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Inventory management means keeping track of the goods you buy, process, or store as part of your business.
The cost of buying and holding inventory can be very high. It can account for up to 80 percent of the final price of goods or services in some industries. Good inventory management involves minimizing inventory costs. It will also help you determine where you are working profitably and where you are making a loss. Keep a poor track of inventory and you may be making a loss without even knowing it.
Inventory management involves more than just record keeping. It affects the operational structure of your business.
What Is Inventory?
All the resources that you hold for future use or sale are classed as inventory. This includes:
- Raw materials - anything that you will convert into a product or a tangible part of a service.
- Supplies - goods that support the production process such as office stationery or fuel to power machines.
- Partially transformed goods - your work-in-progress inventory.
- Work-in-progress inventory that you set aside as a buffer, to work on in case of delays in production or supply.
- Finished goods, ready to be delivered or sold.
How Much Inventory Do You Need To Hold?
Your costs increase when you hold too much or too little inventory. If you have too much inventory you are paying money to store it for no good reason. If you have too little you risk delays in production or service delivery. Good inventory management means having the right amount of inventory in the right place, at the right time.
Many businesses like to hold more inventory than they need for immediate use or sale. This is because reserve inventory can:
- Cover for unexpected quality problems in the production process.
- Smooth over unexpected production delays (such as supply problems caused by transport strikes, supplier bankruptcy, general supply scarcity or plant breakdown).
- Minimize downtime caused by such disruptions.
- Provide the capacity to respond quickly to unexpected demand increases.
- Generally improve the reliability of the production process.
- Take advantage of bulk purchase discounts.
But there is a downside to holding inventory:
- The cost of storage.
- The risk of inventory theft or decay.
- The loss of value of inventory items (through obsolescence, for example).
- The administrative costs of ordering, transporting, handling and keeping track of inventory.
Deciding how much inventory to hold is partly a matter of weighing up costs and benefits. It means analyzing when and where you will have a crucial need for inventory. To carry out this analysis you need take a close look at your business processes and identify internal and external demands for inventory. You could do this yourself, but it is advisable you run your conclusions by your RAN ONE accountant for feedback.
Consider Internal And External Demands
Mapping out your business processes will help you understand your internal demands. If you are a manufacturer, your process map will show you when and where you need materials.
Internal demands can be quite complex, even for a small operation, as you may need to keep track of a large number of supplies and components. Mistakes can be costly. Say production is higher than usual for the month - production may be held up if someone has forgotten to cover for higher production by ordering more of one critical component (paint, for example). Your inventory management systems should prevent such mistakes from occurring.
Inventory management also requires you to keep in touch with market demand. You need to stay in touch with larger economic or market trends. But you also need to keep a close eye on how products are being sold. If you are a retailer with several outlets, for example, you might find certain products sell better in certain areas.
Keeping a close eye on sales will help you decide how much to ship, so that shelves are neither overstocked nor empty. This can be particularly important if you are selling perishable goods or goods that follow seasonal demand (such as fashion).
Consider Your Operational Structure
Your inventory management systems need to fit in with the kind of operation you run and the way you respond to customer demand.
Resource to order
If you are running a ‘resource to order’ operation, it means that you stock resources in response to individual customer orders. If you are a caterer, for example, you will buy stock for particular events. Or if you run an engineering company, you may stock up for particular construction projects.
You deliver a highly customized product to your clients and this flexibility is likely to be seen in all parts of your operation. You are likely to have a multi-skilled workforce that is highly sensitive to customer demands. Your inventory needs will vary according to the job or project you are working on.
Make to order
If you are running a ‘make to order’ operation, you keep a standard inventory but produce a customized product. For example, you might run a small sandwich shop. You keep a range of ingredients and make the sandwiches according to individual customer orders.
Or you might run a small computer retail operation and use standard components to build a computer to customer requirements. One customer might require a large monitor, for example, or a particularly fast processor.
Though your inventory is standard, you are still running a flexible operation and you will expect your team members to take initiative, show a range of skills, and fill in for each other on occasion.
You will not produce goods in any predetermined sequence and your component needs will vary according to each customer’s wishes. You will need to stock inventory to meet a range of possible needs.
Make to stock
‘Make to stock’ operations tend to produce a high volume of standardized products. For example, if you run a sandwich shop that makes and sells pre-packaged sandwiches, you are making to stock. Or if you are a manufacturer who produces a line of standard alarm clocks, you are making to stock.
Your inventory needs will be simpler, in one respect, as you will need components and supplies in standard and predictable proportions. You will not be able to customize to attract individual consumers. But you will produce high volumes of a standard product, giving you access to economies of scale.
This type of operation traditionally requires a less skilled workforce, though modern approaches such as lean manufacturing are changing this.
When you consider your inventory management, think about the sort of operation you run. It will affect how closely you need to monitor your inventory, how often you need to monitor stock levels, and how predictable your inventory demands are likely to be.
Focus on Inventory
There are many other aspects to inventory management such as monitoring inventory; inventory management software for manufacturers; Just-In-Time goods delivery techniques; retail trade inventory; addressing excess inventory problems; tagging methods. Your RAN ONE Accountant can give you more detailed information and guidance about these important considerations. Inventory management is a key part of your business. It does not matter whether you are running a small or medium-sized company or whether you are delivering goods or services. Inventory management can make the difference between running in the red or in the black.
Do-It-Yourself IT
Every small business needs IT help now and again. But it can get expensive. Here are a few tips on how to do it on the cheap.
When you’re running your own IT network a relatively small problem can crash your network. This could spell disaster for your business if you don’t have a dedicated IT department to call on for help, or the financial resources to call a consultant.
Patrick Deasey, director of Nature Links, a horticultural contracting and consulting services business, has first hand experience of just such procedural and implementation difficulties.
“Our business employs up to 10 people at any given time. Most of our employees work on a casual basis and live fairly far away, so apart from the three PCs we have in the office our staff also have their own computers.”
“Our business runs a database that is in spreadsheet form. Our employees work from that database and email regular progress reports to our office based on the work they have performed. We then update the database.”
As a small business owner, Deasey advocates a strong do-it-yourself approach to implementing any system. “We are the type of company that would rather muddle through or pull something off the shelf than pay some crazy consultant rates.”
He admits though that this is not always a practical solution. “If the area requiring attention is reasonably specialized, it may need a little more attention. Even though they say that most programs can be tweaked to your specific needs, it may often take a specialist to do the tweaking.”
According to Chinh Quach, who runs a computer and network installation and consulting business, the key to cutting the cost of expensive consultants is proper documentation.
“Make sure that you have proper documentation. Know how to restart your modem. Know how to reset your server. These things can be done in a couple of minutes. Even if the problem requires more specialist attention, identifying aspects of the problem will make it easier for you to convey these to a consultant. ”
“Consultants work on billable hours. If you cut down on troubleshooting time, you are cutting your own costs and maximizing cost efficiency. It’s as simple as that.” This entails making sure that there are employees on hand who are familiar with relatively simple day-to-day processes, like checking the server connection.
“How to check glitches and troubleshooting are often relatively basic, often the computer is hung or the modem can’t dial out. A basic checklist sheet will easily address the most common problem areas.”
Quach also provides a list of other processes and potential problem areas that any business should address, and can do themselves.
“When you are on a network, you need to set up logs on what is being downloaded. Check and assess traffic so that staff aren’t clogging their machines unnecessarily with non-work-related downloads” he said.
“A virus protection program needs to be installed both on the server and on each individual computer. Then, this needs to be upgraded once a month which most virus packages that you subscribe to online will provide automatically with update prompts”.
Passwords are a major problem says Quach. “People often forget their passwords, so the manager or someone in the business needs to have a list of these, so as to minimize time spent by consultants trying to track down or override passwords so as to fix any major difficulties.”
Quach sums up with some basic advice:
- Get tips on what to download and what not.
- Set up some maintenance-help sheets.
- A manual can be posted on the company’s Intranet or as a hard copy word document.
- Most error messages are similar and having definitions can help team.
- Learn your email error messages, so that you know what to address and what the problems are – that way you can know if it is something that you can fix yourself.
These simple procedures can minimize your risks and need for expensive IT consultants.
Let Flexibility Be Your Competitive Edge
Running a small to medium- sized business requires a great deal of flexibility because there are more tasks than people and things change quickly.
This built-in pliability is a major competitive edge that you have over your larger rivals.
But when the people in the business become rigid, either through a lack of desire to diversify or a lack of skills, the competitive edge is lost. This is why you need to keep the requirement for flexibility firmly on your list of priorities when hiring and training team members, not to mention when considering their own actions in the business.
When hiring new team members it is important to check they are comfortable with the idea of pitching in around the office, as well as confirming their versatile skill-base. Business owners often make the mistake of hiring a person who doesn’t have the capability to grow with the company.
“We needed a basic clerical administration person and we were mindful that we would never need an office manager so we employed somebody who was overqualified,” says Greg Vance, managing director of a training company.
“But later when the company grew and we needed that position to expand, she could not meet our needs. She was well intentioned but she could not do the new job and we could not afford to hire a second person so we were left with a staffing issue.”
You must ensure new team members have the ability to grow with the business by checking they have all the skills needed for your business now as well as the ability to grow with future plans.
Another common mistake when hiring is bringing a person on board with only 75-80 percent of the skills needed for the position.
“Inevitably that person will need training, which involves extra costs and time, which can be very frustrating for everyone when you are talking about small business,” Vance says.
He suggests using innovative hiring methods like asking the person to come in for half a day or testing their computer skills on site.
When a new person gets onto the floor it is important they are given an outline of their responsibilities, as well as the fact they are expected to be flexible in their work.
“At the outset it is important to have a clear definition of the role a person is going to fulfill and their responsibilities and objectives,” Vance says.
Clarifying the objectives of each team member is a way of ensuring everyone knows who is accountable for the jobs, no matter who pitches in to help.
An attitude of pitching in is also encouraged through the owner’s actions.
The actions of the owner set the tone for everyone in the office. Therefore if he or she occasionally goes out to buy the lunches or gives half an hour to photocopying in a time of crisis everyone else feels happier about helping out when they are needed.
Communicating the priority of flexible attitudes to work also makes team aware of what is required.
Vance suggests this priority be carried through to training sessions.
For example, dedicated sessions can be set up, during which team members sit with each other and exchange knowledge about their roles in the business.
“Person A sits with person B to understand what they do and by the end of the week they can have a brief chat with the owner about what they have observed and any questions that come up,” suggests Vance.
Time will never be put into growing knowledge about other team members’ needs - unless the owner communicates it is clear priority.
The final tool for encouraging flexible team members, according to Vance, is positive feedback.
“Positive feedback is often neglected with the attitude of “oh they know they are doing a good job,” Vance says.
“But once you start giving people positive feedback you lift the lid on their own personal motivation.”
Team members are much more likely to see what needs to be done and do it if they are feeling good about their job and their ability to do it.
How to Make the Most of Your Newsletter
Be sure to read each article with the mindset “How could this apply to our business.” Thinking of it that way will guarantee that you get value. Better yet, take notes as you read and commit to having the ideas implemented by the time the next edition arrives. Also, make copies for each team member. To really make sure something positive happens, work with your business development specialist to talk your team through the ideas and how to set a schedule for getting them implemented. We’re here to help you get started.
Memorable Quotation
“If you don't drive your business you will be driven out of business.”
—B.C. Forbes
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While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.
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