How to Efficiently Manage Inventory

Controlling Inventory Costs

If you are a manufacturer, wholesaler, or retailer 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 material needed to be converted into finished goods. As a wholesaler or retailer, you need to maintain enough products on your shelves to meet the needs of your customers. In either case, you lose business if you cannot fill customers’ orders on a timely basis and increase expenses if you keep too much inventory on hand.

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 the cost of storage space, insurance, obsolescence, and labor to handle product.

You need to forecast your sales accurately. You may want to have extra inventory on hand if you are just starting your business. Not responding to an existing or potential customer in a timely fashion 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 measure accurately 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, batteries. The company needs to have reliable suppliers and know how long it takes from the time parts are ordered until they are delivered.

Making sales projections to minimize inventory costs

Projecting your inventory needs can be complicated but is critical to keep customers happy and costs low. You need to look at your previous period sales trends to help ascertain your current needs. Previous period 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 how the market is shifting so you have the right type of inventory. Customers’ taste in cell phones, for example, may shift 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 derived from that campaign, you will frustrate current and new customers by not delivering on your campaign promises.

Author: Marc J Marin