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 john b. vinturella, ph.d. and john b. vinturella, ph.d., and maintains business and political blogs.

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Taking Stock

Small Business