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Controlling Your Inventory

How to find a balance between too much stock and not enough
October 4, 2006
URL: http://www.entrepreneur.com/article/168406

Q: I yo-yo between having too much of my product in stock and not enough. How can I find a better system for controlling my inventory?

A: You're already taking a step in the right direction by thinking about finding a better system. When businesses self-destruct, if an entrepreneur later looks for the lit fuse, they can often find it began with their inventory. After all, if you spend $20,000 on inventory, and that inventory sits in your warehouse for three months until it's finally sold, that's $20,000 you might have had for three months to spend on other aspects of your business. It's a simple way to put it, but we don't have much space for complexities here. There are other reasons, of course, for not wanting too much inventory--if, for instance, your $20,000 in inventory can be ruined by insects eating your raw materials or by a hurricane destroying your warehouse.

As for finding that better system, it really depends on how big your operation is. There are numerous inventory software programs that specialize in keeping track of inventory and the costs that go with them. There are industry consultants who you could hire to take stock of your stock and see where you're wasting money. For instance, some bars and nightclubs outsource firms to come in and check their inventory every week, to make sure that bartenders aren't over-pouring drinks or simply giving away the product to friends or customers who they hope will tip them well.

It's all about cash flow. If you're spending more than you need to on your inventory, your business is wasting money. That's why many companies employ what's called a just-in-time inventory strategy, in which they have a solid relationship with a supplier who can fill inventory needs virtually as fast as you're filling orders. There can be problems with that, however--if there's a truckers' strike or some other variable you're not expecting--which is why some entrepreneurs also use a "just in case" inventory strategy, with enough key items in reserve to help if there's an emergency.

Inventory is one of those things that you can think about for hours--and occasionally, you should--but your system for controlling it, ultimately, shouldn't be too time-consuming. But it's definitely worth thinking about, as there's almost always a better way.

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