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Taking Stock of Inventory Management

Taking Stock of Inventory Management

It may not be glamorous, but getting a handle on your inventory can mean the difference between a profit and a loss

Jeremy Quittner

If the very thought of “inventory days” calls to mind one of Dante’s circles of Hell, maybe it’s time to take a page from Stephen Carroll’s playbook. Carroll is the owner of Walking Equipment Co. in Largo, Fla., a $2 million business that sells medical devices such as canes and wheelchairs online. On a busy day, his six employees ship some 500 packages. To track his inventory, Carroll uses software from Stone Edge Technologies that tells employees the location of any item in his warehouse. When an item is picked off the shelves, the software produces purchase orders. Shipping tags and pick lists are also generated automatically. Says Carroll: “I no longer sit on inventory I don’t need, and this system helps my cash flow.” Later this year, Carroll will upgrade to Stone Edge’s premium product, which should let his workers use handheld bar code readers to send inventory information to Carroll’s database for near-simultaneous updates. He says he’ll then be able to count items in certain sections of his warehouse without doing any data entry. Customers will be automatically notified when an item is back-ordered and told when they can expect it to be delivered.

Inventory management is the unglamorous, but essential, guts of your business. It’s imperative to dig into it—probably more deeply than you’d like. Inventory is an asset, but it’s also a liability until it has been sold. An undersupply means you might not be able to meet a surge in customer demand when the economy recovers. An oversupply ties up too much cash. “It is very expensive to store inventory,” says Mike Braun, CEO of Intacct in San Jose, Calif., which makes inventory management software. “Inventory can go bad, and if you don’t move it, that can mean the difference between profit and loss.” Inventory management is also important from another angle: If your company happens to be a supplier for a much larger one, increasingly, that larger company will want to know your inventory management capabilities are up to snuff so that they can depend on your deliveries.

The big question for any supply management system is how to balance your suppliers’ capabilities with your customers’ demands. Although something of a chimera, the ultimate goal is often referred to as just-in-time or zero-inventory management, terms popularized in the 1970s. The premise is that businesses can, with the help of technology, calibrate their inventory levels so that supplier deliveries exactly match customer demand, leaving little to nothing sitting on the shelves.

So how do you know how much inventory you need? Inventory is usually measured in “turns,” with one turn being your annual sales divided by the value of inventory. If you’re doing $1 million in business a year, and you have $100,000 in inventory, you’re doing ten turns a year, and moving your entire inventory about once a month. By contrast, if you have $10 million in annual sales and your inventory value is $5 million, you have two turns of inventory that take about six months to move. That could indicate a problem, since inventory has no value until it is sold.

The goal is to hold as little inventory as possible and still keep your business running. A software business will have next to no inventory, as code can be produced on demand. Retailers will typically have more turns, but not so much that they get caught when fashions suddenly change. Manufacturers often play things closer to the bone.

Carroll has divided his inventory into three categories: items he can get domestically within four weeks; goods he can get within eight weeks from overseas; and items manufactured overseas specifically for him that can take up to five months to arrive. Carroll knows he needs about three turns of inventory for things that can take up to five months to deliver, and only one to two for products he can get more quickly. By managing his inventory carefully, he’s increased profits by about 5% and shaved $15,000 from his yearly labor costs.