Top 3 Considerations in Small Business Inventory Management

While the raw dollars involved in small business inventory management may pale in comparison with large corporations, it is even more critical to the organizational success. Lower volume of business, less redundancy, a smaller overall operational capital base, and more critical dependence on positive customer experience all contribute to increasing the importance of proper inventory control.

Some of the key critical inventory practices vital to small business inventory management include:

  • Safety Stock
  • Lead time reduction
  • Consignment inventory

Many of the decision a manager makes regarding small business inventory management are dependent on the risk to the company. If he cost of carrying too much inventory is potentially more damaging than being out of stock for a particular item, then safety stock is not a concern. In an environment that might bring the small business operations to a grinding halt for want of a nail, then safety stock, re-order point management and lead time reduction must be the priority.

Safety Stock

Safety stock refers to inventory held when there is little or no confidence in lead time associated with an item or the supplier of that item. Methods to determine safety stock vary. Many of the players in small business inventory management subscribe to the simpler models for determining safety stock when instead they should use one of the standard deviation models. This allows lead time, demand, and service levels all play a role in determining the right minimal stocking level.

Lead Time Reduction

One of the quickest ways to simplify small business inventory management is to establish a reliable supplier network that reduces order to receipt time. This lowers the stocking level requirements and lowers inventory carrying costs. There may be an incremental rise in order processing costs, requiring a true cost benefit analysis before making a change to current ordering practices.

Consignment Inventory

A fast way to reduce small business inventory costs is to establish consignment inventory relationships. This model, used in industries ranging from booksellers to power industrial equipment repair part, allows access to a broad inventory without an upfront investment. Through either periodic cycle counting by the vendor or an integrated Point of Sale system, the inventory is billed based on usage, not on delivery.

When viewed from the perspective of the owner, there is nothing small about small business inventory management. Without the luxury of a larger capital base, effective inventory management is even more critical to the health of the company.


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