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Managing Your Company's Inventory

(August 2008) posted on Mon Aug 11, 2008

Reaping the benefits that follow a sound inventory system.

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By Marty McGhie

In today’s business environment, there’s never a shortage of areas that a business needs to pay attention to. One such area of constant focus should be your inventory. An effective inventory-management system can prove to be a valuable asset, creating significant advantages in your business.

Certainly there are different methods whereby inventory can be managed. On the one hand, your philosophy may be to create a low-inventory policy-striving to implement just-in-time principles that require less inventory at any given time to produce your products. The disadvantages of this type of approach are somewhat obvious: You’re much more likely to run out of inventory on a regular basis, which won’t make your customers very happy. You may have a great system in place to manage very low levels of raw materials, but when you begin delaying jobs because of material shortages, that won’t matter-you’ll lose sales and, eventually, customers as a result.

The primary advantages of a low-inventory system, on the other hand, are with your cash. High inventory levels eat up your cash; by having less inventory in-house, your capital will be freed up for use in other areas of your business. Another benefit to carrying less inventory may be in the physical space that you’ll save-extra space in your shop may be used for production, machinery and equipment, or other needs.

On the opposite end of the spectrum, if you choose to carry heavier levels of inventory, the pros and cons simply flip flop. You’ll end up using a significant amount of cash to purchase and maintain high inventory levels, potentially strapping your company of working capital. You may also find yourself with much more obsolete inventory that will generate little or no revenue. On the other hand, heavier inventory levels will probably avoid problems with inventory shortages and ensure that your customers’ products can be produced in a timely manner. It can also enable you to offer a wider diversity of products to your marketplace. Plus, there can be additional advantages gained with fewer material deliveries, saving shipping costs.