If your business requires maintaining an inventory, you might sometimes feel like you’re walking a tightrope. Not having enough inventory means you run the risk of losing sales, while having too much inventory is costly in more ways than one. That’s why having an efficient inventory control system is so important.
Inventory is expensive to acquire. When you pay, say, $15 for an item from a supplier, you do so with the expectation that you will soon sell the item for a higher price, allowing you to recoup the cost plus some profit. As long as the item sits on the shelf, though, its value is locked up in inventory. That’s $15 you can’t use elsewhere in your business. So inventory control isn’t just about managing the “stuff” going in and out of your company; it’s also about managing your working capital, keeping you from having too much precious cash tied up in operations.
One of the worst things you can do in business is to turn away customers — people who are ready to give you their money — because you’ve run out of the item they want. “Stockouts” not only cost you money from missed sales, they can also make you lose customers for good, as people resolve to take their business somewhere that can satisfy their needs. An efficient inventory control system tracks how much product you have in stock and forecasts how long your supplies will last based on sales activity. This allows you to place orders far enough ahead of time to prevent stockouts.
When inventory isn’t managed well, you can also wind up with overstock — too much of certain items. Overstock comes with its own set of problems. The longer an item sits unsold in inventory, the greater the chance it will never sell at all, meaning you’ll have to write it off, or at least discount it deeply. Products go out of style or become obsolete. Perishable items spoil. Items that linger in storage get damaged or stolen. And excessive inventory has to be stored, counted and handled, which can add ongoing costs.
Inventory control isn’t just a concern for companies that deal in finished goods, such as retailers and wholesalers. It’s also critical for manufacturers, who maintain three types of inventory: raw materials, works in process and finished goods. If you run out of an essential ingredient or component, production will halt, which can be extremely costly. If you don’t have a supply of finished goods on hand to fill orders at they come in, you risk losing customers. Staying on top of inventory is essential if you’re to keep the line running and keep products moving out the door.