Sometimes we benefit from taking a step back for a larger view of the scenery and business landscape. Not having enough inventory means running the risk of lost sales, while having too much inventory is costly on several levels. Those reasons are why an efficient inventory control system is critically important. Inventory control isn’t only about managing “boxes” going in and out of your business; it’s also about managing your working capital.
1. Understanding Your Inventory Levels
It’s a reality of business you’ll experience a shortage of product or an out-of-stock. Reacting with an over-order that exceeds planned usage undermines business profits. Yes, overstocked items come with their own set of problems. The longer an item sits unsold in inventory, the greater the chance it will never sell, meaning you’ll have to write it off or discount it deeply. It’s an unfortunate fact of business that products go out of style or become obsolete while perishable items spoil. Items lingering in storage could also become damaged or even stolen. Additionally excessive inventory has to be stored, counted and handled, which adds ongoing costs to your operation.
When considering those overstock issues, It’s also important to keep in mind a best business practice of viewing your supplier as a business partner. Uneven ordering cycles place strain on both your business workflow as well as your supplier attempts to plan for your orders (THEIR working capital). Be a good business operator and partner – establish viable minimum and maximum par levels with consistent ordering cycles.
2. Accuracy in Tracking
Start with educated projections of how much supply you’ll need and when you’ll need it. The best gauge is your ordering history. If you’ve sold 100 items per month for the past 12 months, chances are you’ll need 100 this month. Does your industry experience a “peak season”? Have those peak periods been identified with isolated inventory activities? Have any slow seasons also been addressed? After establishing a baseline for usage you’ve now become ready to build out a physical inventory. Opportunities will always be available for miscounts during receiving, ordering or theft. In the F&B and manufacturing industries, you’ll also account for yield and/or waste during production. Invest as much time as needed to avoid the dreaded pendulum of ordering cycles.
3. Pareto Rule and Priorities
Large inventories may present challenges to track each item on a regular basis. Prioritize the most expense and/or the most active of your inventoried products. Reflect back to the Pareto Rule of 80% demand being generated by 20% of your items. Within inventories there is a modified version addressing strong, moderate and slow product activity. Spend most of your efforts on the 20% of strong selling items by forecasting usage, reviewing onhand levels and reordering more frequently. The moderate selling 30% of items, will typically generate 15-20% of sales. The slowest selling items account for half the items you stock, but may only generate 10% of your sales.
One of the worst things you can do in business is to turn away customers — people who are ready to give you their money — because you’ve run out of the item they want. Out-of-stocked items not only cost you money from missed sales, they may also contribute to losing customers, as people decide to take their business somewhere that can satisfy their needs.
4. Location Specific Assignments
Proper inventory management depends on knowing the best place to put inventory and being able to easily locate it. Too often businesses store their inventory in places that are not labeled or lack clear means of identification. This is especially unfortunate since labeling inventory locations can be done easily with a little planning while only investing in inexpensive labels.
5. Backup Planning
An efficient inventory control system tracks how much product you have in stock and forecasts how long your supplies will last based on sales activity. This allows you to place orders with enough lead time to prevent out-of-stock situations. Purchasing and/or inventory control SOPs do not include “Tom” or “Kathy” as part of the workflow. The old adage “the best defense is a good offense,” applies in this case. One employee should never be the sole holder of essential operational knowledge. Effectively cross-train multiple employees to minimize the effects of a single employee’s departure.