Whether you are into manufacturing, service, or trading, you need to monitor and manage your inventory.
“Inventory” includes: raw materials, work-in-process goods, and completely finished goods.
Inventory represents one of the most important assets of a business, because turnover (sales) of inventory is the primary source of revenue generation and profit making for the company.
The basic idea behind inventory control is to operate your business effectively and smoothly (with no down time or lost time) with the least amount of stock.
Keeping too much inventory for long periods of time is not good for the business because of the danger of spoilage and obsolescence plus the cost of inventory storage. On the other hand, having too little inventory is risky as you may lose out on potential sales and potential market share.
Thus, it is important that you should know:
- · When to order
- · How often to order
- · How much to order.
The basics of inventory control are simple. You need enough on hand to satisfy your sales, and not much more than that. You also need to track your inventory closely enough to know the difference.
Here, from smallbusiness.chron.com are basic steps in inventory management and control.
Step 1
Begin your inventory system by counting how much of your stock and ancillary supplies you have on hand. For example, a small retail business might have 1,500 small widgets, 750 medium widgets and 350 large widgets out on the shelves and in the storeroom. All widgets must be sold in a box and placed in a plastic bag, so the store also has 1,000 medium boxes and 500 large boxes on hand, as well as 3,000 plastic bags.
Step 2
Review your sales records to determine a reasonable expectation of future sales. In the example, small widgets are the best seller, which is why the manager keeps so many in stock.
Step 3
Analyze your inventory counts to ensure that you can service the sales you can expect. Small widgets require a medium-sized box, as do medium widgets. Let’s say, however, that you have only 1,000 medium boxes on hand. Even if 1,500 small widgets are a two-week supply, you will run out of medium boxes in a week, so you must place a new order to refill your stock before it runs out. You have 5,000 plastic bags, and you must use one bag for every order. If you only need 1,000 bags a week, you might want to order fewer bags at one time, so you don’t have to spend money any sooner than necessary. On the other hand, if you get a better price for the larger order, then it can be worthwhile to purchase in bulk.
Step 4
Track your sales so you know how your inventory is dwindling, and when you need to resupply. The simplest way to do this is at the point of sale, by using your registers to track what is being sold. At the end of each sales day, the registers will be able to tell you exactly how many items were sold, and how many boxes were used. This is far easier–and cheaper in terms of labor–than manually redoing a count regularly.
Step 5
Place your orders so your resupply arrives before you run out. These orders must take into account the turnaround time from your suppliers. For example, the hypothetical widgets are imported, and must be purchased a month in advance. But the boxes might come from a local supplier, with 48-hour delivery. Making purchases too early depletes your cash on hand, and ties it up in inventory value, which does not become liquid until you have made another sale. Your bottom line will be healthier if your excess inventory is just enough to handle sales fluctuations, but no larger than that.
Photo: “Dairy in the Walkin” by Tracy Hunter, c/o Flickr. Some Rights Reserved