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Command of inventory helps control costs
By Jenny
C. McCune • Bankrate.com
 In
tough times, it's crucial for a small-business owner to properly
manage inventory. You either control it or lose it, and that affects
your bottom line regardless of whether your company is selling goods
or services.
Holding too much inventory will put a squeeze on your
cash. Not having enough inventory can cost your company sales. Inventory
mismanagement also can cost a service company that, for example,
often holds stock on office supplies. While these items are used
indirectly in the business's operations, they still cost the firm
money when lost or mismanaged.
And a small-business owner must know what he or she
has in inventory to help prevent theft.
Weakest link in supply chain
Of course, getting a handle on inventory isn't easy, says Chicago-based
Chuck Poirier, a partner with the supply-chain-solutions group of
technology consultant and systems integrator CSC of El Segundo,
Calif.
Of all the links in the supply chain, the chain that
leads from manufacturer to the ultimate purchaser, inventory is
the weakest link, he says.
"Most of the savings have come from lowering manufacturing
or transportation costs, not managing inventory simply because it's
so hard," according to Poirier.
It's hard and it's necessary. Here are tips on how
to better manage your inventory -- and your business:
- Take stock. Figure
out a way to track your inventory. If you can afford it, buy software
to automate the process. If not, then establish a paper system
that keeps track of demand and supply. For example, a bookstore
could implement a simple price tag system. Each time a book is
sold, its tag is removed and then cross-checked against physical
inventory to figure out what's been sold.
A small-business owner wants to keep as little stock on hand as
possible to fulfill the demand of its customers without ending
up out-of-stock when somebody wants to buy something. Generally
this means building in a safety margin -- a small stock excess
-- that you can tap in case of delayed shipments to you or an
increased in demand from a customer. The emphasis in rocky times
is on "small" since holding too much inventory will not do your
company any good and can do it some serious harm.
- Focus on fast movers. Once
you have a system to track inventory, analyze your sales and act
accordingly, says Kimberly Stansell, author of Bootstrappers
Success Secrets.Concentrate on what sells and reduce inventory
on your slow-moving items. Determine whether the profits you receive
from slow-moving items justifies the amount of money that's tied
up to keep them in stock.
- Collaborate. To
help gauge what you need to have on hand, ask your large customers
to tie your company into their inventory and sales tracking systems.
Many large retailers, such as Federated Department Stores, the
large department store chain, have Internet sites where manufacturing
partners can find out what's selling and what's not. Poirier recommends
sitting down with your large customers and going over the supply
chain, including inventory, to ascertain and correct inefficiencies.
If you find that you have little clout because of your size, try
banding together with several other small suppliers and present
a united front to a large mutual customer.
One trend that won't help your small business: Many large retailers
are trying to push costs onto their suppliers by having them hold
inventory. Your company in essence becomes the warehouse for your
big customer. There's not much you can do other than try to convince
the customer that it's an undue burden on your company, Poirier
says.
- Turn, turn, turn. Track
inventory turnover. Manufacturers' inventories should turn over
six to eight times a year. Distributors' inventories should turn
over four times a year. Fewer turns means too much cash is being
tied up in inventory.
- Tighten up your supply chain. Reduce
the number of your suppliers and streamline deliveries so that
you receive goods more quickly, book author Stansell says.
- Skip long-term contracts. Long-term
contracts can lock a small business into high ongoing costs. It's
a gamble though, particularly with energy. Sometimes a long-term
contract is a way to lock in a lower price, but only time will
tell whether the guaranteed price is a bargain or a boondoggle.
- Buy and sell online. Submitting
and receiving orders electronically can save your company, your
suppliers and your customers big bucks in postage and other processing
costs. Try to avoid proprietary electronic data interchange (EDI)
when your business sends a bill to a client through a private
network. Many customers have set up password-protected Web sites
for suppliers that don't require special software to use.
Or consider some of the electronic marketplaces that have sprung
up. Just be careful. "You need to use your crystal ball as to
whether the electronic marketplace will be around for the long
haul," Poirer says.
Take these steps to tighten up inventory and improve
your flexibility and your company will be well positioned to ride
out bad times.
Jenny C. McCune is a contributing
editor based in Montana
-- Posted: May 18, 2001
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