📖 Reading: Key components of Inventory Management for Small Businesses

▶️Video: Inventory Management Explained

▶️Video: Tips to Find Suppliers

📝Example: Inventory Management Process Map Example

📝Example: Inventory Control - Bike Rental Business

Finding Suppliers:

If you have a clothing store, a restaurant, or you make and sell a product, inventory is a key to your success. Having enough raw materials, ingredients and component parts, as well as finished goods, and having them at the right time, is key to making sales and also saving money. You must always be aware of how much product you have, how much you need, and where and how quickly you can get more. At the same time, you don’t want to be stuck with inventory, having inventory you don’t need or that won’t sell.

For many of our entrepreneurs, their initial operations are quite small and so they only buy in small quantities. These quantities are not large enough to enable the entrepreneur to purchase materials at wholesale prices or get volume discounts. So, they end up purchasing at retail stores like Walmart or Costco. This is a disadvantage, as they are purchasing at retail to sell at retail, which undercuts their ability to make decent margins on each item they sell. The goal should be to purchase everything at wholesale, or based on volume discounts, as soon as possible. Otherwise, you are competing with companies that start with a big advantage.

When you are ready to purchase things at wholesale, conduct a formal search for sources of supply. Start with an online search. So, if you make candles, search for ‘suppliers of candle wax’ and a number of wholesalers will show up. You can also attend a trade show or event for businesses in the same industry as you. Another approach is to check out trade associations for your products or join an industry group. More simply, you might talk with other business and get recommendations.

For some businesses, you may be able to get better prices on certain items by joining AmazonBusiness. A different platform is Faire Wholesale that features U.S. sources of supply to address small business needs. EK wholesale, which is based in Scotland, offers high-quality goods, and is integrated with Shopify. Wholesale Central in another platform offering a wide range of products. IndiaMart also offers a large range of options. In addition, there are search engines such as AliExpress where you can find thousands of wholesale products of medium- to low- quality, sourced from China. Another example is DHgate.

When you identify places to get inventory, be sure to carefully evaluate them in terms of:

• prices,

• quality of merchandise,

• minimum order sizes,

• delivery fees,

• lead time to get delivery,

• returns policies, and

• policies or perks of each seller.

Keep in mind that some of these options also have membership fees. It is also worth remembering that you may be able to negotiate different aspects of the purchasing arrangement with a given supplier. Remember, you can negotiate many aspects of your arrangements, so feel free to ask for what you need. Other helpful insights on finding and buying from wholesale suppliers can be found at: https://www.shopify.com/blog/wholesale-suppliers

Managing Inventory

If you sell multiple products (as opposed to services) then inventory is a big issue. Inventory ties up your cash, and represents risk (as you can be stuck with items that do not sell), so it must be carefully managed. When it comes to how much inventory of different items to purchase and keep in stock, you might want to consider a simple ABC inventory management system. While there are software packages available, you can do this yourself. With ABC (which stands for Always Better Control over your inventory), you divide the items you are selling into three categories or buckets (A, B and C).

Basically, you are grouping your products based on how much they are likely to contribute to the overall performance of your business. You can use different factors for grouping items, but one approach is to focus on how many units of an item you expect to sell, what the item cost you to make or acquire, and the markup or margin on this item. You may want to review our discussion of volumes and margins in STEP 16).

Group A would include your highest potential products, or products that have good margins or markups on them and that you expect to sell medium to high amounts. These are even more attractive if they are items that cost you more to make or acquire and that have higher prices and margins. Group B is an intermediate category and here you could include products having either i) medium volumes (in terms of number of units) with medium to low margins, or ii) high volumes with low margins. Group C consists of products from which you will not make much money, usually because they sell at a slow rate (fewer units) and the margins you make on each sale are moderate to low. Consider grouping the items that you will be selling in three different categories:

• Category A Products (higher potential)

• Category B Products (medium potential)

• Category C Products (lower potential)

There is a general principle that has been proven time and time again. It basically suggests that up to 20 percent of your products will fall into Category A, while 30 percent of whatever you sell will fall into Category B, and 50 percent (or more) of the things you sell with fall into Category C. Called the Pareto Principle, it suggests that 20 percent of the items you carry will end up producing 80 percent of the money you make.

The message is clear. The entrepreneur who manages inventory based on this ABC approach will pay the most attention to carefully monitoring the Category A products. These are the items that you do not want to stock out of, and so you will buy or make the most frequently. This is where your real money will be made. It is where you might want to concentrate your marketing efforts as well. Alternatively, you are less concerned about stockouts of your Category C items, and may choose to re-purchase these items less frequently.

Again, you can do this by hand or using a simple spreadsheet. Once you are up and running, you should keep a close eye on the patterns in terms of what is selling the most and what has the higher margins. Over time, you might move products from one category or bucket to another. Finally, a number of free inventory management tools are also available that can help you tracking the state of your inventory. Examples include:

• Odoo: Has been rated as being good overall

• Square: Is especially good for retailers and restaurants

• Zoho Inventory: Is very good when you have very large inventories

• ABC Inventory: Is viewed as quite good for manufacturing and repair shops

• Sortly: Is rated high when it comes to a mobile inventory app with barcoding and scanning

More detail on inventory software for small businesses, and a spreadsheet for use in tracking inventory, can be found at: https://fitsmallbusiness.com/free-inventory-management-software/

As the business begins to get traction, you will need to revisit the mix of products and/or services that you are selling. In this step, we examine what to emphasize and what to consider dropping. In STEP 69, we will consider what you might add.

When you first start the business, the entrepreneur offers the products and services that a) they think will sell; b) they can afford to make or purchase; and c) they are able to source. With time, they begin to see what is selling and what is not (although they might not yet understand why), they become able to offer more of certain items, and they become aware of additional sources of supply. If you go back to STEP 12, where you estimated which products or revenue drivers would sell the most, compare that estimation to what has actually happened.

As we noted in STEP 52, there is a rule that suggests that 80% of your revenue will come from 20% of the products or services that you sell. So, the beginning point is to analyze sales data. Try to determine the answers to the following three questions:

• For which particular products or services do you sell the most units?

• Which particular products or services bring in the most revenue?

• Where you sell multiple versions of the same product or service, which ones (sizes, models, versions) do you sell the most of?

One additional question requires your attention. Does the sale of a given product or service affect the sales of other products or services. An example would be the tendency of people who buy a dress from you would also buy a belt or a scarf? In a bar, do people who buy appetizers also tend to purchase more drinks? In a surfboard shop, do people who buy long boards also tend to buy board wax from you?

Also consider products that take considerably more time to make or acquire, and yet do not bring in that much revenue. Another consideration is products that have ingredients or components that are very difficult to acquire, or where the costs of acquiring them can vary widely—and yet again they do not produce that many sales. With this information in hand, you can begin to make adjustments to your mix of products and services. Rank in order all your products or services in terms of which are the winners, which are doing okay or play an important role, and which are the leading candidates for elimination. Do this ranking for each type of product, and then separately, for the different sizes, styles, models or versions of a given product.

The ones at the bottom of the list are your dogs and, in the early years of a business, you cannot afford to be carrying too many dogs. They tie up resources that could be devoted to higher potential items.

For the items you believe you should continue to offer, you need to adjust inventory levels. The ABC inventory analysis discussion in STEP 52 will be helpful in rethinking how much of a given item to stock. You want to carry more of your winners, and acquire them more frequently (or make more of them). For other items, consider adjusting the inventory levels downward. This sort of analysis should not be a one-time thing. Profits are greater for the entrepreneur who understands that adjusting your inventory levels must be an ongoing process.

Finally, as you look across the mix of products and services that you decide to continue selling, think about creative merchandising tactics. Where products tend to be purchased in combination (like the surfboards and the board wax mentioned above), you might provide a special or discount to encourage this. You might experiment with bundling, where an insurance company tries to bundle homeowners insurance and car insurance. Another option is a “loss leader strategy”, where you sell some items at cost or below cost (usually items that are not that profitable in the first place) because it might incentivize the customer to buy something else from you that has a higher margin. For instance, a grocery store that sells turkeys at below cost might find the customers end up buying all the things that go with a turkey dinner from them, so in the end the store is ahead.

One of the most important aspects of entrepreneurship is how a business emerges, and usually in ways not anticipated when the entrepreneur first starts out. A key part of this emergence involves additions to the mix of products and services being sold. Frequently, what proves to be the best-selling and most profitable product or service for a business was not initially being offered.

Once you conduct the analysis of your current products and services, as described in STEP 68, and have a sense of what your winning products are and if you have any dog products, you are ready to consider new possibilities. The key question becomes whether there are any gaps or holes in your mix of products.

As you consider new products or services, here are four sample directions you might explore:

Are there complementary things you might sell, such as a business that makes and sell chocolate candies and decides to add hot chocolate mix, or a company that sells barbeque and decides to add its own brand of barbeque sauce or seasoning or flavoring rubs. In our car detailing example above, the entrepreneur is evaluating whether to add engine cleaning. While it does seem complementary, it is not a service most of the customers for the existing three product lines (detailing, waxing and car care products) would necessarily want. Customers seeking this service are probably a distinct (and perhaps very small) niche. Further, the new service might involve equipment, training and even some potential legal liabilities that are above and beyond what is needed for the things that are currently selling.

A second direction worth considering would be to add items to existing lines, such as the wipes for leather in our example above. Alternatively, consider a store that sells a line of hand-made leather purses in three different styles. For the most popular style, the entrepreneur is considering introducing a slightly smaller version of the same purse. Similarly, an entrepreneur who sells kettle corn might contemplate adding a spicier version of the basic product.

A third possible direction would involve modifying existing products to create a new offering for a market you are not currently serving. For instance, an entrepreneur who produces beautifully designed baby bibs decides to add a new line of bibs intended for developmentally challenged adults. With our car detailing example, we might think about offering a unique detailing package to auto dealerships, where we would focus on a servicing a large volume of cars.

As a fourth direction, the entrepreneur might consider introducing value-added services that are applied to the existing items that you sell. If we consider an entrepreneur running a gift store, the entrepreneur might assess the attractiveness of adding a fee-based delivery service for the products you are currently selling, or adding a gift-wrapping service. Another example would be our entrepreneur who makes the baby bibs. While she produces a number of different designs for her bibs, she might be considering adding a customizing service, where a customer could have the baby’s name or some other letting added to the bib.

As you consider adding products or services, there are four critical points to keep in mind:

Point #1:

Don’t add products just to add them. We frequently find that entrepreneurs assume that the more products they have, the more money they will make. Just the opposite is often the case. It is not about how many products you offer, but whether you are offering the right products. Further, as we discussed in STEP 68, you want more inventory invested in your products that sell the most and make you the most money—adding products can take away from your ability to do this.

Point #2:

Don’t add products or services that are not in alignment with what you currently sell and how your company is positioned in the marketplace. Doing so is confusing to customers, and undermines the identity of your business. If you make and sell your own brand of lip gloss, it might not make sense to also sell eyelash extensions, and would make even less sense to try and sell screen printing services.

Point #3:

Keep your customers in mind as you add products. You might be serving different market segments, but you do not want to add products that will appeal to new segments.

Point #4:

Be careful about adding products or services based on your own wants, needs or preferences. Just because you like something does not mean that a sufficient number of other people will buy it from you. When you have ideas for new products based on things that you like, run the ideas past a number of your existing customers, not just asking them if they like the idea, but how often and how much they would buy of the product if it was made available.

Finally, as you consider ideas for new products or services, it is important to do research. One of the best sources of new product ideas is to listen to your customers. Keep in mind that customer’s needs are always evolving and changing. What sort of products do they ask about that you are not currently offering? You might also periodically ask some of your loyal customers for ideas of things they would like to see added. Be careful, however, that you do not over-react to a suggestion from a single customer—try to get a consensus from multiple customers that the new item is something they would regularly buy from you.

You will also want to keep your finger on the pulse of industry and competitor trends. Do research on your industry to see what new products are coming, or what kinds of items have recently been introduced. Attend trade shows that focus on your industry. Go online and look at businesses like yours in other cities—especially ones that are doing well. Look at their product offerings for ideas. When you are traveling, visit as many competitor businesses as you can.