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Managing Your Company's Inventory

Reaping the benefits that follow a sound inventory system.

In today’s business environment, there’s never a shortage of areas that a business needs to pay attention to. One such area of constant focus should be your inventory. An effective inventory-management system can prove to be a valuable asset, creating significant advantages in your business.

Certainly there are different methods whereby inventory can be managed. On the one hand, your philosophy may be to create a low-inventory policy-striving to implement just-in-time principles that require less inventory at any given time to produce your products. The disadvantages of this type of approach are somewhat obvious: You’re much more likely to run out of inventory on a regular basis, which won’t make your customers very happy. You may have a great system in place to manage very low levels of raw materials, but when you begin delaying jobs because of material shortages, that won’t matter-you’ll lose sales and, eventually, customers as a result.

The primary advantages of a low-inventory system, on the other hand, are with your cash. High inventory levels eat up your cash; by having less inventory in-house, your capital will be freed up for use in other areas of your business. Another benefit to carrying less inventory may be in the physical space that you’ll save-extra space in your shop may be used for production, machinery and equipment, or other needs.

On the opposite end of the spectrum, if you choose to carry heavier levels of inventory, the pros and cons simply flip flop. You’ll end up using a significant amount of cash to purchase and maintain high inventory levels, potentially strapping your company of working capital. You may also find yourself with much more obsolete inventory that will generate little or no revenue. On the other hand, heavier inventory levels will probably avoid problems with inventory shortages and ensure that your customers’ products can be produced in a timely manner. It can also enable you to offer a wider diversity of products to your marketplace. Plus, there can be additional advantages gained with fewer material deliveries, saving shipping costs.

Systems versus levels
So what’s the answer to managing your shop’s inventory? While I’ve touched on perhaps the two extremes of inventory levels, the answer doesn’t really lie in a discussion of "levels," but rather in "systems." In other words, once you’re able to implement a successful inventory system to manage your materials, the proper inventory amount will fall into place, creating an efficient balance between necessary inventory amounts to accommodate production-and minimizing the amount of cash necessary to do so.

For many years, our company managed its inventory levels from a manual, Excel-based system, something that certainly can be done if proper inventory procedures are followed. But the higher that sales grow, the more complicated inventory becomes to manage.

In years past, our solution was to simply buy and stock higher volumes of the materials we were regularly running out of-hardly a scientific approach. And then, one day, we woke up and realized the inventory amount on our balance sheet was enormous. At that point, we began to apply some sound inventory-management principles. What follows are a few standard practices that we’ve implemented and that your shop should be able to use as well:

* Put someone in charge: One of my favorite management principles also applies to inventory: "If everyone is in charge, no one is in charge!" While inventory management requires a joint effort from multiple people and departments in your business (purchasing, accounting, production, scheduling, etc.), there has to be one person responsible for daily, weekly, and monthly inventory control. It is that person’s job to make sure the systems are being followed and that inventory levels are adequate and in line with future needs.

* Establish a min/max re-order program: One of the most critical means of controlling inventory is to analyze each SKU that you carry, and determine a minimum level at which you re-order that particular item-as well as a maximum level at which you will stock the item. These levels should account for various factors such as shipping lead times for the product, inventory turnover rates for that SKU, physical space requirements, shipping costs, and so on. These factors all have to work together to ensure that you aren’t ordering inventory too frequently, thus incurring heavy shipping charges-or, on the other hand, not ordering enough and finding yourself constantly low on materials for production. For example, let’s assume that you decide to stock two pallets of banner vinyl in your inventory. And let’s assume that you consume, on average, one pallet every two weeks and your re-order point is at one pallet. If it only takes a couple of days to get a pallet shipped, that may be okay; but if it takes a week or so to get the vinyl shipped in, you run the risk of running out of inventory and probably should adjust your max up to three pallets.

* Utilize regular cycle counts: Implementing a regular cycle-count system is one of the best ways to avoid inventory shortages and inventory obsolescence. The frequency of cycle counts should directly correlate with the turnover rate of each SKU in your inventory. If you have a high turnover, you may choose to do a weekly or even bi-weekly count. On the other hand, if it’s a slow-moving item, then perhaps a monthly count will be sufficient. Even if you’re running an automated inventory system, a cycle-count system can eliminate problems that can occur with inventory levels.

* Automate your system: Establishing an automated inventory system should be a high priority. Even though these principles can be effectively implemented into a manual system, until you initiate a system that brings together all your systems from purchasing, accounting, and production, you’ll always struggle with the balance between carrying too much inventory versus not enough-and, as a result, experience the consequences. Automated inventory systems don’t have to cost hundreds of thousands of dollars to be effective. Most accounting systems come with some form of inventory-management options. Start with that, and if it isn’t working, look into other systems that will suit your needs and fit within your budget.

Avoiding the pitfalls
While your inventory is one of many parts of your business that demands daily management, it’s often one that draws only casual attention. To some extent, inventory needs will always be unpredictable and challenging to manage. By implementing the few recommendations I’ve made here, you’ll soon find yourself avoiding the pitfalls that accompany a loose inventory policy-and reaping many of the benefits that follow a sound inventory system.

Marty McGhie (marty@ferraricolor.com) is VP finance/operations of Ferrari Color, a digital-imaging center with Salt Lake City, San Francisco, and Sacramento locations.

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