Selling products to customers is the reason many companies are in business. These days especially, success means that you have the products on hand to purchase. As supply chains smooth out, it’s time to revisit profitability through inventory control.Â
Sure, this topic may not seem as exciting as, say, sales and marketing are. Still, inventory management needs to be treated as a critical part of your everyday business endeavors, and one that is at the front line to customer satisfaction.
Here are some things to think about to manage your inventory successfully.
Defining Inventory
Inventory is your product stock, the goods you sell, and any materials you need to run your business successfully. Here are a few of the most common types:
- Raw materials: Raw materials can be things like minerals, chemicals, steel, wood, or food items that you use to create your product. They may also be things you purchase from external suppliers that have already been assembled or manufactured, such as nuts and bolts, electronic components, and canned food.Â
- Work-in-progress materials: What you have in the form of materials and parts that are waiting for you to transform them into something else are considered work-in-progress materials. These also refer to partially assembled items that are in line to be made into a finished product.Â
- Finished products: These are items that are ready to be shipped or sold to customers, which can include retailers or wholesalers. These can be stored on the shop floor or in a special storage area.
- Transit inventory: Products moved from the warehouse to the factory.
- Buffer inventory: Items kept on hand so you will not run out because of poor quality or slow delivery.
- Anticipation inventory: Items that you stock up on in case there is sudden demand.Â
Understanding Inventory Costs
It costs money for you to purchase inventory, process it, store it, and sell it. In order to make a profit, you must include these costs with other operational costs, balancing all of them against the price you charge for the product. Inventory costs can be broken down into different types as well:
- Purchase costs. This is the most basic cost. It could mean buying finished products, buying parts that can be assembled, or even buying raw materials they work with to produce their products.
- Processing costs. This refers to the cost of assembling or processing the materials you buy from outside companies. The cost involves labor for the processing and utility costs for the work area.
- Distribution costs. Most companies need to ship their products to market in order to sell them and get paid.Â
- Inventory holding costs. This refers to the costs associated with storing your inventory at your place of business or in a warehouse.
- Shrinkage costs. Anything that makes a product not salable is called shrinkage. This can be poor quality, theft, or spoilage.
Taking Inventory Action
Don’t keep too much in stock.
If you have too much inventory on hand, you’ll have lots of cash tied up in its purchase. Additionally, you will have added costs for storage. The way to avoid these situations is by keeping on top of your sales projections through proper forecasting.
Track your inventory accurately.
Maintain good records as inventory moves through your business. Make sure to take into consideration unusable inventory due to damage or poor quality. Monitor pilferage and other forms of shrinkage.Â
Use reliable software to track inventory.
Using reliable inventory management software like QuickBooks or Peachtree can make it easier to track what you have on hand, both at an item level, as well as its associated dollar value.
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