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