Inventory Control

Recently, I was checking the news in the web page of the magazine Entrepreneur and I saw this title "Inventory Control. When it comes to inventory, the key is striking a balance between too little and too much." It was interesting to read something about we have been discussing in class.

"One way to protect yourself from such shortfalls is by building a safety margin into basic inventory figures. To figure out the right safety margin for your business, try to think of all the outside factors that could contribute to delays, such as suppliers who tend to be late or goods being shipped in from overseas. Once you have been in business a while, you'll have a better "feel" for delivery times and will find it fairly easy to calculate your safety margin".

"No matter what your business, however, excess inventory is something to be avoided. It costs you money in extra overhead, debt service on loans to purchase the excess inventory, additional personal property tax on unsold inventory and increased insurance costs. In fact, one merchandise consultant estimates that it costs the average retailer anywhere from 20 percent to 30 percent of the original inventory investment just to maintain it. Buying excess inventory also reduces your liquidity-something to be avoided."

When you find yourself with excess inventory, your natural reaction will probably be to reduce the price and sell it quickly. Although this solves the overstocking problem, it also reduces your return on investment. All your financial projections assume that you will receive the full price for your goods. If you slash your prices by 15 percent to 25 percent just to get rid of the excess inventory, you're losing money you had counted on in your business plan.

The final message of the article was in any type of business it is necessary to try to avoid excess inventory establishing a realistic safety margin and order only what you can sell.