Running a small business means managing the most minuscule of details. There is no finer example of that than watching over your inventory. It is a part of every business that can make or break you.

While some businesses use order fulfillment services to capture and process orders, most need inventory on hand to have products readily available.

You need to have enough on hand to keep customers happy. Customers don’t like delays and you will eventually lose sales. But too much on hand and you’re asking for trouble.

You pay interest on finished products or materials. Storage and handling costs. Insurance. Taxes on unsold goods. There’s also the possibility for damage, spoilage and other kinds of loss. As important as any of that is that with too much inventory, cash gets tied up and can’t be used for other things.

Well-managed inventory, on the other hand, improves cash flow and the all-important bottom line. When done right and turnaround is quick, costs are in line and customers are happy.

So how do you keep inventory in line? Well, the right inventory levels are based on several variables.

Effective Lead Time

There’s no simple formula. It comes down to studying inventory and learning the variables. What product sells quickly? How fast can it be replenished? All products and materials aren’t used or replenished at the same rate. Once you learn the patterns, you can maintain sales and operations and keep costs down. And, of course, keep those customers coming back.

Inventory Buffers

There are some tried and true methods to keep inventory running smoothly.

Past history, future sales and production forecasts all help indicate necessary inventory levels. That said, most businesses create an additional buffer to handle short-term spikes in activity.

The key to making the buffer work for you is to balance its cost vs the cost and need for that on-hand inventory. The size of the buffer depends on the business; 5% additional inventory could be enough for all but the most unexpected circumstances.

Here’s an example-if an item costs $5,000 and a supplier delivers that item in two days, maintaining a buffer may not make sense. On the other hand, if a business is based on volume sales, then a larger buffer makes sense so no sales are lost due to lack of inventory.

Minimum Requirements

An effective inventory management system includes:

  • identifying and sourcing reputable suppliers who deliver on time and in quantities needed
  • pre-established stock levels
  • periodical reviews to adapt to changes in production capacity, sales trends and market forces
  • triggers that signal purchases or purchase delays when item or material price levels rise or fall dramatically

Customer relationship management (CRM) software can be a big help as it tracks sales and inventory needs. It’s also essential to developing sales and inventory projections.

Reduce Inventory Costs

Take inventory management to a higher level as the need for effective management increases, usually based on past sales and accurate sales projections.

Ask suppliers to help

Many suppliers will manage inventory, create just-in-time systems and even provide items and materials on consignment. That’s a supplier who’ll keep you happy and one you want to have a relationship with.

Create best practices

Having an adept knowledge of what works allows you to apply techniques across the supply chain. Companies with multiple locations often use localized inventory management practices-this allows them to use the best methods for inventory control, which streamlines and standardizes processes while reducing operating costs.

Adapt operating practices to inventory goals

When you produce large quantities, you need more raw materials and increased inventory levels. So, when you adjust production schedules, you save on total inventory costs and increase productivity when items are handled less frequently.

Dispose of obsolete stock

No one likes throwing away unused products or materials. So be creative to move them. Sell them at a discount or toss it all together. This will save you money and free up inventory in the long run.

Reduce inventory review time

With a shorter review time, you create faster order cycle times and often reduce the level of inventory needed on hand. Rather than orders placed on a physical inventory once a month-which takes longer to get new products or raw materials.

Optimize ordering processes

The more approvals you need, the longer your lead times are going to be. Find a process that sets order limits and avoids unneeded management approvals. This will keep re-order times shorter and allow you to control the time and the money better.

Analyze customer needs

Here’s a thoughtful approach-businesses that use products over time, like construction, can deliver portions of their order immediately. This allows for less total inventory and lower inventory costs. Always making sure that the lead time is short enough to meet their requirements.

Bottom Line

You can’t serve two masters. Let alone several. So, when figuring out what goals to chase, make it less about personal goals like hitting productivity targets. Inventory management is a direct line to the bottom line. It improves cash flow, optimizes inventory levels, and dramatically reduces the cost of keeping the excess product in storage. Which seems like the right goal to chase.