inaccurate sales forecasts or market changes, you should improve your forecasting practices or adjust your procurement strategies accordingly.

6. Switch Accounting Method
   When inventory costs rise over time, switching from the first-in, first-out (FIFO) inventory accounting method to the last-in, first-out (LIFO) method may be advantageous. FIFO assumes that items are sold in the order they were acquired or produced, so the cost of goods sold is based on older, and presumably lower, prices. In contrast, LIFO allocates the most recent, and presumably higher, costs to the cost of sales. By increasing the cost of sales, this method reduces taxable income.

   LIFO can produce tax savings when prices are rising. But keep in mind that it can increase taxes in deflationary periods. Also, LIFO requires complex computations and demands more sophisticated recordkeeping practices, so it’s more expensive to use than simpler FIFO.

Related Read: Eight Strategies For Boosting Your Production Capacity

Inventory your practices

These are just a few strategies to make your inventory management practices more cost-effective and tax-efficient. Given the high costs involved in maintaining inventory, now is a good time to explore your options for controlling these costs.

For more information, contact Ken Tornheim at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Manufacturing and Distribution Group. Sign up here to receive our blogs, newsletters and Client Alerts.

Reap the Rewards of Reskilling and Upskilling: Tackling the Labor Shortage from Within

Harry Fox, CPA, CVA

Manufacturers continue to face a serious labor shortage. According to The Manufacturing Institute, “By 2030, manufacturers will need to fill 4 million jobs, 2.1 million of which could go unfilled if we do not inspire more people to pursue modern manufacturing careers.”

A big part of the problem is a “skills gap,” driven by the rapid pace of technological development in the manufacturing industry. Two important ways to close this gap are upskilling and reskilling, which focus on developing the skills of your existing workforce rather than recruiting new hires.

Why the skills gap?

Recent technological changes in manufacturing — particularly in the area of automation — have advanced at a dizzying pace. One innovation transforming the industry is the industrial “internet of things” — that is, the integration of smart sensors, internet-connected devices and advanced analytics into manufacturing processes and infrastructure.

Artificial intelligence, machine learning, robotics, virtual reality, advanced data analytics and 3D printing have also impacted the workforce. All these innovations require workers with the skills necessary to work with these technologies effectively.

What are upskilling and reskilling?

Upskilling means helping existing workers adapt to new technologies, tools or processes to enable them to perform better in their current roles. For example, you might train a machine operator to use a new 3D printer or automated production line.

Reskilling is helping your workers develop completely new skill sets, enabling them to transition to new roles or career paths. An example might be training a warehouse worker, whose job is being phased out due to new technologies, to be a robotics technician.

Related Read: How Cross-Training Creates a More Productive and Flexible Workforce

What are the benefits?

Upskilling and reskilling offer several advantages over hiring new talent, including:

1. Bridging the Skills Gap
   Given the current labor shortage, upskilling and reskilling may be the most effective way to ensure that your workforce has the necessary skills.
2. Saving Money
   Recruiting and onboarding external hires can be expensive and time-consuming. Often, it’s more cost-efficient to develop the skills of existing workers.
3. Enhancing Productivity and Creativity
   Skilled workers are usually more productive and more likely to innovate and identify process improvements.
4. Gaining a Competitive Advantage in Hiring
   Offering opportunities for training and career advancement can be powerful recruitment and retention tools, helping to distinguish your company from the competition.

What are some disadvantages?

These strategies are not without challenges. They include:

1. Upfront Costs
   Quality training programs can be expensive, particularly for cutting-edge technologies that require specialized skills.
2. Disruptions
   Training workers can disrupt your regular operations and cause productivity to temporarily decline. Of course, hiring new workers can also be disruptive.
3. Lack of Engagement
   Whether from resistance to change, fear of failure or complacency, a lack of worker engagement can derail your upskilling and reskilling efforts.
4. Employee Turnover
   There is a risk that retrained employees will take advantage of their newly marketable skills to look for opportunities elsewhere.

Identifying the right candidates for upskilling or reskilling can overcome many of these challenges. You will also need to promote a strong learning culture throughout your company and offer flexible training options (including online training). Consider creating incentives (monetary and otherwise) to help retain upskilled/reskilled workers.

To minimize disruptions, some manufacturers adopt a hybrid approach. They use skilled contract workers to meet their immediate needs while developing existing workers for their new roles.

Are you ready?

If you are considering an upskilling or reskilling program, choose your training provider carefully. Be sure the provider can customize the program to meet your company’s unique needs. Too often, these initiatives fail because workers receive generic training that is not tailored to provide them with the specific skills their jobs require.

Done right, upskilling and reskilling efforts can help manufacturers address the labor shortage and bridge the skills gap, while enjoying the benefits of the latest technological innovations. Contact your CPA to discuss whether the benefits of upskilling and reskilling outweigh the costs.

Sidebar: 5 tips for combating the labor shortage

In addition to upskilling and reskilling, manufacturers should consider the following five alternative strategies to address the labor shortage:

1. Financial Incentives
   Besides competitive compensation and benefits, consider offering signing and stay bonuses as well as “voluntary benefits.” These include life and disability insurance, financial and legal counseling, and employee assistance programs.
2. Intangible Benefits
   Nonfinancial benefits, such as flexible work arrangements and mentoring programs, can be attractive to employees.
3. Referral Bonuses
   Satisfied current employees can be effective recruiters. Consider offering referral bonuses or other incentives to entice workers to participate in recruiting.
4. Internships and Apprenticeships
   Establishing internships, apprenticeships and skills certification programs can help attract potential future workers from local high schools, community colleges or trade schools.
5. Recruit Online
   Younger, tech-savvy workers often focus their job searches online, so take advantage of online job sites, social media and other digital recruiting tools. This strategy also allows you to expand the reach of your search beyond your geographical market. Skilled workers may be willing to relocate for the right opportunity.

Related Read: Labor Shortage: How Manufacturers Can Attract and Retain Qualified Workers

For more information, contact Harry Fox at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Manufacturing and Distribution Group. Sign up here to receive our blogs, newsletters and Client Alerts.