Inventories - Why Count?
By Peter R. Ramsaroop
Stabroek News
May 4, 2007
Inherent risks must be dealt with by the economy not only through economic speculation but also by maintaining inventories. Inventory is a substitute for knowledge. No food would ever be thrown out after a meal, if the cook knew beforehand how much each person would eat and could therefore cook just that amount.
Inventory costs money; a business enterprise must try to limit how much inventory it has on hand while covering the possibility that its best guess as to how much it will need may be inadequate. Having either too large or small an inventory means losing money. One of the factors in the success of companies is the ability to operate with only enough inventory to last for a few days, when the competitors' inventories are some multiple of that. With the distance of shipping and cost, we find most of our businesses cannot follow these procedures thus their profit margin is less when having to hold inventory for longer periods. At the end of the day, it is the consumer that suffers, having to buy defective products if the inventory is old. One example that comes to mind is Red Wine. I find those items on the shelves of small stores, sometimes there for years without being stored at the right temperature, only to prove bad when the consumer takes it home.
On the other hand, we find that many businesses bring in very low priced materials that are inferior products. I recently built a house and almost all my sliding doors, tracks, locks, toilet tank flush system, shower heads and much more have to be replaced with imported items from the US. Most of the products coming out of China that we find our businesses buying are inferior products that have no life expectancy.
Too large an inventory means excess cost of doing business. Too small an inventory means running out of what the customers want, and you not only miss out on immediate sales but also risk having those customers look elsewhere for more dependable suppliers in the future. The goal is to have a tracking system to understand the sales trend, high and low season (e.g. Airlines seats to Guyana are much less after Easter) and to be able to predict market changes as we saw in the recent construction boom. It is clear, though, that those businesses which are closest to the optimal size of inventory will have their profit prospects enhanced.
Do you count? The first thing you need to determine is why you are counting. Specifically, what is it that you expect to achieve through your count programme? You should be counting to optimize your business operations and achieve high levels of customer service and satisfaction. Many of our businesses that have been operating for some time probably have some idea of the areas that have had ongoing problems related to inaccurate inventories. Small variances in some types of raw materials may have little or no effect on operations while inaccuracies on others may shut down your operation. Inaccuracies in finished goods tend to have the most obvious direct effect on customer service and generally get a high priority in count programmes. Tracking accuracy is necessary to determine where improvement is needed. Timing is critical in cycle counting. A good count programme combined with solid inventory practices will prove to be an incredible asset to your business. I was one that failed to do a good inventory count during my recent building phase and lost lots of materials to theft by contract workers. Lesson learned! Until next week "Roop"