Author/s: J. Tol, Jr. Brooame
Issue: June, 1999
J. Tol Broome Jr., a credit-risk manager for a Greensboro, N.C., bank, writes on financial matters.
To many small-business owners, inventory is simply the stuff they keep on the shelves to generate sales. Despite the investment required to maintain appropriate levels of inventory, they put little effort into monitoring it. But ignorance about inventory can be costly
Just ask Todd Heim, owner of Future Cure Inc., a company in North Olmsted, Ohio, that manufactures spray booths used for painting cars. The typical spray booth has more than 300 parts, so Helm has learned how to manage his inventory effectively.
"Inventory control impacts cash flow directly. That's bow important it is," says Helm. Mismanage inventory, and you risk having your checking account hit zero, he warns.
Here are five suggestions to help entrepreneurs manage their inventory effectively:
Computerize your records. Some businesses still use a manual tracking system when they should he using an electronic system.
The cost of automating has dropped dramatically in recent years as computer hardware and software prices have fallen. A good PC-based system containing all the hardware and software you'll need can be purchased for as little as $10,000. If you don't have that amount handy, banks and leasing companies do, and they offer a number of cost-effective financing options.
Entrepreneurs who aren't proficient computer users can use training packages to get up to speed; such packages are available from most computer vendors.
Helm installed a state-of-the-art automated financial system two years ago. Included in the package was a detailed inventory-tracking component. Using it, he cut the company's level of inventory by 25 percent in just a few months.
The new system produced other benefits: Parts are nearly always on hand when needed. The need for costly overnight shipping has dropped. The amount of unused or unneeded inventory has been reduced dramatically. And employees spend less time scrambling to find parts.
"We no longer have the truck ready to leave in 20 minutes with someone frantically running around looking for a part for the booth," Heim says.
Track inventory turnover. A good automated system will help immensely in calculating inventory turnovers. Total inventory turnover is stated either in number of turnovers per year or number of days of inventory on hand.
For instance, a turnover rate of 12 times per year can also be stated as 30 days of inventory on hand. You should track this number and compare it against industry averages, which can be obtained from trade groups. If, for instance, your inventory turns 12 times per year and the industry average is 15, your operations may need improvement.
It's also important to track turnover for individual items. Jim Laws, owner of two Video Review stores in Greensboro, N.C., installed an automated system that computes inventory turnover for each video in stock.
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"We compare turns from week to week, or even day to day," he says. "We will often cut loose excess copies if they aren't renting and sell them as previously viewed on a retail basis in the store."
Helm's computer system also tracks the turns of each item in his inventory "Before we put in our automated system, we would find some parts with a year's worth on hand, while some would be completely out when we needed them," he says. "It was very costly, but we can now manage individual items effectively"
Balance data and educated guesswork. Even for a business that tracks turnovers with an automated system, finding the balance between too much and too little inventory can be an inexact science. This is particularly true for retailers and wholesalers expected to provide their customers with "just-in--time" inventory levels-supplying the customers with their inventory needs no sooner or later than the goods are needed for manufacturing or distribution.
Laws, who has been in the video business for 15 years, says this guessing game is one of the biggest challenges he faces. "We are trying to anticipate demand," he notes. "We are making decisions each week on each movie trying to guess its potential popularity. Then we have the added challenge of guessing how many copies our competitors will stock."
To try to find the right balance, he relies on his tracking of past trends for similar movies, as well as input from a buying service. "If we spend too little, we won't have enough to meet demand, and our customers will go somewhere else," says Laws. "But if we spend too much, it costs us money. Finding the right balance is tough but essential in our business."
Create an ordering system. Many small-business owners make the mistake of letting just about anyone order inventory, but it's a specialized task that requires dedicated attention to detail.
Laws says he orders all inventory himself to ensure uniformity Heim delegates this responsibility to one person only
"If we had four or five people ordering inventory, it just wouldn't work," Heim explains. "Our inventory person knows the policies of the vendors, their personalities, lead times, and the costs. He also has built relationships with our vendors that enable him to ask for special favors when we get in a pinch."
Besides the specialization involved, say experts in the field, an efficient ordering system typically involves certain practices, such as never overordering just to save a few dollars, using just-in-time ordering whenever possible, shopping for suppliers periodically, and asking for discounts.
Hold employees accountable for inventory management. Accountability is critical in managing inventory In a manufacturing business, this means tracking parts used in assembling products. In a wholesale or retail company, it means holding key employees accountable for inventory ordering levels, for shipping errors, and for any acceptance of defective items.
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Let your employees know that you regularly review inventory-control reports and that they will be held accountable. Says Heim: "Our computer gives us all the inventory information we need, but a business still needs a competent employee putting that information to use and being held accountable for doing it right."
If you think of your inventory as dollar bills on your shelves, you'll have a greater appreciation for effective inventory management. Laws came to understand this concept well as his video business grew. "We started small," he says. "Now we order the same amount of inventory in one week as we had in our store's inventory when we first opened. Inventory management is one of the most critical aspects of my business."
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