Do’s and don’ts of inventory management
Read time: 3 minutes
If you’re like other entrepreneurs, you find it challenging to manage your inventory. It’s one of the main headaches in many businesses—finding the right balance between having enough stock on hand for production and customer demand, while not tying up excessive cash in your inventory.
It doesn’t help if you don’t have a good idea of what’s in your inventory in the first place, says Lucie Le François, a BDC Business Consultant who advises entrepreneurs on inventory control and operational efficiency.
“Some companies often have no idea what they have in inventory,” she says. “You have to make sure you have the right products, at the right time, in the right location and quantity.”
Here are some do’s and don’ts of inventory management from Le François.
1) Monitor your inventory—Good inventory management starts with tracking what you’ve got. This means having a reliable way of recording how much inventory you have, where each product is located and when you received it. To make sure your system is accurate, you need to regularly count your actual inventory.
2) Measure performance—It’s important to regularly measure the performance of your inventory management. Choose performance measures that make the most sense for your business.
For example, you can track the number of days of inventory on hand (the average number of days inventory is held before it’s sold), losses, inventory accuracy (how well your inventory record-keeping matches your actual physical inventory), supplier lead time and inventory turnover (how often you sell your inventory in a period of time, such as a year).
3) Align inventory management with other processes— Ordering new items should take into account customer demand, sales forecasts, financial considerations, production needs and distribution.
“Companies sometimes buy a truckload of stock on discount, but they don’t look at the costs of holding the stock or the possibility that it may expire before it can be used,” Le François says.
You may want to adopt a process called sales and operations planning (S&OP). It’s a formal method of coordinating activities in a business, including inventory management. You can buy S&OP software to help you organize the process.
1) Use inventory as a band-aid—Don’t use inventory as a band-aid for operational or supplier problems. “Ask yourself why you have so much inventory, and work on solutions,” Le François says.
For example, if you find yourself with a lot of buffer stock, look into whether it’s because of excessive lead time or delivery issues. Or is it because you need to compensate for frequent production delays?
Solving these problems will reduce the amount of inventory you need to hold and save you money. An operational efficiency expert can help you improve your processes and eliminate waste.
2) Dump inventory without a plan—If you have a lot of excess or discontinued inventory that’s been gathering dust, you may decide to dump or liquidate it. In order to minimize the financial hit, make a plan.
First, decide what you consider excess inventory and when it’s time to discontinue a product. Next, identify products on which you need to take action. Finally, create rules for what you will do with aging or excess inventory. Options include approaching suppliers to return items, offering sales reps incentives to sell them, liquidation, donation or destroying items.