The Ins and Outs of Inventory Management
Controlling inventory costs can create significant cash savings for your business.
Implementing an effective inventory-management system can be an overwhelming task. And some managers are afraid that, as they begin controlling inventory, they might run out of stock more often and end up failing to meet customer deadlines while waiting for new inventory to arrive. Plus, setting up a system requires some investment in software and related hardware, and these costs can seem prohibitive.
Nonetheless, by implementing some of the inventory-management suggestions I’ll make here, your business can save a significant amount of money that will justify the necessary changes and related expenses—and create significant cash savings for your business.
Managing inventory levels
The most obvious way to save money is in the management of inventory levels. Begin your analysis by determining the average amount of a particular material you use during a month. Then determine the amount of lead time required to receive that item from your supplier.
For example, if you typically use 20 rolls of 13-ounce vinyl in a given month, and the lead time to receive new goods is five days, your average carrying amount might be determined to be around eight to 10 rolls. You won’t want to bring that average down to the five-roll level, because that would jeopardize your inventory supply if, for example, a very large job came into your shop at the low point of your inventory cycle.
Dialing in on inventory levels will require some initial work and trial and error, but once you get a handle on the ordering lead times and consumption rates, this will allow you to carry a much leaner level of inventory and save you significant money.
You should also determine a minimum as well as a maximum level of inventory for each SKU to carry, and a re-order point for each. Just be careful in this process not to become too aggressive early on, resulting in cutting yourself in inventory and possibly missing a customer deadline. But one of the more difficult challenges you’ll have in controlling inventory costs is deciding which items to stock and which to carry on special order. This decision is mostly a function of frequency of use, but can also be evaluated on the cost of the inventory item.
For example, something you use for your customers every 60 or 90 days would probably not justify carrying in inventory unless it were very inexpensive and the costs of one-time orders make sense. On the other hand, if an item is used more frequently, but is very expensive, you could carry a lower amount in inventory and replenish as soon as an order is placed that consumes that amount of inventory. Again, this requires continuous analysis and fine tuning over time before you feel comfortable with the right amount.
Communication and relationships
Another helpful tool in managing inventory is good communication with your staff and customers. At Ferrari, we continually update our sales team with any changes to inventory stock and non-stock items, informing them of the lead times necessary to secure non-stock inventory. This way, we don’t get into a situation where we have promised the customer we’ll deliver on a deadline, then fail to do so due to inventory issues.
We also communicate with our primary customers in order to learn about large jobs coming our way. Let your customers know that an early heads up about large upcoming jobs will help ensure their products are produced in time.
And then there are vendor relationships. Approach your key vendors as a partnership and they will go to great lengths to keep you as a customer. For instance, one of our company’s primary vendors has a warehouse in our city. We’ve negotiated a deal with them where they carry a significant amount of the inventory we use regularly and allocate it in their warehouse specifically for us. So in addition to the amount of inventory we carry in our own location, we know they have another larger amount on their floor that we can secure in one day. This allows us to significantly reduce our inventory levels on those goods, thus avoiding a larger cash investment and producing much higher turnover on those goods.
Although you might not have that luxury in your own place of operation, you do have leverage with your suppliers. Use that to your advantage when negotiating the terms of your purchases such as shipping costs, discounts, overall pricing and expediting charges.
Marty McGhie is VP finance/operations of Ferrari Color, a digital-imaging center with Salt Lake City, San Francisco, and Sacramento locations. The company offers high-quality large- and grand-format photo, inkjet, fabric, and UV printing. firstname.lastname@example.org