"Inventory" to many business owners is one of the more visible and tangible aspects of doing business. Raw materials, goods in process, and finished goods, all represent various forms of inventory encountered in a manufacturing organization. Each type represents money tied up until the inventory leaves the factory as a purchased product. Likewise, merchandise stocks in a retail store contribute to profits only when their sale puts money into the cash register.

In a literal sense, inventory refers to stock of anything necessary to do business. These stocks represent a large portion of the business investment and must be well managed in order to maximize profits. In fact, many small businesses cannot absorb the types of losses arising from poor inventory management. Unless inventories are controlled they are unreliable, inefficient, and costly. In attempting to control inventories, managers usually lean towards keeping inventory levels on the high side, yet this greater investment (given a constant amount of profit), yields a lower return on the dollar invested. This is one of the contradictory demands made upon the manager with respect to keeping inventory, others include:

Maintain a good assortment of products - but not too many;

Increase inventory turnover - but only at a good profit level;

Keep stocks low - but not too low;

Make volume purchases to obtain lower prices - but don't overbuy; and

Get rid of obsolete items - but not before their replacements have taken hold in the market.

Successful Inventory Management

Successful inventory management involves simultaneously attempting to balance the costs of inventory with the benefits of inventory. Many business owners often fail to appreciate fully the true costs of carrying inventory - which include not only direct costs of storage, insurance, taxes, etc., but is also the cost of money tied up in inventory. And it is often not realized that small reductions in inventory investment may result in large percentage changes in the company's total cash position. For example, one reward of improved inventory management may be an increase in working capital without the necessity of having to borrow money.

Computation of the Inventory Turnover Rate

One commonly used, simple measure of managerial performance is the inventory turnover rate. This value gives a rough guideline by which managers can set goals and measure performance, but it must be realized that the turnover rate varies with the function of inventory, the type of business, and how the ratio is calculated (whether on sales or cost of goods sold). For example, on a cost of goods sold basis, the average inventory turnover rate for manufacturers of paperboard containers ranges from 4.5 to 21.0.

Values such as these are published periodically by the trade associations and professional organizations; they can be useful in setting guidelines for one's own company, but must be used with care.

Manual Record keeping Methods

At a very basic level, business inventory records provide the information needed to make decisions about inventory management. But the number and kinds of records maintained, as well as the type of control system needed, depend upon the type and size of inventory. In very small businesses where visual control is used, records may not be needed at all or only for slowly moving or expensive items. But in a larger organization where many items from various suppliers are involved, more formal inventory records, such as kardex files, are appropriate. In such a case, regardless of the type of records maintained, the accuracy and discipline of the recording system is critical. It is important to remember, however, that in many cases attempts to improve management and reduce costs fail, not simply because of insufficient records, but rather because of inaccurate and carelessly recorded inventory data.

Many small manufacturers, wholesalers, and retailers with relatively few items in inventory use manual inventory control system. They use card records, inventory tags and accounting data to capture the information necessary to establish economic order quantities, order points, and other parameters for effective inventory control. However, as the number of item, supplies, and general importance of inventory increases, it is often desirable to consider use of a computerized system for inventory control.

Using Computers in Inventory Management

Today, the use of computer systems to control inventory is far more feasible for small business than ever before, both through the widespread existence of computer services organizations (listed in the yellow pages of many telephone directories) and the decreasing cost of micro computers. Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer.

Most computer manufacturers offer free, written information on the inventory management systems available for their computers. In addition, computer service companies often have material readily available describing the use of their particular computer "software" programs for inventory management. These companies provide a good source of information on general descriptions of particular inventory management techniques, as well as help on specific inventory management problems.

Whether a manual or computerized inventory management system is used, the important thing to remember is that inventory management involves two separate, but closely related elements: the first is knowing what and how much to order, when to order and what price to pay; the second is making sure that the items, once brought into inventory, are used properly to produce a profit.

Stock Control

Stock control is necessary if the retailer is to offer customers a balanced assortment. A system need not be elaborate. It should enable the retailer to determine what needs to be ordered on the basis of: (1) what is on hand, (2) what is on order, and (3) what has been sold.

The kind and amount of paperwork necessary for effective stock control depends largely on the type of merchandise. This Guide emphasizes unit control. Unit control provides information about; breadth of assortment, depth of assortment, number of brands stocked, and quality of line stocked.

Maintaining effective control over stock is important in all kinds and sizes of retail operations, but it can be critical in a small one. At best, the owner-manager of a small retail store flirts with loss when stock becomes unbalanced.

The type of merchandise you handle will largely determine the kind and amount of paperwork needed for effective stock control. For example, control of perishables - such as in a delicatessen - requires no paperwork. Stocks are controlled visually. Many deliveries - such as milk and bread - are daily, and others are frequent. In addition, the supplier's route people have a self-interest in helping keep stocks fresh.

But even so, the owner-manager may need some sort of reminder - perhaps a note on the calendar - to make periodic checks. The important thing is to watch for changing customer demands requiring changes in your purchases.

The situation is different, though, with parts inventory in a service operation and with sizes and styles in an apparel store. For example, the owner-manager of a shop that specializes in motor tune-up may keep track of the parts used every day with little effort. But what about those used only once a month? Some sort of record is necessary if the right parts are to be on hand when needed.

In shoes, ladies ready-to-wear, and other soft goods stores style, colour, and sizes complicate the problem of stock control. A great deal of paperwork may be necessary in order to serve customers properly and to prevent over or underbuying.

The Basic Picture

The owner-manager of almost any store can sketch the basic picture of stock control. It involves four facts: (1) what you have on hand, (2) what you have on order, (3) what you have sold, and (4) what you need to order.

But whether or not these facts are used to achieve effective control is another story. A memory lapse on any of them can mean being out of stock or overstocked on an item, a style, a colour, or a size.

What Kind of Records?

Stock control records help prevent memory lapses. They estimate the need for carrying details - especially on style, colours and sizes - in one's head, a trying task. They provide a container into which the owner-manager can deposit details.

The kinds and number of control records which an owner-manager uses depend on the amount of details that are needed. Stock control systems may be achieved either by counting stock or by counting sales. Either way, a model stock list is required.

The Model Stock List

A model stock list is the first step in setting up a replenishment system for merchandise that involves styles, colours and sizes. You prepare a list of all the items you want to control.

The list should include "model stock" quantities. These quantities are the amounts needed in order to maintain an "in stock" position for a certain period - usually a number of weeks.

You can use a simple formula to determine the period of time to be covered by the model quantity. It is: Reorder Period + Delivery Period = Number of weeks.

Suppose that you order shirts every 6 weeks and delivery from the vendor takes 2 weeks, your number of weeks to be covered would be 8 (reorder period of 6 weeks + delivery period of 2 weeks = 8 weeks). Suppose further that you sell an average of 10 shirts a week. In this example, you would need 80 (10 x 8 weeks) to maintain the stock of shirts.

When size is a factor, as in shirts, the necessary size run should be noted on the model stock list. You know from experience which sizes of an item are best sellers, which are medium sellers, and which are low sellers. Best selling colours can also be noted.

Some model stock lists - women's clothing, for example, - include a special section. This section is called maintained selection items. Its purpose is to flag items that change with the fashion.

The term, "maintained selection items," implies groups of items which can be substituted for each other. Girls' blouses provide an example. When they reach the reorder point, you may need to order a new style to replace the old style. Examples of the selection item groups are infants' wear, and children's wearing apparel.

Merchandise of the selection type should be listed on the reorder records in groups by classification, item, and price. Such a listing will insure stocking a given price line at all times with proper merchandise. At the same time, it provides a record of the sales activity on the individual style.

Counting Stocks or Sales?

Counting is the basis for getting the information necessary for effective control. You can count stock on a periodic basis or you can count it daily by counting sales.

Which is best for your situation depends on the kind of merchandise you carry and the amount of work involved for you and your salespeople. Your goal should be to use a method which will provide up-to-date information at the most economical cost.

If You Count Stock

Your situation may lend itself to counting the stock on a periodic basis. If so, you would use what is called "the rotated method" and record the information on cards.

In the rotated method of stock control, you use rotated unit control cards. The format varies according to the kind of merchandise, but the kind of information is the same. With such a card, you keep track of an item, such as shoes by listing: (1) what is on hand, (2) what is ordered, (3) what has been received, and (4) what has been sold. Once every 2 weeks, the stock is counted to determine how well an item is selling.

If sales are dragging, you may decide to close out the item. If sales are normal, you would order fill-ins. On the other hand, the stock count and other information on the card may reveal that sales are greater than activity on the sales floor has indicated. If so, your decision may be to increase the filling order and plan to promote the item.

The principle behind the rotated method is: Old Inventory + Purchases - New Inventory = Sales. In this formula, you can substitute the word "disappearance" for the word "sales". Disappearance represents shoplifting, inaccuracies in counting inventory, and sales.

If You Count Sales

The other method for controlling stock is the perpetual method. In it, stocks are calculated from the store's recorded sales.

If you use this method, you have to keep track of sales when they are made, on an item basis. Its usefulness depends on whether the device you use captures the information with a minimum of effort and chance for error. The owner-manager with a fairly large sales volume should check the possibility of using a computer service centre to count sales and create up-to-date stock records. Such data processing may be more economical than maintaining the records manually.

Even when electronic data processing is not used, cash register tape may be such a device for capturing the needed information. If a sales count is needed on only a few items, you could check the possibility of using your register to get the information. For example, "Key A" might stand for one item number, "B" for another, and so on.

Sales slips provide another device for recording the item sales. Still another is the price ticket which can be detached when the item is sold.

Whether the information comes from register tape, sales slips, or price tickets, it has to be related to your stocks, specifically to particular classes of merchandise. A drug store, for example, needs sales information on prescriptions, proprietaries, fountain, sundries, tobacco, confections, magazines, and toiletries. The best way is to summarize the information and post it daily to your stock records.

These up-to-date stock records provide the information you need for ordering fill-ins. You review them on a periodic basis - once every 2 weeks, for example - and reorder as needed. One disadvantage is that errors can creep into the posting of the daily sales. However, adjustments can be made through a physical count of stocks every so often.

If you have only one or two items that need unit control, you might want to work with price tickets. At the time of the sale, detach the ticket and file it for later posting on your record. The balance on hand after the posting will determine what you need to reorder.

The principle behind the perpetual method is: Old Inventory + Purchases - Sales = New Inventory.

Preventing Excess Stocks

In a small store, preventing excess stock serves two purposes. One is the maintenance of a balanced assortment which allows the store to serve customers. The other is the assurance that an excessive amount of working capital is not tied up in merchandise.

Open-to-buy is the key to keeping stocks in line. Open-to-buy is the amount of merchandise (in units or dollars) that you need to receive into stock during a certain period.

The period may be the selling season that is customary for a certain line of merchandise. Or it may be a time-span that is set by the owner-manager to fit his or her particular situation.

At the start of the period, a merchandise classification - such as blouses - is open to receive the number of blouses that is necessary to achieve the sales you expect to have in that period. Suppose, for example, that you expect to sell 200 blouses. To start the season, you buy and receive 160 blouses. Thus you are open to buy an additional 40 blouses.

The 40 is your control figure when your order fill-in stock. As long as you buy no more that 40 during the season, your investment in inventory for blouses will be no greater that you had planned.

But what happens if customers make a run on the blouses? If sales activity is tremendous early in the season and you can get a new stock within the next several weeks, the question is a merchandising one. How hot is the hot item? Repeat if halfway? Or is it a freak situation that will have cooled off before new stocks can be received and promoted?

After you have decided how heavily to restock the item, you set a new open-to-buy figure. Living within it keeps your inventory investment within your plans and prevents an excessive stock which might have to be marked down at the end of the season.

A side benefit from stock control records is that they are helpful in delegating work. They provide concrete tools which you can use in training an employee to care about details, such as counting stock.

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