The basic problems with inventory are very simple: you have too much or too little product, you're not sure how much you actually have and you can't find it.  In short, you don't have control over your inventory. 

Jon Schreibfeder, a leading inventory consultant, defines Inventory Control as managing the inventory that is already in your warehouse.  Inventory management, on the other hand, is determining when to order products, and how much to order.

When working with new clients and/or prospects that sell or carry inventory, I ask the owner how quickly their inventory turns. Most reply 6 to 8 times per year. But many times , I also find they are simply calculating their annual sales and simply dividing by their average inventory. For example, if they sell $6 million a year and their inventory balance is $1 million, they will say their inventory turns 6 times a year. Okay, that would be correct if inventory was carried at sales price, but inventory is carried at cost on the balance sheet, which assuming a 50% gross profit margin in this example, inventory would only be turning 3 times per year.  Therefore, instead of having 60 days worth of sales in inventory on hand (360 days/6), they actually have 120 days worth of inventory on hand. No wonder most small to medium size companies are strapped for cash. I believe most of them don’t realize the tremendous cash flow repercussions of having too much inventory on hand.

So, how do we get inventory under control?  There a number of basic steps.

1. Develop a Rating scale for inventory.  Determine the activity for each item and rank your items from high to low.  Then assign a number grade to each item from A to D, plus X being never used.  Using the 80/20 rule, I would assign an A to items accounting for 80% of hits, then B to the next 15%, C to the next 4% and D to the last 1%. 
2. Get rid of your slow movers.  Using your grading scale you can start making some dents in the size of your inventory.  Can you return material to your vendor, sale price inventory, incent sales people to move it or find ways to liquidate stock?
3. Re-Organize your warehouse.  Using your grading scale, look for ways to improve layout to speed fulfillment of orders.  If your warehouse guy can fill an order without running back and forth all day - will that save time?  Time that could be used to better manage inventory.

Don’t fall in love with your inventory and think that you have a great asset on your books. Inventory falls in value continuously, it gets stolen, it becomes obsolete and it gets lost.  Remember when managing cash and working capital “it isn’t what you sell, rather it’s what you buy, particularly how much and how often”. 

As a B2B CFO®, I am experienced and skilled in helping companies analyze their optimum inventory and working capital components in order to maximize cash flow. If you are concerned with your current ratio, quick ratio, inventory turns and/or lack of cash flow, take a look at your inventory levels. Better yet, contact me and I can assist you in your analysis.