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How does an economic slowdown impact inventory management?

24 Nov, 2022 | Business Tips

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Jon Cohen, chief research officer at Momentive, said in August 2022, “Whether we are officially in a recession or not, small business owners are feeling the sting of high prices and reporting a new low point in our Small Business Confidence Index.” Every business must alter its perspective on multiple fronts during an economic slowdown, including production, sales, distribution, and inventory management.

Should you bring down your inventory level?

A slowdown can affect businesses in unique ways. Some businesses gain by cutting down on inventory. For instance, discretionary spending tends to decrease during a slowdown.  Thus, companies selling luxury items like large TVs and expensive cars, may want to reduce their inventories.

Reducing inventory saves money during a downturn because you do not need to carry costs to stock the inventory. Carrying costs include land, labor, and capital costs to stock the products. If the inventory is stored for a long time without an active market, the carrying cost could skyrocket. Therefore, a company should analyze predicted spending trends before investing in inventory.

Should you increase your inventory level?

Some companies increase inventory during a downturn in anticipation that the slowdown is temporary and the markets will recover soon. If the prices rise, these companies will have the lower-priced stock at their disposal. The market sees a reversal of economic slowdown when there is a positive sentiment in the market leading from a recent event or an announcement. So, if you expect a market recovery, stock up on goods. A significant drawback of this approach is that you could be left with excess stock on hand if the price falls further. Even if the price is stable, you will have to bear the extra carrying costs for the excess inventory.

You can follow this approach and stock up on goods if you are confident that the prices will increase.

 

Points to consider for inventory management during an economic slowdown

Reduce your lead time

If you can reduce the lead time by negotiating with your suppliers, you can get the goods sooner, thus narrowing the window in which the prices might rise. If the import prices rise too much, you can either stock the inventory or source the products locally to reduce the transportation cost. Reducing the lead time results in the reduction of inventory stored in the warehouses. For example, if you needed to stock inventory that would last ten days, reducing the lead time by two days can help the company reduce the stock accordingly. It can now function with eight days inventory.

The purchasing feature of DEAR Systems’ inventory management software can help you get a clear view of your purchases that can ultimately reduce your lead time.

Build seamless connections

Internal and external communication can make or break a company. A slight miscommunication might bring on a huge impact on the business, especially during an economic slowdown. An order not placed or a shipment that missed the deadline can have more significant repercussions during a recession. Therefore, relying on trustworthy software can ensure foolproof communication.

During an economic downturn you need a definite inventory management policy that suits your company’s needs. By programming your inventory management software to adapt to the newer requirements you can help your company maintain that level automatically.

DEAR Systems’ automation feature can set up the entire workflow with your custom conditions. It takes up the responsibility of notifying the right people instantly to avoid miscommunication.

Ensure end-to-end visibility

A clear, real-time view of the inventory can help you or your management team make the right decisions at the right time. During an economic slowdown, a missed opportunity can cost much more than in a traditional market. If you have all your data visualized on a screen, it can assist you in making quick decisions.

A company should be extra vigilant during an economic downturn about the price differences in raw materials to take advantage of the situation. If prices are rising, you can stock additional materials to counter the cost, or if prices are falling, you can postpone buying until you need materials to reap the benefit of the falling prices.

DEAR Systems offers reports with charts and graphs to make the data more comprehensible to the management. It can integrate multiple sales channels, warehouses, and workflows to give you an exact idea of where you stand.

 

Wrapping up

A company can not always benefit from reducing inventory during an economic slowdown. Neither can it guarantee benefits by hoarding goods. You must find the proper balance of inventory suited to your business and the type of products you require. You might have to purchase excess stock of some of your items and lower the stock of others. You might also have to pull out investments from other sources to invest in inventory during a recession. Therefore, it is prudent for your company to use well-researched knowledge of market conditions before deciding on your inventory policy during economic slowdowns.

How can DEAR Systems help you make inventory decisions during economic slowdowns? Don’t hesitate to book a call with our experts for a quick chat.

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