It’s always a pleasure connecting with various people through this blog, whether they are fans or new comers discovering this blog through any means. You are warmly welcome. Our goal is to share as much as possible, quality information regarding entrepreneurship or business management, so that entrepreneurs globally can improve their enterprise management. While some entrepreneurs have many things right in their businesses due to the internal availability of skill and knowledge bases including the right human capital, other entrepreneurs don’t have that advantage or privilege and cannot even afford to pay for consultants or knowledgeable staffs, and hence rely on tips from websites and resources such as this to improve the management of their enterprises. We aim to ensure that enterprises are run profitability, efficiently and effectively, with social, ethical and environmental responsibly, and in a sustainable manner in the interest of entrepreneurs, other stakeholders and humanity in general.
Well, after that primer, let me get into our topic of the day – INVENTORY. The word inventory refers to raw materials, work-in-progress, finished goods, spare parts and other supplies that businesses use in the normal course of business. The terms ‘stocks’ or ‘merchandise’ also refer to inventory. Inventory management refers to the entire process involved in ordering, storing, using and accounting for inventories. Today our focus is on vital or principal facts and considerations an entrepreneur must know about inventory. Before we proceed, let me say here that some enterprises do not hold inventory and hence these points may not be relevant to them. For entrepreneurs to whom inventory is critical, let’s proceed and consider these points. These are vital considerations that can help you minimize costs, avoid and minimize losses, keep your customers happy, and comply with laws and regulations. Moreover, you have lots of gains in your business by following these guidelines. Come on!
So, what are the principal considerations for an entrepreneur regarding inventory or stocks?
- For many business inventory is critical to business operations. Those entrepreneurs who hold large volumes of inventory might have an idea of what I’m talking about here. Don’t you agree with me? In some enterprises managers cannot afford even to spend a day without focusing on inventory because it’s the heartbeat of the business. Proper planning and activities including putting money into inventory can determine success or failure in some businesses. Imagine a situation where your customers or other distributors want stocks from you urgently and you don’t have them. It’s much more than missed business. They may psychologically downgrade your business or think you are simply not serious, and may never come back another day. How about home consumables? There are periods when demand spikes. An example is Christmas period – and we have the next approaching by the way. Beyond business, there is also life. Consider emergency and life-saving items such as medical supplies. I leave it to you to determine what happens when such supplies run out! Inventory also determines contract fulfillment. Businessmen sometimes go to court regarding contract terms not met due to poor inventory management. It’s that serious. So take note!
- Where high volumes of inventory are maintained there are significant financing and other holding costs involved. By the way, stock is money. Depending on what you deal in, this could translate into tens and hundreds of millions worth. Inventory holding costs include interest (financing costs), insurance costs, storage costs such as rent, power, staffing, security etc. These are not small things to toy with if you hold huge inventories. The thing is – these costs hit your bottom line of profitability and could significantly reduce your profits or even wipe it out if you are a careless and unconcerned entrepreneur. Do you get what I mean? So, this is a principal consideration for an entrepreneur in respect of inventory. Most balance sheets (statements of financial position) of big companies have inventory as the most sizeable current asset (and overall assets) and hence you can have an idea of the implications of costs involved.
- Inventories must be kept secure and in the right conditions and situations. If you hold inventories Mr. Entrepreneur, ensure that you have in place good practices in keeping your inventory or stocks. Your warehouses must be spacious enough, well lit, ventilated and always kept clean and in hygienic conditions. In some countries authorities do regular visits of warehouses but in others they don’t. It should we well organized. Physical access must be restricted and only done with authority. Physical security of your warehouses is also vital. Your stock items should be properly labeled and easily identifiable, with proper records of quantities and units of measure. Sensitive goods such as chemicals and foods normally have statutory and regulatory guidelines in terms of storage. If you need trouble, simply ignore these points. The day when some government guys pass by and close your warehouse including your entire business, and additionally fine your business huge sums, is the day that your brain starts working like a clock. I’m not joking! You will remember that someone one day advised you about inventory management in some blog. Fire extinguishers should be put in place to combat fire when it starts. Ignore these issues at your peril! Don’t blame anybody! Ok? Destructions or disposals of expired or damaged stocks have to be approved by a senior person in the enterprise. For some sensitive or regulated items you have to involve regulators before you destroy or dispose the items, or even hand over the items for controlled destruction or disposal.
- You should optimize your inventory holdings in light of supply, demand and costs. Now, optimizing your inventory means having a logical and conscious choice of what you stock, the quantities you stock and at what costs etc. Regarding costs, you can work with your suppliers, financiers, insurers etc. to reduce and minimize costs. The aspects of demand and supply are critical to inventory holdings. It’s not advisable to hold too much or too little inventory. Some reasonable forecasting of demand and supply, and working with your procurement staffs, can help you optimize inventory. Your need to factor ordering costs, the lead time (time between ordering and receiving stocks), cost of carry or holding etc. into your inventory optimization plans. I guess you have a good idea of the cost of stock-outs anyway. Optimizing your inventory ensures that you keep your costs down while satisfying demand on a timely basis and making your customers happy. Of course you know that when they are happy they will keep coming back and also promoting your business. Don’t you like this loyalty?
- The Just-In-Time (JIT) approach to inventory management. Closely connected to inventory optimization above is the concept of just-in-time inventory management approach. This is another principal consideration for an entrepreneur regarding inventory or stocks. This principle is reported to have originated in Japan. I know I have referred to the Japanese in many blogs I have posted. You don’t need to blame me for it, or for being discriminative. I’m simply emphasizing good business principles that those folks have, and I believe you agree with me that those guys are ahead of the entire world in some things. This should not attract jealousy but rather opportunities to learn from them and improve. The just-in-time approach dwells on ordering inventory just at the time they are needed. This minimizes holdings costs and ensures you only stock what will go out in the shortest possible time. I mean, you order on demand. Now, while this principle is good, you need to consider other factors such as logistical issues, volumes, demand timing etc. However, if you can adapt and practice it, why not? Get smart my dear entrepreneur! The world is moving forward.
- Insure your inventories. By the way, when I talk about insurance I know that there are many entrepreneurs out there who dislike insurance, and will run away from insurers if they have the opportunity to. No wonder in some countries insurance uptake is very low. The good thing is that there are also smart and persistent insurers who will still get such entrepreneurs occasionally and with some good luck. Such entrepreneurs insure nothing, not stocks, not fixed assets, not inventories, not staffs, not business risks, nothing. Some are forced by the laws to insure. Now, that is terrible I think. My candid opinion is this. Insurance expenditure is not a waste. Your stocks are very valuable enterprise assets and you should insure them against loss, theft, damage by fire etc. This does not mean you get careless with the stocks because you think some dumb insurance company will pay you whatever happens. Ok? Insuring your stocks covers your back in the event that some mishaps occur. You might not get entire compensation but you have a good starting point. This can wipe away your tears and help you maintain some sanity. I have seen some entrepreneurs cry like babies when fire guts their facilities with uninsured stocks worth zillions. Some are fiction-like situations. Not pleasant. Why do you carry that risk?
- Maintain proper records of your inventories. Another principal consideration in inventory management is the aspect of record keeping. This could be either manual or computerized, or both. We are in the dot.com age but there are entrepreneurs who still don’t appreciate and use computers. Some due to real limitations in education and possibly resources, but some just dislike and mistrust those gadgets. They prefer the old ledger books that they can physically handle with the assurance that their records are intact. You need to maintain good records of your stocks, indicating the flow. I mean what comes in and what goes out and the balance at any one time. Record keeping ensures you are in control of your stocks (type, quantity and value), helps avoid and detect losses or waste and helps your procurement planning. You also need inventory records to do accurate financials for your business, and also drive sense in some ambitious and aggressive taxmen who might want you to pay your entire life in tax. If however, you knowingly distort your inventory records to evade tax that is up to you! I’m not in that. It’s your choice.
- Segregate roles and responsibilities for people in charge of inventories. The principles of internal control in business advise that you should separate roles and responsibilities in managing inventory. For example, the person purchasing should not be the one maintaining the records or keeping stocks. The person keeping stocks should not purchase or maintain records. I know there are limitations in small businesses where possibly the entrepreneur is the CEO, human resource manager, procurement manager, storekeeper and accountant. Don’t worry at all. You will grow with time. The main idea in separation of roles is to safeguard your assets from loss due to untrusted staffs. If you are the main and only person there you know entirely what you are doing. If you decide to steal or divert and mismanage your own stocks that is up to you! Ok? You reap what you sow.
- Carry out physical stock-checks periodically to confirm the status of your inventory. Again, in medium and large businesses where there are many employees, physical stock check is another important control element to detect and avoid loss. Beyond loss detection, generally physical stock-check in all businesses helps you confirm the accuracy of your records because physical stocks must agree with the stock balances the records indicates. Errors in records can be detected by physical stock counts and vice-versa. Physical stock-check also helps check the conditions of stocks and can guide corrective measures in a timely manner. Imagine that your enterprise has several large stores that you don’t even visit. You might one day be surprised to find infested stores and stock damage. So please, don’t ignore physical stock counts and stock checks. Do you understand?
- It’s advisable to have policy guidelines for inventory. This again may not be applicable to small enterprises run by one or three people. It might not make much sense. However in larger businesses that deal in and hold significant inventory items, there is need to have in place policies and guidelines regarding stocks. Such policies could cover areas such as ordering, receiving, storing, issuing, reporting damages, duties and responsibilities, stock-counts, warehouse management rules and procedures etc. The principle of segregation of duties and responsibilities, providing internal checks and balances, is an important element that has to be incorporated into these policies. Policies are another principal consideration in managing inventories or stocks. If you the entrepreneur cannot draft these policies, simply pay some good accountant or business consultant to do this for you. It should not cost you an arm and a leg and yet provides valuable safeguards to your resources, promotes accountability and ensures your enterprise operates well.
OK now. It has been another long one today, but I think entrepreneurs deserve it. The long write-up must now be balanced with a swift close and that is exactly what I will do.
So, till then,
The Wise Entrepreneur