Inventory Control

When it comes to inventory control, the key is finding a balance between too little and too much.

As a manager over an inventory control support group, I would get a good number of phone calls regarding inventory control. One day I received a call from a customer that was seemingly unhappy about his inventory levels. He said his store was loaded with all kinds of excess inventory and our system and processes were to blame. That's not the exact language he used, but the point was well taken. In less than thirty minutes from that phone call, another customer called said that his store was out of stock. Then I heard how the systems and processes were to blame for that. When it comes to inventory control, sometimes it seems hard to win.

The rule of thumb is that initial inventory control starts with your business's basic inventory level and should be enough large enough to cover the normal sales demands of your business. Startups and existing business's that are expanding locations will not have sales and demand numbers from previous years to project demand. The first year sales must be based on projections based on the inventory control number from existing locations or a well-constructed business plan for startups.

The first step in understanding inventory control is to under the basic numbers. The calculation for basic stock is the length of time between when you order and receive a product, also called lead time. For example, if a product sells 100 units per week and the lead time is two weeks, you will reorder sometime before the inventory levels falls below 200 units. If you were to order once you ran out of the product, you would have go 2 weeks without any of that product. The latter would not be the ideal inventory control situation.

Lack of inventory and inventory control has a host of issues. These include lost sales, lost employee productivity, and decreased inventory control efficiency. Your customers will be unhappy with you because they now have to wait for the product or go somewhere else. Your customer service employees are spending more time with each customer trying to provide information on the status of the problem. This reduces the number of customers that they can serve in a day. Your operational employees may get paid to sit around waiting for product to arrive and when it does come in, you may be in a situation to pay them overtime. This lack of inventory control, could at worst, cause you to make irrational purchasing decisions, so this will "never" happen again, leaving you in an overstock situation.

One way to protect yourself from such shortfalls is by building a safety margin into basic inventory control plan. To figure out the right safety margin for your business, try to think of all the outside factors that could contribute to delays, such as suppliers who tend to be late or goods being shipped in from overseas. Once you have been in business a while, you'll have a better "feel" for delivery times and will find it fairly easy to calculate your safety margin.

Avoiding Excess Merchandise

Avoiding excess inventory is especially important for owners of companies with fashionable or seasonal product lines, such as clothing, home accessories or holiday and gift items. These products have a short shelf life and are hard to sell once they are no longer in fashion. Inventory control becomes even more important. Business owners who sell more non-seasonal, non-specialty items, such as plumbing equipment, or auto products, have more leeway because it takes longer for these items to become obsolete.

No matter what your business, however, using inventory control to control excess inventory is something to be avoided through inventory control. It costs you money in extra overhead, more debt on loans to purchase the excess inventory, additional personal property tax on unsold inventory and increased insurance costs. In fact, one merchandise consultant estimates that it costs the average retailer anywhere from 20 percent to 30 percent of the original inventory investment just to maintain it. Buying excess inventory also reduces your liquidity-something to be avoided using inventory control techniques.

When you find yourself with excess inventory, your natural reaction will probably be to reduce the price and sell it quickly. Although this solves the overstocking problem, it also reduces your overall return on investment. All your financial projections assume that you will receive the full price for your goods. If you slash your prices by 30 percent just to do inventory control, you are losing money you had counted on in your business plan.

Other novice entrepreneurs will react to excess inventory by being overly cautious the next time they order stock. However, this puts you at risk of having an inventory shortage and continuing a costly cycle of errors. To avoid accumulating excess inventory, establish a realistic safety margin and order only what you're sure you can sell. This will ensure a happy an healthy inventory control plan.