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The Ins and Outs of Inventory Management

(August 2010) posted on Tue Jul 27, 2010

Controlling inventory costs can create significant cash savings for your business.

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By Marty McGhie

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.