Selling products or goods to customers is the reason many companies are in business. To be successful, that means you must have the products on hand for them to purchase. However, to be profitable, you will have to make efficiency with inventory control integral to the success of your business.
The topic may seem unexciting when compared to sales, marketing, and product innovation. However, inventory management needs to be treated as a critical part of your everyday business endeavors, one that is at the frontline to customer satisfaction.
To help you get a handle on this core part of your business, here is a look at the ins and outs of managing your inventory.
Types of Inventory
Inventory is your product stock, the goods you sell, and any materials you need to run your business successfully. Depending on your type of business, there are different types of inventory.
Raw materials are typically commodities such as minerals, chemicals, steel, wood or basic food items that your business uses to create components or finished products. They may also be things you purchase from external suppliers that have already been assembled or manufactured, such as nuts and bolts, electronic components, and canned food. Raw materials can also include goods that are only partially finished, which you then take to completion.
For example, if you sell vegetable juice, the raw materials include vegetables, flavorings like sugar or spices, preservatives, and the juice container you sell. The raw materials for a computer company would include circuit boards, diodes, chips, and the housing for these components.
What you have in the form of materials and parts that are waiting for you to transform them into something else are considered work-in-process materials. It also refers to partially assembled items that are in line to be made into a finished product. Goods that you have finished, but haven’t packaged yet are also work-in-progress materials.
Using the earlier example, cucumbers and carrots are raw material inventory for the juice company. When they have been transported from the storage area and into the assembly line, they now become work-in-progress inventory.
These are items that are ready to be shipped or sold to customers, which can include retailers or wholesalers. These can be stored on the shop floor or in a special storage area.
Other Types of Inventory
Your company needs a range of goods on hand to stay in business, including items for maintenance and repair, as well as those needed to stay in operation. These types of inventory are given names that designate their purpose.
- Transit inventory is the name for products moved from the warehouse to the factory.
- Buffer inventory refers to items kept on hand so you will not run out because of poor quality or slow delivery.
- Anticipation inventory means items that you stock up on in case there is sudden demand. This often happens in the build up to the Christmas shopping season.
It costs money for you to purchase inventory, process it, store it, and sell it. In order to make a profit, you must include these costs with other operational costs, balancing all of them against the price you charge for the product.
Inventory costs can be broken down into different types as well:
- Purchase costs. This is the most basic cost. For a retailer, it means buying finished products. For some factories, it means buying parts that they can assemble. For other companies, it means buying raw materials they work with to produce their products. The way to control this cost is to find reliable suppliers with prices you can afford.
- Processing costs. This refers to the cost of assembling or processing the materials you buy from outside companies. The cost involves labor for the processing and utility costs for the work area.
- Distribution costs. Most companies need to ship their products to market in order to sell them and get paid. These are called distribution costs. Most large companies use warehouses to store goods for later distribution. Distribution costs include freight or shipping, by truck or rail, for example, as well as local delivery costs.
- Inventory holding costs. This refers to the costs associated with storing your inventory at your place of business or in a warehouse. Items like rent, operational costs for the space and insurance would go into inventory holding costs.
- Shrinkage costs. Anything that makes a product not salable is called shrinkage. This can be poor quality, theft, or spoilage.
Best Practices for Managing Inventory
The better you closely manage your inventory, the more efficient and profitable your company can become. Here is a look at three strategies that will help you stay on top of your inventory.
Don’t keep too much in stock.
If you have too much inventory on hand, you'll have lots of cash tied up in its purchase. Additionally, you will have added costs for storage. Idle inventory can also become obsolete or get damaged. The way to avoid these situations is by keeping on top of your sales projections through proper forecasting.
Track your inventory accurately.
Maintain good records as inventory moves through your business. Make sure to take into consideration unusable inventory due to damage or poor quality. Monitor pilferage and other forms of shrinkage. You need accurate records of what you have on hand in order to control costs, maintain customer satisfaction and reach sales goals.
Use reliable software to track inventory.
An Excel spreadsheet might work if you are just starting out, but it is easy to mistakenly delete a file. It is more reliable to use Quickbooks, Peachtree or one of the other inventory management programs available. They make it easy to track what you have on hand, both at an item level, as well as its associated dollar value.
If you want to keep your customers happy, you need to have inventory available to meet their needs. Holding excess amounts of inventory, however, can be costly and put a strain on your company's finances. Regular inventory monitoring, strong forecasting, and detailed cost tracking will help you manage inventory levels properly. How you manage your inventory can make all the difference in the world in terms of profit margins and the competitiveness of your business. It is worth your full attention.