By: Anthony Cornell, CPA
Construction inventory management involves overseeing the materials, equipment, and supplies required for a construction project and is crucial for businesses to ensure smooth operations and prevent disruptions. Effectively managing inventory during a supply chain shortage requires strategic planning, proactive measures, and flexibility. Supply chain shortages can have significant impacts on businesses, industries, and economies leading to disruptions in the production and distribution of products. Below are the impacts of supply chain shortages on inventory management and ways a company can manage inventory effectively.
Impacts of Supply Chain Shortages
Small and medium size contractors may be particularly vulnerable to supply chain shortages, as they may have fewer resources to navigate disruptions. This can affect their ability to compete with larger competitors. The impacts of supply chain shortages can be wide-ranging and may include:
- Production Delays and Disruptions: Shortages of key components or raw materials can lead to delays in production schedules. Manufacturers may face challenges in assembling products, resulting in disruptions to their supply chains.
- Increased Costs: The scarcity of certain materials or components often leads to increased prices. Businesses may face higher procurement costs, impacting profit margins and potentially leading to price increases for consumers.
- Price Inflation: Supply chain shortages can contribute to overall inflationary pressures in an economy. As production costs rise, businesses may pass on these costs to consumers through higher prices for goods and services.
- Reduced Product Availability: Consumers may experience difficulty finding and purchasing certain products due to low inventory levels. This can lead to decreased customer satisfaction and loyalty.
Consequences of Poor Inventory Management:
Poor inventory management can lead to negative repercussions for a business. Some of the common consequences are:
- Stockouts and Lost Sales: Inadequate inventory levels can lead to stockouts, where a business runs out of products. This can result in lost sales, dissatisfied customers, and damage to the company’s reputation.
- Increased Carrying Costs: Carrying costs, including storage, insurance, and taxes on inventory, can escalate due to poor management practices, impacting the overall profitability of the business.
- Inaccurate Financial Reporting: Inventory is a significant asset on a company’s balance sheet. Inaccurate inventory records can distort financial statements, affecting the business’s ability to secure financing or make informed strategic decisions.
- Supplier and Customer Relationships: Constant stockouts or delays in fulfilling orders can strain relationships with both suppliers and customers. Suppliers may be reluctant to work with a business that consistently has inventory issues, and customers may seek more reliable sources.
Best Practices:
Inventory management plays a significant role in construction projects, making it essential to incorporate them into your business continuity strategies. Accurately accounting for inventory management allows you to optimize resource allocation, make informed decisions about ordering supplies, and meet consumer demand. Some of the best practices a company can implement to manage supplies inventory are:
- Integrate Systems: Integrate your inventory management system with other business systems such as accounting and sales. This integration streamlines data flow, reduces manual entry errors, and provides a comprehensive view of your business operations.
- Safety Stock and Establish Reorder Points: Maintain a safety stock to account for unexpected increases in demand or delays in supply. This buffer helps prevent stockouts during peak periods or unexpected disruptions. Set reorder points for each product based on historical sales data and lead times. Reorder points trigger the replenishment process, ensuring that you order more stock before it runs out.
- Regularly Update Inventory Levels: Perform regular physical counts of your inventory to ensure accuracy. Schedule these counts periodically or use cycle counting, where a portion of your inventory is counted at regular intervals.
- Supplier Relationship Management: Cultivate strong relationships with reliable suppliers. This can lead to the ability to negotiate favorable terms, discounts, and flexible ordering options.
Suttle & Stalnaker, PLLC is ready to help you. If you would like more information on how this applies to you, contact Danny Shobe, CPA, CCIFP at 304.343.4126 or at dshobe@suttlecpas.com. You may also contact Anthony Cornell, CPA at 304.343.4126 or at acornell@suttlecpas.com.