Managing Your Company’s Inventory

By Lawrence Chester

Every business owner knows that one of their biggest assets is Inventory. But if your business doesn’t have shelves in a warehouse filled with products for sale, you might think that you don’t need to worry about all of the issues and problems that go along with managing, protecting and selling that inventory. Actually, there are different kinds of inventory, and as a result, every business has inventory. Trust me. It doesn’t matter if you’re a manufacturer, a restaurant, or a law firm. Each one of these organizations has inventory, but they’re all different, and need to be managed differently. Here are the three main categories of Inventory. Then let’s talk briefly about each one:

1. Durable Inventory – Inventory items that have no specific shelf life and remain usable over a long period. They may become obsolete over time, but the business has time to manage the inventory as those changes start to take place. Think of manufacturing companies, retailers, any company that is making or selling “hard goods.”

2. Perishable Inventory – Inventory items that have a limited shelf life and can spoil, degrade, or become unusable in a short period of time. The big issue is understanding the “expiration date” and assuring that you use up that inventory before you need to discard it. Think of restaurants, grocery stores, pharmaceutical companies.

3. Volatile Inventory – Intangible inventory that is defined by service capacity, such as man-hours. It cannot be stored, transferred, or used later. This requires more management because the risk of loss is greater, and the loss is instantaneous, and irrecoverable. Think of any company that sells services. Medical practices, Law Firms, Consulting Firms,

Durable Inventory

When people think of Inventory, they primarily think of durable inventory. These are things that you can hold in your hand, or put in a cart, and they will look the same next week or next month as they do today. If you are responsible for durable inventory, here are a few things that can help you manage that inventory.

Management tips:

• Performing Regular Inventory Cycle Counts fine tunes your inventory management, and reduces operational errors, keeping your perpetual inventory accurate.
• Using “Just In Time” inventory management allows you to become more efficient, and reduces your financial commitment in inventory since your suppliers will deliver the inventory just as you need it, saving you time, space and money.
• Taking advantage of Vendor Managed Inventory allows your supplier to maintain your inventory at predetermined levels. This reduces your financial commitment, while making your supplier responsible for inventory management.

KPIs: these are measuring sticks that make sure that you’re managing your inventory pragmatically, not just by gut.

• Inventory Turns – measures how often your inventory is sold and replaced. Don’t only measure this by total inventory. Calculate it by individual item or at least by item family group. This will give you a better handle on not only how fast the inventory is moving, but watching trends will tell you if you need to change the amount of inventory you’ve got on hand – if sales are slowing down.

• Carrying Cost – this is the price you pay for having your inventory on the floor, available for sale. The cost of storage, insurance and even obsolescence are the cost of holding those items on a rack waiting for shipment to your customers.
• Landed cost – this is the total cost of inventory, including all of the freight charges, tariffs, duties, packaging or anything else that needs to be done to make sure that you can ship immediately upon receiving the order.

Perishable Inventory
This inventory has a short shelf life. In a grocery store or restaurant, we know that fresh food can spoil, and there is no bringing it back. In the pharmaceutical industry, drugs have a certain shelf life before they become unsafe, or their efficacy is reduced. Both of those categories are among inventory that is perishable.

Management Tips:
• FIFO Method: Implement a first-in, first-out approach to ensure the oldest stock is used first, reducing waste.
• Tight Inventory Control: Keep close tabs on inventory levels and shelf life to make timely decisions on markdowns or promotions.
• Temperature Control and Handling: Ensure proper storage conditions to extend the life of perishable goods.

KPIs:
• Shrinkage Rate: Measures the loss of inventory due to spoilage, theft, or damage.
o Calculation: Value of Lost Inventory ÷ Total Inventory Value x 100
• Sell-Through Rate: Measures the percentage of inventory sold within a specific time frame.
o Calculation: Number of Units Sold ÷ Number of Units Received x 100
• Stockout Rate: Frequency of inventory shortages.
o Calculation: Number of Stockouts ÷ Total Sales Opportunities x 100

Volatile Inventory
This is Intangible inventory, which you can’t hold in your hand, or give to someone else. It is represented by service capacity, such as man-hours, that cannot be stored or transferred. This is used by Consulting firms, Law Firms, Medical Practices, Marketing agencies, Banks.

Management Tips:
• Use Time Tracking software to monitor how employees utilize their time, helping to identify unproductive hours.
• Flexible Scheduling: Adjust staffing based on demand to minimize idle time.
• Employee Training: Continuously train employees to enhance efficiency, reduce downtime, and create additional opportunities for utilization. Cross training allows employees to fill in where needed, reducing idle time.

KPIs:
• Utilization Rate: Measures the percentage of billable time used out of the total available time.
o Calculation: Billable Hours ÷ Total Available Hours × 100
• Revenue Per Employee: Indicates the revenue generated per employee, reflecting productivity and efficiency.
o Calculation: Total Revenue ÷ Number of Employees
• Client Satisfaction Score: Assesses the quality of service based on client feedback, impacting future service utilization.
o Calculation: Typically through surveys rated on a scale, then averaged.

Consulting firms use the Utilization Rate to optimize the allocation of consultant time.
Marketing agencies might focus on Client Satisfaction Scores to gauge service success and areas for improvement.

By tracking these KPIs, businesses in each inventory category can not only measure current performance but also pinpoint areas for improvement and strategize accordingly. Integrating these metrics into a company’s month-end analysis provides insights for business owners looking to enhance their inventory management and overall operational efficiency.

For each inventory category, it’s beneficial to see how business owners can measure both their efficiency and losses through various metrics and KPIs. For example, tracking the turnover rate in durable goods, the spoilage rate in perishable goods, or the billable utilization rate in volatile inventory sectors. The key is that businesses that measure their performance with hard numbers are better able to identify the direction of company performance, and how quickly things are improving or getting worse. Only then, can you truly make changes today that affect profitability tomorrow.