U.S. Small Business Administration MP-22





 INVENTORY MANAGEMENT



By: Floyd D. Hedrick

 Library of Congress, Washington, D.C.

 Frank C. Barnes, P.E., Ph.D.

 University of North Carolina at Charlotte

 Edward W. Davis

 University of Virginia, Charlottesville

 D. Clay Whybark

 Indiana University, Bloomington

 Murray Krieger

 

Editor: Jeannette Budding, Communications Manager

 National Association of Purchasing Management 



 Management and Planning Series

_________________________________________________________________

 

This publication is a merger of former SBA publications,

"Purchasing for Owners of Small Plants," "Buying for Retail Stores"

and "Inventory Management." 



While we consider the contents of this publication to be of general

merit its sponsorship by the U.S. Small Business Administration

does not necessarily constitute an endorsement of the views and

opinions of the authors or the products or services of the

companies with which they are affiliated.



All SBA programs are provided to the public on a non-discriminatory

basis.

_________________________________________________________________



 TABLE OF CONTENTS



INTRODUCTION



SUCCESSFUL INVENTORY MANAGEMENT



THE PURCHASING PLAN



CONTROLLING INVENTORY



DEVELOPMENTS IN INVENTORY MANAGEMENT



TIPS FOR BETTER INVENTORY MANAGEMENT



SPECIAL TIPS FOR MANUFACTURERS



APPENDIX

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INTRODUCTION



"Inventory" to many small 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. Each type represents money tied up until the inventory

leaves the company as purchased products. 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 stocks 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.

_________________________________________________________________



SUCCESSFUL INVENTORY MANAGEMENT



Successful inventory management involves balancing the costs of

inventory with the benefits of inventory. Many small business

owners fail to appreciate fully the true costs of carrying

inventory, which include not only direct costs of storage,

insurance and taxes, but also the cost of money tied up in

inventory. This fine line between keeping too much inventory and

not enough is not the manager's only concern. Others include:



 * Maintaining a wide assortment of stock -- but not spreading

 the rapidly moving ones too thin;



 * Increasing inventory turnover -- but not sacrificing the

 service level;



 * Keeping stock low -- but not sacrificing service or

 performance.



 * Obtaining lower prices by making volume purchases -- but 

 not ending up with slow-moving inventory; and



 * Having an adequate inventory on hand -- but not getting

 caught with obsolete items.



The degree of success in addressing these concerns is easier to

gauge for some than for others. For example, computing the

inventory turnover ratio is a simple measure of managerial

performance. This value gives a rough guideline by which 

managers can set goals and evaluate 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). Average inventory

turnover ratios for individual industries can be obtained from

trade associations.

_________________________________________________________________



THE PURCHASING PLAN



One of the most important aspects of inventory control is to have

the items in stock at the moment they are needed. This includes

going into the market to buy the goods early enough to ensure

delivery at the proper time. Thus, buying requires advance

planning to determine inventory needs for each time period and 

then making the commitments without procrastination. 



For retailers, planning ahead is very crucial. Since they offer

new items for sale months before the actual calendar date for the

beginning of the new season, it is imperative that buying plans be

formulated early enough to allow for intelligent buying without any

last minute panic purchases. The main reason for this early

offering for sale of new items is that the retailer regards the

calendar date for the beginning of the new season as the

merchandise date for the end of the old season. For example, many

retailers view March 21 as the end of the spring season, June 21 as

the end of summer and December 21 as the end of winter.



Part of your purchasing plan must include accounting for the

depletion of the inventory. Before a decision can be made as to

the level of inventory to order, you must determine how long the

inventory you have in stock will last. For instance, a retail

firm must formulate a plan to ensure the sale of the greatest

number of units. Likewise, a manufacturing business must 

formulate a plan to ensure enough inventory is on hand for

production of a finished product. 



In summary, the purchasing plan details:



 * When commitments should be placed;



 * When the first delivery should be received;



 * When the inventory should be peaked;



 * When reorders should no longer be placed; and



 * When the item should no longer be in stock.



Well planned purchases affect the price, delivery and 

availability of products for sale.

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CONTROLLING YOUR INVENTORY



To maintain an in-stock position of wanted items and to dispose 

of unwanted items, it is necessary to establish adequate controls

over inventory on order and inventory in stock. There are 

several proven methods for inventory control. They are listed

below, from simplest to most complex.



 * Visual control enables the manager to examine the inventory

 visually to determine if additional inventory is required. 

 In very small businesses where this method is used, records

 may not be needed at all or only for slow moving or 

 expensive items.



 * Tickler control enables the manager to physically count a

 small portion of the inventory each day so that each 

 segment of the inventory is counted every so many days on a

 regular basis.



 * Click sheet control enables the manager to record the item

 as it is used on a sheet of paper. Such information is 

 then used for reorder purposes.



 * Stub Control (used by retailers) enables the manager to

 retain a portion of the price ticket when the item is sold.

 The manager can then use the stub to record the item that

 was sold.



As a business grows, it may find a need for a more sophisticated

and technical form of inventory control. 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 service organizations and the decreasing cost

of small-sized 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. 



 * Point-of-sale terminals relay information on each item used

 or sold. The manager receives information printouts at

 regular intervals for review and action.



 * Off-line point-of-sale terminals relay information directly

 to the supplier's computer who uses the information to ship

 additional items automatically to the buyer/inventory

 manager.



The final method for inventory control is done by an outside

agency. A manufacturer's representative visits the large retailer

on a scheduled basis, takes the stock count and writes the reorder. 

Unwanted merchandise is removed from stock and returned to the

manufacturer through a predetermined, authorized procedure.



A principal goal for many of the methods described above is to

determine the minimum possible annual cost of ordering and stocking

each item. Two major control values are used: 1) the order

quantity, that is, the size and frequency of orders; and 2) the

reorder point, that is, the minimum stock level at which additional

quantities are ordered. The Economic Order Quantity (EOQ) formula

is one widely used method of computing the minimum annual cost for

ordering and stocking each item. The EOQ computation takes into

account the cost of placing an order, the annual sales rate, the

unit cost, and the cost of carrying inventory. Many books on

management practices describe the EOQ model in detail.

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DEVELOPMENTS IN INVENTORY MANAGEMENT



In recent years, two approaches have had a major impact on

inventory management: Material Requirements Planning (MRP) and

Just-In-Time (JIT and Kanban). Their application is primarily

within manufacturing but suppliers might find new requirements

placed on them and sometimes buyers of manufactured items will

experience a difference in delivery.



Material Requirements Planning is basically an information system

in which sales are converted directly into loads on the facility 

by sub-unit and time period. Materials are scheduled more 

closely, thereby reducing inventories, and delivery times become

shorter and more predictable. Its primary use is with products

composed of many components. MRP systems are practical for 

smaller firms. The computer system is only one part of the total

project which is usually long-term, taking one to three years to

develop.



Just-In-Time inventory management is an approach which works to

eliminate inventories rather than optimize them. The inventory 

of raw materials and work-in-process falls to that needed in a

single day. This is accomplished by reducing set-up times and 

lead times so that small lots may be ordered. Suppliers may have 

to make several deliveries a day or move close to the user plants

to support this plan.

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TIPS FOR BETTER INVENTORY MANAGEMENT



What to do at time of delivery:



 * Verify count -- Make sure you are receiving as many cartons

 as are listed on the delivery receipt.



 * Carefully examine each carton for visible damage -- If 

 damage is visible, note it on the delivery receipt and have

 the driver sign your copy.



 * After delivery, immediately open all cartons and inspect 

 for merchandise damage.



Steps to take when damage is discovered:



 * Retain damaged items -- All damaged materials must be held 

 at the point received.



 * Call carrier to report damage and request inspection.



 * Confirm call in writing--This is not mandatory but it is 

 one way to protect yourself.



Steps to take when carrier makes inspection of damaged items:



 * Have all damaged items in the receiving area -- Make 

 certain the damaged items have not moved from the receiving

 area prior to inspection by carrier.



 * After carrier/inspector prepares damage report, carefully

 read before signing.



Steps to be taken after inspection has been made:



 * Retain damaged materials -- Damaged materials should not be

 used or disposed of without permission by the carrier.



 * Do not return damaged items to shipper without written

 authorization from shipper/supplier.

_________________________________________________________________



SPECIAL TIPS FOR MANUFACTURERS



If you are in the business of bidding, specifications play a very

important role. In writing specifications, the following 

elements should be considered.



 * Do not request features or quality that are not necessary

 for the items' intended use.



 * Include full descriptions of any testing to be performed.



 * Include procedures for adding optional items.



 * Describe the quality of the items in clear terms.



The following actions can help save money when you are stocking

inventory:



 * Substitution of less costly materials without impairing

 required quality;



 * Improvement in quality or changes in specifications that

 would lead to savings in process time or other operating

 savings;

 * Developing new sources of supply;



 * Greater use of bulk shipments;



 * Quantity savings due to large volume, through consideration

 of economic order quantity;



 * A reduction in unit prices due to negotiations;



 * Initiating make-or-buy studies;



 * Application of new purchasing techniques;



 * Using competition along with price, service and delivery 

 when making the purchase selection decision.



________________________________________________________________



APPENDIX: INFORMATION RESOURCES



U.S. Small Business Administration (SBA)



The SBA offers an extensive selection of information on most

business management topics, from how to start a business to

exporting your products.



SBA has offices throughout the country. Consult the U.S. 

Government section in your telephone directory for the office

nearest you. SBA offers a number of programs and services,

including training and educational programs, counseling services,

financial programs and contract assistance. Ask about



 * SCORE: Counselors to Americas Small Business, a 

 national organization sponsored by SBA of over 11,000

 volunteer business executives who provide free

 counseling, workshops and seminars to prospective and

 existing small business people. Free online counseling

 and training at www.score.org. 



 * Small Business Development Centers (SBDCs), sponsored

 by the SBA in partnership with state governments, the

 educational community and the private sector. They

 provide assistance, counseling and training to 

 prospective and existing business people.



 * Womens Business Centers (WBCs), sponsored by the SBA 

 in partnership with local non-government organizations

 across the nation. Centers are geared specifically to 

 provide training for women in finance, management,

 marketing, procurement and the Internet.



For more information about SBA business development programs and

services call the SBA Small Business Answer Desk at 1-800-U-ASK-

SBA (827-5722) or visit our website, www.sba.gov. 



Other U.S. Government Resources



Many publications on business management and other related topics

are available from the Government Printing Office (GPO). GPO

bookstores are located in 24 major cities and are listed in the

Yellow Pages under the bookstore heading. Find a Catalog of

Government Publications at http://catalog.gpo.gov/F 



Many federal agencies offer Websites and publications of interest 

to small businesses. There is a nominal fee for some, but most 

are free. Below is a selected list of government agencies that 

provide publications and other services targeted to small 

businesses. To get their publications, contact the regional 

offices listed in the telephone directory or write to the 

addresses below:



Federal Citizen Information Center (FCIC)

Http://www.pueblo.gsa.gov 

1-800-333-4636

The CIO offers a consumer information catalog of federal

publications.



Consumer Product Safety Commission (CPSC)

Publications Request

Washington, DC 20207

http://www.cpsc.gov/cpscpub/pubs/pub_idx.html 

The CPSC offers guidelines for product safety requirements.



U.S. Department of Agriculture (USDA)

12th Street and Independence Avenue, SW

Washington, DC 20250

http://www.usda.gov 

The USDA offers publications on selling to the USDA. Publications

and programs on entrepreneurship are also available through 

county extension offices nationwide.



U.S. Department of Commerce (DOC)

Office of Business Liaison

14th Street and Constitution Avenue, NW

Washington, DC 20230

http://www.osec.doc.gov/obl/ 

DOC's Business Liaison Center provides listings of business

opportunities available in the federal government. This service

also will refer businesses to different programs and services in

the DOC and other federal agencies.



U.S. Department of Health and Human Services (HHS)

Substance Abuse and Mental Health Services Administration

1 Choke Cherry Road

Rockville, MD 20857

http://www.workplace.samhsa.gov 

Helpline: 1-800-workplace. Provides information on Employee

Assistance Programs Drug, Alcohol and other Substance Abuse.



U.S. Department of Labor (DOL)

Employment Standards Administration

200 Constitution Avenue, NW

Washington, DC 20210

The DOL offers publications on compliance with labor laws.



U.S. Department of Treasury

Internal Revenue Service (IRS)

1500 Pennsylvania Avenue NW

Washington DC 20230

http://www.irs.gov/business/index.html 

The IRS offers information on tax requirements for small

businesses.



U.S. Environmental Protection Agency (EPA)

Small Business Ombudsman

1200 Pennsylvania Avenue NW

Washington, DC 20480

http://epa.gov/sbo

Hotline: 1-800-368-5888

The EPA offers more than 100 publications designed to help small

businesses understand how they can comply with EPA regulations.



U.S. Food and Drug Administration (FDA)

5600 Fishers Lane

Rockville MD 20857-0001

http://www.fda.gov

Hotline: 1-888-463-6332

The FDA offers information on packaging and labeling requirements

for food and food-related products.



For More Information



A librarian can help you locate the specific information you need

in reference books. Most libraries have a variety of directories,

indexes and encyclopedias that cover many business topics. They

also have other resources, such as



 * Trade association information

 Ask the librarian to show you a directory of trade

 associations. Associations provide a valuable network

 of resources to their members through publications 

 and services such as newsletters, conferences and

 seminars.



 * Books

 Many guidebooks, textbooks and manuals on small

 business are published annually. To find the names of

 books not in your local library check Books In Print,

 a directory of books currently available from

 publishers.



 * Magazine and newspaper articles

 Business and professional magazines provide 

 information that is more current than that found in

 books and textbooks. There are a number of indexes to

 help you find specific articles in periodicals.



 * Internet Search Engines



In addition to books and magazines, many libraries offer free

workshops, free access to computers and the Internet, lend 

skill-building tapes and have catalogues and brochures 

describing continuing education opportunities.

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