Navigating Inventory Losses in 2023: A CFO's Perspective

Inventory losses can have a significant impact on a company's financial performance. As we navigate through 2023, the increasing complexity of supply chains and the volatility of markets pose a challenge to CFOs in managing inventory losses. In this blog, you will take a closer look at some of the key factors contributing to inventory losses in 2023 and explore the strategies that CFOs can implement to mitigate these losses and drive sustainable growth for their organizations.

Understanding Inventory Management

Effective inventory management is critical for ensuring that the right products are available at the right time, in the right quantities, and at the right cost. CFOs must have visibility into the inventory levels, demand patterns, and supply chain operations to manage inventory efficiently. A lack of transparency in supply chain operations can lead to inadequate demand planning, overstocking, stockouts, and lost sales. They must collaborate with supply chain leaders to gain visibility into the supply chain and align inventory levels with demand.

Disruptive Causes of Inventory Losses

Before you dive into the strategies for managing inventory losses, it is important to understand the various factors that can contribute to inventory shrinkage. These include:

• Theft and fraud

This is one of the most common causes of inventory losses. It can occur at any point in the supply chain, from the warehouse to the retail store.

• Obsolescence

This occurs when inventory becomes outdated or is no longer in demand. This can happen due to changes in consumer preferences, technological advances, or other factors.

• Damage and spoilage

This can occur during transportation, storage, or handling. It can result in inventory becoming unsellable or requiring significant discounts to move.

• Inaccurate inventory counts

This occurs when the recorded inventory levels do not match the actual inventory on hand. This can happen due to manual errors, system glitches, or other factors.

Challenges Facing C-Suite

• Drive end-to-end supply chain actionability.

A constant obstacle that C-suite leaders encounter is the lack of actionable insights into their supply chain operations. Without complete transparency and the ability to prioritize initiatives, accurate demand planning is unachievable. This is not only crucial for sustained and dependable business growth in the long run but also for tactical planning in the short term.?

Solution

Detailed visibility into operations allows for demand sensing, which ultimately ensures precise demand forecasting and planning.

• Minimize product portfolio complexity and inventory levels.

When accurate demand predictions are made, optimizing production runs becomes simpler, as efforts are no longer scattered across a vast array of products that yield inadequate margins. By monitoring demand at the SKU level, CFOs can determine which products generate the highest and lowest margins, allowing for the rationalization of product mixes to increase profits.?

Solution

This entails focusing on a more streamlined and concise product mix or reducing production configurations, changeovers, and safety stock requirements. As a result, constraints can be optimized, and complexity can be minimized, resulting in a more predictable outcome and significantly reduced inventory and working capital needs.

• Ordering less will not solve the problem.

In the past, simply observing an increase in stock levels and attempting to limit orders has not resulted in significant improvements to business operations. Nonetheless, efficient inventory management is not a simple task, as it is affected by ever-changing lead times, unforeseeable shifts in demand, and numerous factors that are influenced by financial decisions and the complexity of supply chains.?

For example, deliveries received presently may have been requested during a period of scarcity, several months prior. Furthermore, any operational decision made today will probably not manifest an effect until several months down the line.

Solution

Even in modern times, several businesses rely on spreadsheets to manage thousands or even tens of thousands of SKUs, goods, and materials. Although this method of management is straightforward, it tends to be unchanging and retrospective, providing no opportunity for prediction or scalability. As a result, if an order is postponed, no one can anticipate when it will be fulfilled or what to expect. Without transparency, it is impossible to take corrective or proactive measures.

Necessary Collaboration: CFOs and Supply Chain Leaders

Despite ample warning signs, finance and supply chain teams continue to operate in apparent discord, lacking the visibility and intelligence required to overcome the current disorder. CFOs frequently lack a robust comprehension of supply chain operations, and similarly, supply chain leaders often possess limited knowledge of finance. Without a common language, businesses may suffer as inventory decisions are arbitrary and ignorant of current economic conditions.

CFOs should work closely with suppliers to gain visibility into the supply chain, manage lead times, and optimize inventory levels. Collaboration with suppliers can help to reduce stockouts, improve order accuracy, and reduce the risk of obsolete inventory.

The Strategic Roadmap

The roadmap starts with the implementation of an effective inventory management system. This system should be designed to provide real-time visibility into inventory levels and demand, enabling companies to make informed decisions about their inventory needs.

The next step in the roadmap is to implement a demand forecasting system that can accurately predict demand based on historical data, seasonality, and other relevant factors. This system should be integrated with the inventory management system to enable automatic replenishment of inventory as soon as it falls below a certain threshold.

Conclusion

Managing inventory losses is an ongoing challenge for CFOs, but with the right strategies, it is possible to minimize losses and improve profitability.?

By implementing tighter controls, investing in technology, reducing lead times, analyzing data, and implementing sustainable practices, companies can reduce the risk of theft, fraud, obsolescence, and damage. These strategies can also help companies improve efficiency and sustainability while enhancing their reputation with customers and stakeholders.

For example, As a CFO, it is essential to stay on top of these trends and implement strategies that meet the evolving needs of your business.