Managing inventory

Let’s look first at companies that sell tangible products and for which inventory is an important part of the business. Managing that inventory is a high-level skill. Too little inventory results in lost sales and a furious and frustrated sales force, while too much inventory ties up large quantities of cash and may put the business in a precarious financial position. Thus, the person that manages the inventory has the head of sales on one side and the financial officer on the other side reminding him of what he should do.

In short, every dollar of your inventory is a dollar that you no longer have in cash. But you know that you need inventory. It’s the “stuff” that customers come to buy. No stuff, no sale. And sometimes, if we don’t have the stuff on hand, the customer leaves to shop where they have stuff.

Our experiences indicate that the most common problem related to inventory is that businesses usually carry too much of it. Sure, there are firms that have too little inventory (those are the “backorders” and “stock out” notices you get), and there are those who do a masterful job of balancing the need for sales and cash flow. Good for them.

For most firms, however, that is not the case. These companies need to focus on how to reduce their excess inventory and get cash back into the business. Fortunately, this can actually be done.