The first step to success is knowing what goods are lying where and for how long
IF YOU ARE A BUSINESS owner, having a system in place for counting and maintaining inventory or stock is essential for the success of your business. Managing inventory well will bring higher returns on investment and more customer satisfaction.
Stock Just The Right Amount
Too Little: Having inventory can make you lose sales and customers to your competitors. Also, keep in mind unexpected orders. Suppose you have many small customers, and a few large ones that account for say 40% of your sales. What happens if the one of the latter wants to buy up a large chunk of your stock? Logic would say that always accommodate the large customer, but you cannot afford to displease the smaller buyers.
Therefore, don't take chance in an effort to minimize investment in stock
To Much: The more inventory you have means the more money you will spend on overhead costs, loans, insurance, etc. So, analyze your needs, keep a record of the entire range of goods including reorder points storage space required and item location. Take into consideration shelf life of perishable goods, and seasonal and festive demand. And as for predicting requirements of large customers, the best way is to be aware of their consumption patterns and business model.
Follow the 80/20 Rule
About 20% of the items you sell will provide about 80% of your profit, because they sell the most. It's a fact that less expensive items often sell faster and need to be replaced more often sell faster and need to be replaced more often. For instance, when you sell ten items that cost Rs. 5 as often as a single item that costs Rs 5 as often as a single item that costs Rs. 50, you will have made sales of Rs. 50 with the Rs. 5 items. So, keep these fast-selling products at the top of your re-ordering list. And invest 80% of your funds in these items.
Keep Track of Time
Turnaround Time: This is a major consideration when maintaining inventory. Not all products sell at the same rate. So, knowing which products move quickly and which ones more slowly will go a long way towards helping you achieve a balanced inventory. Follow the simple technique of noting the date of purchase and order quantity every time it is replenished, to get a snapshot of turnaround time for each time.
Lead time: It is the time between reordering and the actual receipt of goods. Order Processing, order filling, and transportation usually take place during this time, which could be days, weeks, or months, depending on your supplier. It is therefore critical to be aware of manufacturers production cycles and last order dates, location of your suppliers good owns, and even stock positions of your competitors if possible.
Safety margin: As a precaution, order extra quantities to reduce chances of a shortage, or order a few days earlier. Having reserve stock can come in handy.
Consider cost of inventory
Inventory is often the single most significant asset; it is expensive and has to be managed carefully, else you may lose money. Cost of inventory involves rent, maintenance, insurance, finance cost, pilferage and damage, and even value of stock that may never be sold. These costs when added up, erode profits.
Pilferage and damage percentages are always greater when there too much inventory. It's much easier for theft to go unnoticed when there too much stuff, and breakages and damages are more likely to happen.
When there excess inventory, markdowns (distress discounting) are always higher, because excess inventory invariably slows the rate of sale of everything. The longer merchandise remains unsold, the greater the markdowns that will be necessary to move it through.
Minimize chances of pilferage and breakage by installing a good lighting system in the godown. A CCTV system would act as a deterrent too. Fix narrow and wide shelves according to product categories, label the shelves, and also number them. This will enable you to access items quickly, plus keep a check on their movement.
Inventory accounting: LIFO, FIFO, WAC Keeping inventory means that when you add or remove items from your stock, you will have made a note of it. Here are the most commonly used methods for inventory accounting.
LIFO (Last In First Out): In this, you will sell the most recently purchased inventory first. Suppose you purchased five units for Rs 10 each last month, and five more units for Rs 12 each this month. Using LIFO, Rs 12 would be the rate assigned to each item taken out of inventory until all the five recently purchased are gone. For each item sold after that, Rs 10 would be recorded.
FIFO (First In First Out): In this, you will sell the goods you receive first. Using the example above, you would record the Rs 10 items before the Rs 12 items. This means the value of your inventory is at its most recent price. FIFO is usually used during periods of relatively low inflation.
WAC (Weighted Average Cost): In this method, each time new inventory is added, the average cost of the items is recalculated. In the example above, the average cost of the ten items would be Rs 11 after the month's purchase was made. Now each item taken out of inventory would be recorded as costing Rs 11.
Get Tech Savvy
Having an active inventory record will help to move your business forward. It's a good idea to invest in an inventory management software that controls accounts receivables, accounts payables, inventory and general ledger. The basic idea is to improve the speed with which you turn your goods into receivables, and receivables into cash.
You should also consider bar coding all your products. A bar code system allows items to be scanned at the sales counter and speeds up the transaction process, and also automatically updates the inventory records when products are sold or purchased. This increases the efficiency or your business
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