Inventory Planning

Posted by Super User
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on Wednesday, 04 June 2014 in Blog Posts

Companies can find great benefit in effectively managing their inventory, just as they can find great peril in ineffectively managing inventory.

For the small business, or for a business just starting out, planning initial inventory levels, setting up inventory control processes, and managing logistics can seem like daunting tasks.  To make matters even more difficult, folks in inventory and logistics management often communicate using language that’s challenging, at best, for the novice to understand (just what did he mean when he referred to our shipment as “JIT via 3PL, FOB Origin”?).

As intimidating, and not doubt boring, as it may seem, however, inventory planning is very important, and should be given great consideration.

Let’s take a brief look at the importance of determining the amount of inventory your company should have on hand.  There are many companies that have struggled greatly from overloading their inventory to address every possible scenario that could possibly happen (and some scenarios that couldn’t happen), and there are those companies that wrestle with having too small an inventory of fast-rotating items, thus limiting production & increasing transportation costs.  The key to finding the correct inventory levels for your company is determining the right balance between tying up your assets in slow-moving inventory, and being unable to meet your company’s production requirements.  In all cases, however, avoid the “yeah, that looks about right” method of determining inventory levels.  Instead, utilize quantitative measurements, and well-considered forecasts.

For those that tend to err on the side of having too much inventory, here’s a thought for you:  Both your inventory and cash appear as assets on your balance sheet.  The advantage with cash versus inventory, however, is that cash is much more flexible in what it can be used for than inventory.  So, keeping cash on hand, instead of spending it on inventory, provides your company with more options down the road.  Major car manufacturers have certainly taken advantage of having very small parts inventory on hand, for instance.  In fact, the supply chain at automobile assembly plants is designed so efficiently as to require suppliers to arrive with deliveries within pre-determined 15-minute windows.

For those that often find themselves with too little inventory on hand, remember that increasing the speed with which your company produces product will likely result in greater profit.  For example, if you’re running a vacuum repair shop, and for every machine on which you replace a belt you order just one belt from your supplier, you’re wasting your repair person’s time as he or she waits for delivery of the belt, and you’re probably spending too much on inbound shipping.  Instead, have a small supply of commonly used inexpensive parts on hand, thus allowing for faster turnaround, and increased production.

Of course all of the above seems rather obvious when you’re looking at a car manufacturer or a vacuum repair shop as an example.  The challenge for your company is taking what may seem like obvious inventory solutions for other companies, and applying these solutions appropriately to your company.

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