Friday, September 18, 2015

Inventory Management: Striking the Right Balance

inventory management: striking the right balance
“That order will be delivered within the next day. It will be picked and shipped as soon as I hit ENTER. Thank you so much for making us your number one supplier. We value your business”. Once the ENTER key is pressed, will the inventory be available to fulfill the order? Does the computerized inventory system actually show what is available in the warehouse? Nervously, you strike the key praying the promise of next day delivery is met.
Inventory management is vital to the operation and success of any organization. Simply stated, inventory management ensures items are in stock to meet customer needs. A more complicated view considers the intricate balance between keeping too much and not enough inventory available for shipment. Pros and cons exist for both arguments. 
Too Much Inventory:

  • Illiquidity-Inventory is less liquid and is difficult to convert to cash for many reasons. Tying up too much money in inventory hurts cash flow. Banks will typically only lend about 50% of the value of the inventory.
  • Markdowns-Overstock could lead to selling product at greatly reduced prices just to make space for newer materials.
  • Obsolescence-Inventory may need to be reduced in value or worse, become worthless as newer products are brought to the market. This is especially true in technology-focused industries.  
  • Carrying Costs-Inventory has carrying costs. Interest on bank loans, insurance, warehousing expense, etc. can literally eat away the profits of a company.
Too Little Inventory:

  • Missed Sales-A company cannot sell what is not available.
  • Missed Favorable Purchase Prices-This occurs when an unanticipated increase in price occurs or there is an opportunity to buy in bulk. Buying materials at the lower price is often advantageous unless you end up in an overstock situation.  
  • Lost Customer Loyalty-Customers will go to the competition when their needs are not met.
Attaining Sound Inventory Management
The goal is carrying as little inventory as possible without encountering a shortage. Sound inventory management helps manufacturers eliminate shortages by determining the optimal point of reorder known as the economic order quantity. Implementing an automated inventory tracking system, often referred to as a manufacturing response planner (MRP) helps to eliminate shortages and can even be a competitive weapon.
Larger retail outlets will often ask if their inventory procurement systems can talk directly to your computer system. Unfortunately, the old adage of ‘garbage in garbage out’ applies to inventory data as well. Personnel that do not take inventory management systems seriously can often destroy the integrity of the inventory data and completely disrupt operations.
A good inventory system considers many things when determining the appropriate level of inventory. Some of the most important ones are:
  1. Current Demand
  2. Anticipated Demand
  3. Economic Health
  4. Cost of Materials/Labor
  5. Confirmed Sales Orders
  6. Anticipated Cost of Materials/Labor
  7. Seasonal Factors
  8. Physical Inventory Adjustments
  9. Inflation
MMTC can help you improve efficiencies and operations as they related to your inventory. For more information, call 888.414.6682 or email
Since 1991, MMTC has assisted Michigan’s small and medium-sized businesses compete and grow. Through personalized services fitted to meet the needs of clients, we develop more effective business leaders, drive product and process innovation, promote company-wide operational excellence and foster creative strategies for business growth and greater profitability. Find us at

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