Product quality and customer service won't matter if you can't get inventory in the right place at the right time. Failing to fix an inventory problem could mean the end of your business.
When tackling an inventory problem, remember bookkeeping services don't just track your dollars and cents. They also track your inventory movements to give you full control over your business. Here's how improving your systems can solve common inventory problems.
Inability to Find Inventory
How many times have you had to delay an order or tell a customer an item was out of stock because you couldn't find a part in the back room? How many times have you later found an extra box of parts buried in the back, days or weeks later?
Inventory management isn't just about placing orders. It's about knowing how much you have and where it is.
The "how much" is obvious. You want the ability to order according to your typical demand and know when it's time to reorder stock or delay a reorder from too much inventory on hand.
The "where" is possibly more important. If your inventory count says you have a part in stock but you can't find it, you might assume it was lost or not recorded properly. If your inventory tracking system tells you exactly where everything is, and you stay organized, your inventory will never go missing again.
Failing to Meet Orders Due to Inadequate Production
Sometimes, the problem isn't tracking of current inventory but inability to meet future demand. The first step is having your bookkeeping services gather as much data as possible so you can track and forecast demand by season, month and week, or even specific days.
Once you have that data you can determine your production goals. First consider whether you could meet demand by increasing production, starting production slightly sooner before high-demand periods, or freeing capacity by reducing production of low-demand items.
If you can't meet the needed demand on your own, consider a co-packer or other outsourcing arrangement. Even though this decision brings in another party you need to pay, that party's economies of scale could still allow you to acquire inventory at a lower cost than you could on your own.
Unbalanced Inventories Between Locations
If you operate multiple retail locations or ship out of multiple warehouses, you may find that one location quickly sells out of an item while another always has excess inventory. This outcome is almost always due to taking a one-size-fits-all approach and ordering the same quantities of inventory for each location.
Don't forget that local weather, lifestyle and preferences dictate how quickly inventory will move. Even two different neighborhoods in the same city may have different wants and needs. Your demand forecasts should be broken down at both the regional and store level.
Lack of Storage Space
Fears of insufficient inventory often leads to the opposite problem — having more inventory on hand than you can handle. Trying to take advantage of bulk pricing can also lead to you ordering too much.
While losing an order can cost you money, storing and handling inventory isn't free either: You may pay extra rent for a larger warehouse, store or factory. If you can't readily access your inventory, you lose operational efficiency and incur labor costs each time inventory has to be shifted around to gain access to an item. Having more inventory on hand also means a greater potential for loss due to spoilage or damage during a power failure, natural disaster or other mishap.
The just-in-time approach, where you forecast demand and only order the exact amount you need, avoids those problems. If you're considering keeping extra inventory on hand, have your controller services run a cost-benefit analysis to determine the ideal amount and how to handle it.
Wasted Surplus Inventory
Excess inventory isn't just a storage problem. Some items go out-of-season, out-of-date, out-of-fashion or past their expiration date. You then face additional storage costs, write-down losses or lost profits due to clearance mark downs.
When dealing with these types of inventory, you need to take a more conservative approach in your forecasting due to the greater risk of a total loss. Unlike typical demand forecasting where you might assume everything will eventually sell, you'll have to build the risk of loss into your projections.
Poor Cost Controls
Another common inventory problem is poor cost controls. This problem is especially common in manufacturing and food service, where multiple inventory items are combined into a single end product.
For example, a sandwich shop might sell every sandwich for $7 despite different costs for the meats, cheeses and toppings. While its overall profit margins might be good, the margins for individual sandwiches could be weak or even negative.
Understanding inventory costs at the individual item level is critical. While high-level summaries can be helpful, your bookkeeping services should also help you break down inventory usage and costs for every SKU you offer.
Inaccurate Inventory Counts
More often than not, your manual inventory counts won't match your computer inventory reports. Improving your inventory management system will reduce inaccuracies, but it's still only good as your people.
Once your inventory management system is in place, you need to thoroughly train your employees on how to use it properly and explain why it's important for them to do so. One of the most important points to emphasize is that all inventory, including damaged items and disposable waste, should be tracked. You can only improve your operations if you know exactly what's happening in your business.
Need more accounting guidance? Check out our white papers: