Business planning - Just-in-time may just help

A just-in-time policy can be a smart move to aid cash flow in light of post-Brexit uncertainty, Neville Stein advises

The weather has long been thought to be the main subject of conversation between British people, but in my recent experience this seems to have been replaced by Brexit, fuelled no doubt by the daily media coverage of positive, pessimistic and practical predictions. At the time of writing, we at least know that article 50 will be invoked in the first half of 2017.

While we do not know exactly what a post-EU Britain will look like, we might assume that if the pound continues to weaken against major currencies then we will have inflation, and if there are restrictions placed on the free movement of labour there will be a shortage of workers in the horticultural industry, meaning that employment costs are likely to rise. If we want to learn from recent history we can also predict that the UK economy will enter a recession.

Now, let me please stress that I am not being negative, just realistic. This is what happens to economies. By their very nature they are cyclical. In my life I have experienced four recessions, so it is a fairly safe bet that another one will come along in our lifetimes.

Recessions are triggered by many things, but typically markets react adversely to insecurity. We have a lot of insecurity on the horizon and faced with this unsure landscape many companies hold back spending. My concern then is that companies might experience a reduction in demand, which coupled with increasing costs of inputs and labour might result in a challenging cash flow situation.

Through my work as a consultant, I believe that this is the most challenging aspect of having a business - managing cash. We have seen many companies with a sound business model go out of business because they simply run out of cash at a crucial time. How then can we improve cash flow, particularly in the face of an uncertain future?

Well, improving cash flow is a series of articles in itself, but one thing we can do is to reduce stock levels in our business. Holding onto stock is expensive and means that cash is tied up doing nothing. This is particularly a problem if cash is short in the business.

Minimise storage costs

A good way to reduce stocks is to adopt a "just-in-time" approach. Long used in manufacturing, just-in-time detonates a system in which materials, components or goods for resale are delivered immediately before they are required to minimise storage or holding costs. The following steps can help you adopt such a principle in your business:

1 Educate your team It is important that all those who are involved in the buying function fully understand the impact on your balance sheet of holding stock. In other words, let them know how their buying actions can impact positively or negatively on cash flow.

2 Use metrics to measure the implementation of a just-in-time strategy Perhaps the best measurement to use is stock turn - the rate at which stock is used in a business. For example, a stock turn of three effectively means that on average stock has been bought in and sold three times in a year.

Imagine you started with an empty store. A stock turn of three would mean you have filled that store up three times in a year. Perhaps though, a more meaningful metric is to use the stock-holding period. If you have a stock turn of three, simply divide the number of days in a year by three and this will tell you how long, on average, stock is staying in the business before it is being sold.

In this example it would be 121 days before it is sold. Imagine the impact on your cash flow by increasing the stock turn and thereby reducing the stock holding period. Here the classic mantra applies - you cannot manage what you do not measure. If you are stuck wondering how to measure your stock turn, just delegate to your accountant or financial controller. They should be able to work out the answer. Of course, it is all the easier to work out if you have electronic point of sale (EPOS).

3 Use data to inform the buying decision Buying decisions are so often based on a whim rather than making an informed choice. Using EPOS data to identify how many units are sold is essential if you want to reduce stocks in the business. Stocking only what you think or know you will sell is a classic approach to fresh-food retailing and an approach that supermarkets have really nailed. Too much stock and it gets wasted, too little stock and sales are lost. Buy what you need, when you need it, and your cash flow should improve.

4 Share data with your suppliers This really is a key point. You will only be able to adopt a just-in-time approach to managing stock if you bring all those in your supply chain on the journey with you. This means that your suppliers need to know how many units you anticipate selling and when so they can plan not only their production but their despatch processes too.

So this involves a constructive dialogue between you and your supplier. Bring them in on your plans, work closely with them and together you should be able to reduce stocks in your business and improve the flow of cash between your two businesses. In essence, this is all about developing a purchasing strategy with key suppliers, and to do that effectively each party needs to understand how their separate businesses operate, their goals and their challenges.

5 Remember that it is all about relationships From a strategic perspective you will only be able to implement a just-in-time approach to stocks if you have spent the effort and energy in building up a solid, trustworthy relationship with your supplier - a relationship that ensures each of you achieve your goals, make money and, of course, improve cash flow.

It is no good you hanging onto cash and paying your supplier at the last possible moment. As with all business relationships, the best ones are those where both parties win - both parties prosper because of mutual support in the drive for increased profits.

Avoiding pitfalls

Implementing just-in-time does involve effort and co-ordination to avoid the pitfalls of empty shelves and missed sales - and, yes, sometimes it is difficult to predict how many units you may sell, particularly of very seasonal items.

I recall one Easter Friday when I owned three chocolate shops, frantically driving round various wholesalers to collect and replenish dwindling stock. This was the Easter when chocolate penguins featured in place of bunnies in a few local Easter egg hunts, proving that all traditions can be tweaked a little by selling what you have in place of what you do not.

Neville Stein is managing director of business consultancy Ovation


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