Increase Profitability and Customer Satisfaction by Effectively Managing Your Inventory

One of the biggest issues small businesses face is effective management of their inventory. The problem has two main causes - small business owners simply buy too much, or they don't pay attention to the levels they are selling through. As a result of either of these, small businesses wind up with too much inventory of products that aren’t selling and not enough of products that are selling.

I've worked as a business consultant with all kinds of companies, and I've seen that a lack of inventory control is one of the biggest frustrations for my clients. Whether your business is a furniture manufacturer or a hoist assembler, the supply chain is the supply chain. Estimate your needs incorrectly and you're out of luck in satisfying your customers' needs.

To get a sense of how true experts manage their inventory, I spent time speaking with Bob Kinney, President of Wiscolift, a manufacturing business I led on a strategic offsite meeting.

Kinney's business has two inventory areas. One is raw materials from which they manufacture their goods. The other is those manufactured goods themselves. Manufacturers have developed inventory management processes that other businesses can put to good use.

Assign Responsibility

In the past, Wiscolift would keep an inventory of both on hand, and have a min/max for all inventory items. Changes were made but never revisited, simply because it's a small business. "We would get an order for 60 units, so we manufactured those items and then restocked our inventory with 60 of those items. It didn't matter that it was a one-time order. We never went back and looked to see why items weren't moving," said Kinney. The company worked that way for years, until they realized that they were creating manufactured items and keeping them in stock simply because that's what they did in the past.

Kinney's first task was to get the inventory management moved under one person. I see this so often with small businesses -- every employee wearing many hats to get the work done. That only results in too many hands in the pot, and huge issues with inventory. This employee now has the sole responsibility of going through the computer system to change the min/max requirements on every product based on inventory usage.

Create a Leaner Future

Kinney credits much of the company's inventory management practices with the lean manufacturing process. The goal was to reduce inventory as much as possible by revisiting the company's processes and revising the way they manufactured products. Now when an order comes in, it gets manufactured right then and there, then pushed out the door. As the paperwork comes forward, the manager looks at recent history, anywhere from three to 12 months to see how often the product turned before another order is placed. "The inventory manager also has customer contact so they ask questions among customers to ensure that it's not a one-time order or to ensure it will be an ongoing order every 3 months and that helps better manage inventory as well," Kinney says. It's that insight that allows the company to keep as little inventory as possible on hand.

And it's that change to manufacturing "just in time" that allows the company to actually get products to customers faster because the company stocks next to no products. "It only takes five minutes to make a sling so there's zero value in manufacturing ahead of time. It's cut inventory of finished goods way back (nearly 30%)," says Kinney. That allows Wiscolift to customize every order without having unsellable items, those made incorrectly, or overproduced sitting in inventory.

So while Wiscolift gets a reduction in inventory, its customers get the custom product they want and need and aren't forced to purchase something ready-made that isn't quite what they're looking for. And that leads to greater customer satisfation and loyalty.

The company also is able to produce more with only two people, versus having four for the job. So the company purchased equipment to reduce its workers while maintaining output.

Conduct Frequent Physical Inventories

Other businesses could take a cue from manufacturing companies, many of whom conduct rolling inventories. For most manufacturers, physical inventories are conducted on an ongoing basis with every category being counted twice a year. This reduces the burden of counting all inventory once or twice a year -- you don't have to close shop, and it reduces employee fatigue because you're not counting for eight or 12 hours at a time, which leads to employee fatigue and invariably, to mistakes.

Kinney trumpets rolling inventories as the way to get a handle on inventory issues, especially if you have difficulties in a particular area. "It's not a big deal to do it three or four times a year versus once a year." Kinney may recount an area up to six times a year if it becomes an issue, which usually uncovers process problems which can then be addressed.

Increase Profitability

A reduction of inventory, as in Wiscolift's case, leads to increased profitability. Imagine being able to reduce your inventory carrying costs by 30 percent. That's huge. And although their businesses may be different than manufacturing, many retailers have learned this holiday season that it's better to run out of a product versus being saddled by excess inventory, which only has to be marked down which reduces profitability significantly.

How are you managing your inventory and inventory process for greater profitability and customer satisfaction?