Managing Your Inventory

 “too much carryover inventory can wipe away all your hard-earned profits and wreck your cash flow”

For those who sell products, one of the key challenges in responding to a flow of reorders is keeping a large enough inventory on hand—but not too large. The constant dilemma you face is that you know your customer is grading you on your ability to ship reorders, but you also know that too much carryover inventory can wipe away all your hard-earned profits and wreck your cash flow. Important, right? So inventory shouldn’t be solely the concern of a purchasing agent; it deserves continuing attention from your sales manager, your vice president of sales, and/or you.

            Purchasing agents, accountants, and other people involved in pushing papers around tend to be historians. By that I mean that they often do their jobs based on an analysis of past shipments. This is important information, of course, but it’s far from adequate when it comes to projecting future needs. It’s your salespeople who have the best insight into likely future activity, and far too often, it’s their input that’s ignored.

            Yes, there’s a potential downside to building the sales force’s perspective into projections. Salespeople tend to err on the high side when they make projections. They don’t want to frustrate their buyers—and lose their commissions—because an item is out of stock. But I’ll bet that you can identify some very responsible people in your sales force who can make a valuable contribution to your inventory management process.

            Getting “overinventoried” is an ongoing peril in fashion-oriented, trendy, or seasonal businesses. As a rule, I say that it’s better to run out of something than to get stuck with mountains of goods. I’d also recommend finding a way to quickly and consistently sell off your excess inventories and recoup at least some of your costs.

            Inventory management is getting to be an ever bigger challenge, as retailers attempt to shift this burden more and more onto the shoulders of the manufacturer. Manufacturers need to manage their relationships with key retailers, thereby minimizing unfair pressures. At the same time, they have to reduce their production cycle times in order to reduce their distribution lead times. The quicker you can make your product and get it to your retailer, the lower your risk is of inventory surpluses.

“The quicker you can make your product and get it to your retailer, the lower your risk of inventory surpluses”

            Another current trend that increases the importance of inventory management is retailers’ increasing tendency to demand the right to return unsold goods. If too many goods come back unexpectedly, it will wreak havoc with your planning, profits, and cash flow. As with all such developments, manufacturers have to find creative ways to cope. For example: You might develop new markets for these returns. You might charge handling fees for returns. You might sell stores on the idea of taking markdown money from you instead of sending back goods, or you might refuse to accept returns.

            If you are a sub-S corporation that’s growing rapidly, surplus inventories can represent a double whammy. As profits flow through to the individual shareholders, so do the tax obligations. If your company is generating good profits, you’ll have to pay taxes. The Feds won’t be interested in your explanation that the money to pay all those taxes is tied up in the inventory you need for future profits.