How to Efficiently Manage Inventory
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Controlling Inventory Costs
Suppose you are a manufacturer, wholesaler, or retailer. In that case, the cost of inventory can be a substantial part of your expenses, so it is crucial that you learn to manage inventory efficiently. As a manufacturer, you spend money upfront to stock your shelves with the raw materials needed to be converted into finished goods. As a wholesaler or retailer, you need to maintain enough products on your shelves to meet your customers’ needs. In either case, you lose business if you cannot fill customers’ orders on time and increase expenses if you keep too much inventory.
The cost of keeping inventory on the shelves
Keeping too much stock on hand is expensive, not just for the out-of-pocket costs for product and cash flow financing costs if required, but also for storage space, insurance, obsolescence, and labor to handle the product.
You need to forecast your sales accurately. You may want extra inventory if you are just starting your business. Not responding to an existing or potential customer promptly will cost you business.
Likewise, you should have a good basis for projecting your sales if you have been in business for a while and can accurately measure your customers’ needs. For example, a computer and cell phone repair business relies on its supply chain to deliver parts for the various items it repairs—memory boards, cell phone screens, and batteries. The company needs reliable suppliers and knows how long it takes from when parts are ordered until they are delivered.
Making sales projections to minimize inventory costs
Projecting your inventory needs can be complicated, but keeping customers happy and costs low is critical. You need to look at your previous period’s sales trends to help ascertain your current needs. Last periods may include days, weeks, months, or years. You also need to understand the changes in customer tastes. Using the computer and cell phone repair business, you need to know how the market is shifting to have the correct inventory type. For example, customers’ tastes in cell phones may change from one product to another. You need inventory to handle the shift in customer taste.
You need to look at your plans to bring in new business. You may be spending more on advertising or hiring more salespeople. Those operating expenses will drive your sales. You need to be prepared to meet the increased sales generated. You may have a great advertising campaign, but if you cannot fill the orders from that campaign, you will frustrate current and new customers by not delivering on your campaign promises.