Balancing Act

Excess inventory can eat up your cash, so ditch the superfluous stock and use better management practices to keep your business booming.
Magazine Contributor
4 min read

This story appears in the July 2007 issue of Entrepreneur. Subscribe »

Erika mangrum recently found herself in a tight spot. Her Raleigh, North Carolina-based company, Iatria Spa and Health Care Center, which offers a full line of body and skin-care products in addition to treatments and massages, was overwhelmed with requests for a popular robe after it appeared on The Oprah Winfrey Show. "We sold out immediately," recalls Mangrum, 40. Retailers around the country sold out as well, and the manufacturer could not make enough to meet demand. "We were on a huge back order and our clients were pretty upset."

While it's not often that a product will wind up on Oprah, the episode underscores one of the many challenges of inventory management. The delicate balance is almost impossible: Keep just enough in stock to service customers promptly and fulfill orders, yet not so much that product is left languishing on the shelf. Many business owners don't realize how much money they have tied up in inventory that either never sells or must sell for a discount--money that should be invested in other areas of the business.

One of the problems, says John Cronin, executive director of the Rhode Island Small Business Development Center, is that growing businesses often can't take advantage of just-in-time inventory solutions, which allow companies to receive specialty products as they need them instead of having to bulk up. "Many don't have enough volume to negotiate daily deliveries or quick responses to surges," he says. "You have to be a shrewd negotiator to work out a pricing arrangement with suppliers." Most often, you'll have to agree to a higher rate for a higher frequency of deliveries, he says--an arrangement that could be well worth the benefits.

Another option is to get your vendor onboard with a managed inventory solution. Explain the benefits of coordinated forecasting and reduced lead times and inventory, and then offer to be their beta test, says David Pyke, associate dean at Dartmouth's Tuck School of Business. "The tie between you and suppliers and customers is stronger, making it more difficult for them to cast you off."

If that doesn't work, Pyke says, look inward. "Forget your suppliers and customers--get your own shop lean." Begin by analyzing your processes and looking for ways to wring out extra time. For example, if an order has to be approved by three different people or travel four steps, you might be able to cut three days out of the delivery schedule simply by changing that process. "There are so many opportunities like that in small manufacturing companies," says Pyke, who worked with one company that had reduced its three-week flow time to 26 hours with this kind of introspective work.

Mangrum was able to get her business lean by creating a store that buys inventory centrally and then sells it to the other locations. She keeps the ordering system tight and efficient with a sophisticated, homegrown Excel spreadsheet program written by her husband, Dave, who has an accounting background. A centralized, color-coded calendar keeps track of order dates, lead times and inventory-counting dates so that all locations are on the same page. The system factors in customer buying habits and seasonal sales histories so the company can plan ahead, buying only what it needs. And Mangrum has seen a direct impact on the bottom line. With a better handle on cash flow, Iatria has been able to grow quickly, opening five locations in seven years. Mangrum projects sales of $3.5 million this year.


C.J. Prince is a New York City writer specializing in business and finance.


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