Taking Stock

Back when I owned an inventory-based business, one of my better customers had a clever barb in his repertoire. If we were out of anything he needed in his order, he would say "You know, this would be a great place to open a supply house."

But supply, we did for 20 years on my watch. We were in a smaller market, handling about 10,000 separate items, so we enjoyed few economies of scale. We competed with some large distributors and did very well largely due to our focus on inventory control.

At the time we used integrated management software that included an inventory control (IC) module. What made our system work so well was our commitment to keeping accurate inventory on a real-time basis, which necessitated "cycle counting."

Wikipedia.org defines a cycle count as "an inventory management procedure where a small subset of inventory is counted on any given day." In our case, this meant that, instead of taking a physical inventory once a year, we counted 2% (one-fiftieth) of our inventory each week up to the fiftieth week of the year. Using this method errors are caught more quickly, and extra counts can be performed on error-prone items.

With that introduction, let's talk about the steps you can take to get your inventory under control:

1. Evaluate your IC "infrastructure." Are you ready to automate IC? If you are using a management software package, is the IC module adequate for your needs?

Is your inventory layout conducive to administering a "real-time" IC? Can your staff take on the extra duties involved? While getting such a system going can require a lot of initial attention, IC systems save time, by allowing you to know what's in stock without having to go to the warehouse, by quickly detecting any possible theft, and by lowering rates of stockout (lost sales) and overstock.

2. Set a target for customer service level. Measures can include percent of orders filled completely, or percent of items delivered to items ordered. The primary constraint on reducing inventory is, of course, customer service level. What's an acceptable service level for you? 95%? 99.5%? IC software generally uses such a figure to determine how much "safety stock" you need to meet this objective.

3. Learn industry norms to aid perspective. While it should seldom affect your behavior, it is "nice to know" what the industry norms are for businesses of your size. You can probably get these from your trade association, or go to the "Annual Statement Studies" by the Risk Management Association, or "Industry Norms and Key Business Ratios" by Dun & Bradstreet.

What if the industry norms are 90 days of inventory on-hand, and you only keep 45 days worth? What if you keep 120 days worth? No action may be necessary, but this gives you a greater context and perspective as you fine-tune your system.

4. Use "best practices." Minimum overall inventory is not the end of the story. Ascertain whether a reduction is advisable. Even at a good overall level of stock you may still have many items out of balance, over or under. So our efforts should be about "best practices" that minimize quantities required, while raising the quality of your inventory.

5. Clean house! In my most recent turnaround consulting appointment, a plumbing wholesaler, we started by identifying all the items that our IC system identified as overstock. We went from thinking we needed more warehouse space to having about a third of existing space available.

Of course, much of it went straight to the trash heap, but some was recent enough to send back to the manufacturer. In between, we sold some at two garage sales we held, and donated the rest to a local housing agency.

6. Implement "Just-in-Time. " JIT includes a set of actions that work together to squeeze slack out of your processes. Do you enter received material as soon as it arrives? Can your key suppliers commit to shorter lead times?

7. Zero-base SKUs. Take a hard look at the realistic contribution of every item in inventory. You may need to keep some losers as "service items," but you will be amazed at how many of your items are break-even or worse.

8. Partner strategically. Can you narrow your number of suppliers by getting more items from the "majors?" You may currently split up orders to save a penny here and there, but the vendor left standing would probably meet or beat the other's prices for a greater share of your business. More from each vendor means more frequent replenishment, and more opportunities for JIT.

These are a few actions that should apply to continuous improvement programs at most inventory-based businesses. As they say, "your mileage may vary."

John B. Vinturella, Ph.D. has almost 40 years experience as a management and strategic consultant, entrepreneur, author, and college professor. For 20 of those years, Dr. Vinturella was owner/president of a distribution company that he founded. He is a principal in business opportunity sites jbv.com and muddledconcept.com, and maintains business and political blogs.

In The News:

How to apply for a small business loan  Simply Business knowledge
Pandemic hurts small business owner  Pine Bluff Commercial

Franchisor; Ongoing Support and Ideas

Ongoing support for a franchise system is omnipotent. A major... Read More

Do You Want Your Own Fully Programmable ERP? - Part 3

Continuing from the second article:6. About the aground mathematical model,... Read More

Do You Want Your Own Fully Programmable ERP? - Part 2

In the first article we mentioned the main characteristics that... Read More

The Role of the Business Model and Strategy for Business

People will always stress that having a well researched business... Read More

Small Business And The Ability To Find Market Place Opportunities

Marketing is one of the four corner-posts of a solid... Read More

De-Ionization Decisions in Mobile Car Washing

Many mobile car wash operators would like to add de-ionized... Read More

Looking for a New Office Chair?

Perhaps you are building a new home office or you... Read More

Small Business Success Secret: Focus on Your Genius Work?

Do you know what your genius work is? It's the... Read More

Why Small Businesses Need Both A Logo And An Identity System

Experts urge small business owners to "brand" their business ?... Read More

Designing a Franchise Training Program

If you intend to franchise your company you will need... Read More

Truck Detailing Shop Business Case Study

As an entrepreneur you can learn a lot by following... Read More

Marketing Your Small Business with Success Stories

-- The One Pager Shortcut Series --An effective and compelling... Read More

Earn More Money in Your Small Business by Creating a PIG

If you really want to earn more money with your... Read More

A Portable Trade Show Exhibit Makes for an Easier Show

You can make your trade show experience much easier by... Read More

How Micro Loans Can Mean Macro Success for Your Business

"Inch by inch, row by row...that's the way my garden... Read More

Where Can I Get Clients From?

The following tips have come from a wide variety of... Read More

7 Tips To Improve Your Cash Flow

Cash is King?That is what everyone tells us and it... Read More

Small Business Marketing Series ? Choosing a Niche Market

Many smaller businesses choose niche markets for various reasons and... Read More

Excuses Franchisees Make; When They Violate Exclusive Territory Agreements

One of the biggest excuses franchisees of home based and... Read More

Definition of Security: Small Business Owner

Yes, that IS security when nobody can downsize you because... Read More

Pressure Washing Companies; Pricing Dock and Deck Cleaning

If you own a Pressure Washing Company and wish to... Read More

Small Businesses with BIG NAMES: Protect Your Trademarks and Reap the Rewards

You're a small business owner with a hot new product... Read More

FFP vs. CPFF Contracts

SBIR Corner: FFP vs. CPFF contracts:In the SBIR/STTR world, the... Read More

Maintaining Your Carpet Extractor in Your Auto Detail Shop

Auto Detailing: Maintaining A Commercial Carpet ExtractorYou should drain your... Read More

Who Does Over Disclosure Really Hurt In Franchising?

Costs of over regulation and over disclosure end up hurting... Read More