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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.


By Marty McGhie

* Establish a min/max re-order program: One of the most critical means of controlling inventory is to analyze each SKU that you carry, and determine a minimum level at which you re-order that particular item-as well as a maximum level at which you will stock the item. These levels should account for various factors such as shipping lead times for the product, inventory turnover rates for that SKU, physical space requirements, shipping costs, and so on. These factors all have to work together to ensure that you aren’t ordering inventory too frequently, thus incurring heavy shipping charges-or, on the other hand, not ordering enough and finding yourself constantly low on materials for production. For example, let’s assume that you decide to stock two pallets of banner vinyl in your inventory. And let’s assume that you consume, on average, one pallet every two weeks and your re-order point is at one pallet. If it only takes a couple of days to get a pallet shipped, that may be okay; but if it takes a week or so to get the vinyl shipped in, you run the risk of running out of inventory and probably should adjust your max up to three pallets.

* Utilize regular cycle counts: Implementing a regular cycle-count system is one of the best ways to avoid inventory shortages and inventory obsolescence. The frequency of cycle counts should directly correlate with the turnover rate of each SKU in your inventory. If you have a high turnover, you may choose to do a weekly or even bi-weekly count. On the other hand, if it’s a slow-moving item, then perhaps a monthly count will be sufficient. Even if you’re running an automated inventory system, a cycle-count system can eliminate problems that can occur with inventory levels.

* Automate your system: Establishing an automated inventory system should be a high priority. Even though these principles can be effectively implemented into a manual system, until you initiate a system that brings together all your systems from purchasing, accounting, and production, you’ll always struggle with the balance between carrying too much inventory versus not enough-and, as a result, experience the consequences. Automated inventory systems don’t have to cost hundreds of thousands of dollars to be effective. Most accounting systems come with some form of inventory-management options. Start with that, and if it isn’t working, look into other systems that will suit your needs and fit within your budget.

Avoiding the pitfalls
While your inventory is one of many parts of your business that demands daily management, it’s often one that draws only casual attention. To some extent, inventory needs will always be unpredictable and challenging to manage. By implementing the few recommendations I’ve made here, you’ll soon find yourself avoiding the pitfalls that accompany a loose inventory policy-and reaping many of the benefits that follow a sound inventory system.

Marty McGhie (marty@ferraricolor.com) is VP finance/operations of Ferrari Color, a digital-imaging center with Salt Lake City, San Francisco, and Sacramento locations.


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