What are some of the key considerations in managing inventory?

Abraham Cohen, SCORE counselor, shares with us his thoughts on managing your inventory. There is a saying “inventory can make you or break you.” If it is too high, it ties up working capital and cash flow; too low, it may cost you sales. The right balance is easier said than done. Forecasting sales, market conditions, and deliveries may require a crystal ball. Inventory control is not a perfect science. However, the following principles, when applied, will get you close to optimum levels.
- Frequent Inventory Analysis: Use a computer program that matches your needs. Create your own program, buy a ready-made one, or hire the services of a programmer. If you are using QuickBooks for your accounting needs, they offer an inventory control add-on.
- Purchasing - Basic Factors: Months on hand; sales/lost sales; frequency (quarterly, bi-monthly, monthly, weekly or daily); vendors’ lead (delivery) time; safety stock to cover the unforeseen.
- Inventory Turns: Reorders per year. Example: monthly sales for item X is 20 (annual 240) – ordering 40 (2 months worth) every 2 months gives 6 turns; (240/40=6) – average monthly stock would be 20 (240/12). More turns, the leaner the inventory. Order timing is of the essence as well as adjustments for seasonal products.
- Vendor Lead Time: Order date to delivery. A 30 day delivery works fine for the above example, annual 240 and 6 turns. Order 40 units 6 times a year when your inventory is down to 20. Depending on the location of your vendor, domestic deliveries usually arrive in 30 days or less. Imported items can take up to three months or longer depending on the country of origin, trade agreements, location of the port, and inspections at both the shipping and receiving ports. Arranging for ‘Just in time’ delivery would be nice but many times difficult to forecast.
- Safety Stock: This factor is important especially when deliveries are unreliable. A 10 to 20% extra inventory cushion comes in handy, more so when sales are higher than forecasted. Lost sales and backorders hurt business and drive customers to your competitor. Incorporate the 10 to 20% into the purchasing formula.
- Computer Program Data: Above are basics to formulate a purchasing program. They are not universal. Different businesses require different data for their computer systems. The system will work only as well as the data entered: “Garbage in – Garbage Out.”

No computer program can claim perfection. Checking the numbers before placing the order will prevent nasty surprises. An experienced purchasing agent must know the items and have a working knowledge of your business. And remember, inventory = $$$$$$ already spent.

Richard Strug
Greater Princeton Area SCORE (Chapter 631)
Serving Mercer and Middlesex Counties