Inventory Management is Critical for SMEs

Purchasing & Inventory Management Hook Up!

By Charles Dominick, SPSM

A big trend is for organizations to blend their operational functions under the umbrella known as supply chain management. Often, the first two functions to merge are purchasing and inventory management.

So, as a purchasing professional, you must understand inventory management principles to remain valuable.

First, you must know how much inventory to have on hand to ensure continuity of supply in the event of an uncharacteristic increase in either demand and/or lead time. This quantity of inventory is called the safety stock. There is no universally used formula for determining safety stock quantity, but PurchTips Edition 86 suggested a risk averse calculation.

Second, you must know when to reorder materials for inventory. Generally, this point in time is determined when the quantity of materials in stock decreases to a certain level, called the reorder point. The reorder point is determined by the formula:

ROP = SSQ + (QUD x ALT)

Where,

ROP = Reorder Point

SSQ = Safety Stock Quantity

QUD = Quantity Used Daily

ALT = Average Lead Time (in days)

Third, you must know how much to order. A complex mathematical equation determines the Economic Order Quantity, or EOQ. The equation recognizes the tug of war between acquisition costs and inventory carrying costs: when you order bigger quantities less frequently, your aggregate acquisition costs are low but your inventory costs are high due to higher inventory levels. Conversely, when you order smaller quantities more often, your inventory costs are low but your acquisition costs are higher because you are expending more resources on ordering. The EOQ is the order quantity that minimizes the sum of these two costs.

Fortunately, inventory management systems calculate the EOQ for you. But if you want to see the EOQ equation, check out my blog post entitled Purchasing and Inventory Management.

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Spotlight On Professional Development Opportunities

Are you setting yourself up for failure in inventory management? Bad inventory decisions can kill an organization's profitability, whittle away at its market share, and generally wreak havoc on the supply chain, but it doesn't have to be that way.

The course "Profitable Inventory Management and Control" will give you the skills you need to use inventory as a strategic weapon for boosting profitability and giving your organization a competitive advantage. You'll become an inventory management and control expert, you'll have fun doing so, and your organization's financial and operational performance will improve as you implement the easy-to-apply best practices taught in this course.

Learn more about Profitable Inventory Management And Control at:

www.NextLevelPurchasing.com/inventory

Don't Fall in Love with Your Inventory

If you sell or manufacture products then you're aware of the costs to maintain inventory, especially when it sits unsold in your warehouse, garage, or basement. Inventory is money. It's cash that's tied up. And it has many associated costs. So, how can you cut inventory costs?

The most common mistake people make is keeping too much inventory. That may create cash flow issues, as well as increased costs (for handling the inventory).

Here are some considerations if you're managing inventory.

• Don't fall in love with your inventory.
  Get rid of slow-moving inventory at any price in order to get the cash back into the business and working for you. Retailers love to go to shows and buy stuff, and they love to get the shelves in their store really full. The problem is that they don't manage their inventory. They're better buyers than they're sellers. And if they've got a slow seller they won't sell at break-even or loss. Instead they'll say, ‘Oh somebody will buy it someday.'

• Understand inventory turns and profit margins.
  Usually, the greater the number of inventory turns per year (the amount of time it takes to sell out your inventory), the narrower you can make your profit margins (and the lower your prices). For example, a national grocery chain can sell at a narrow margin because they turn at least fifty times a year. At the same time, by turning so much inventory, the grocery chain has more buying power and can seek lower prices. But a jewelry store has wider margins because they turn on an average of 1 to 2 times a year. If you don't understand those principles, you'll be wondering where the money is.

• Keep ‘just-in-time' inventory, not ‘just-in-case' inventory.
  Just-in-time inventory is what the auto companies and a lot of other companies use—it's just the right amount of inventory at the right time (with the ability to keep more when needed). Just-in-case inventory is the opposite; it's when you maintain too much and too varied an inventory.

• Maintain a conservative inventory.
  When it comes to inventory, it's not a sin to be thin. It's always better to err on being a little thin on inventory. Don't just skinny it down; you need enough to do a full presentation. But be conservative and focus on stocking strong sellers. And always have sources of supply available that allow you to bump up your inventory if you need to.

• Cut inventory costs when possible.
  Depending on your needs, try to find creative ways to cut costs. If you depend on an off-shore supplier, you might keep a lot of inventory because of the transit time required to supply you with products or materials. In that situation, you may want to change the method of shipment from surface to air and therefore reduce the supply on hand. In other words look for ways of shifting your inventory burdens to others.