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Good inventory management equals big profits

Maintaining inventory costs money, but not having enough stocks means your supply would be compromised. Here\\\'s how to strike a balance.
By Rafael Santos |

The growth of businesses engaged in manufacturing or retail products distribution means the entrepreneur must constantly deal with an increasing list of inventory items to manage.

According to supply chain expert Arthur Kessel of logistics and freight handling company Accela Inc., a business owner\\\'s ability to manage inventory can spell the difference between big profits and huge losses. He says identifying your best sellers (fast movers) and items that don\\\'t move as quickly are keys to effective management of your precious assets.

"Most businesses need to bloat inventory to be able to supply demand. A businessman must always remember that a business typically only makes money from stock when it is purchased by a consumer. Until then, holding and maintaining inventory costs money, so you have to figure out a way to rationalize purchases first so it won\\\'t cost you too much," Kessel says.

He lists some of the steps an entrepreneur can take to help manage his inventory in an efficient and cost-effective manner.

1. Buy the right goods
Knowing what customers want is one of the first steps to knowing what item to stock up on and how much to buy. Any good businessman knows which of his products sell at any particular time, and by keeping track of trends you can accurately plot when the ebb and flow of the entire supply chain will be, Kessel says.



"Review sales from previous years, review your market place to look for new products your target market may require, think about the forecast for the economy over the next period and what that might do to your target market\\\'s purchasing power. Try to look at competitors to determine their effect on your sales, and use your experience to set out products to buy and the quantities to buy them in," he suggests.


Stocks typically accounts for a large portion of the business investment and must be well managed in order to maximize profits. Overstocking or buying less than what is required can spell doom for any small business, because the majority cannot absorb the types of losses they might incur.


With limited budgets, you are bound to go bankrupt if you keep on taking stabs in the dark. Only purchase items when you have accurate, actionable data. "Unless inventories are controlled, they are unreliable, inefficient and costly," continues Kessel.



2. Implement a stock purchasing plan
A carefully prepared purchasing plan can help ensure your business viability by decreasing wastage. Inventory has a huge impact on the company\\\'s bottom line, according to Kessel, and implementing a stock purchasing plan can help you avoid unwanted losses.


The stock purchasing plan contains the following elements.

  • What items to order
  • How many to order 
  • When to order 
  • When goods should be received 
  • What quantities should be in stock over the business cycle 
  • When reorders should no longer be placed; and 
  • When the item should no longer be in stock.


"You arrive at the answers to these questions when you are done doing a thorough research about how your business cycle goes. Track your progress on a daily basis, and collect and examine them over a period of time to come up with a plan. Since this is a plan, you should not only base it on assumptions but hard facts. Which items are selling? How fast are they moving? What items should I stock more of? All of these elements must be within the plan," he explains.


He also adds that entrepreneurs must also examine lead times for supply and delivery of goods to ensure the goods arrive at the right time for both you and the customer.


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