Controlling and monitoring your inventory is an essential part of maximizing gross profit. To control your inventory, you must have a system of checks, balances and procedures in place.
Here are several inventory control techniques business executives should consider to help improve gross profit:
Inventory counts: First and foremost, your inventory must be correct and verified. Without an accurate inventory count, you don’t know what your true costs are, and if you don’t know what your costs are, you can’t control them. Your month end should always be counted and verified. After the first person counts the inventory, a second person should take a print out of the inventory and verify each item and sign off on the first count, or make corrections as needed.
Some business executives do interim inventories, either nightly or weekly. If you find that your interim costs are not in line with your monthly verified cost, you will need to take steps to insure the accuracy of the interim counts to avoid month-end surprises. Another good tool that can be used in the verification process is random surprise inventories.
Here’s another option that works well for larger companies with multiple departments or businesses: Once or twice a year, have each manager or department head count a different department’s or business’s inventory. In other words, pull a switch-a-roo and each employee will count the inventory of another department or business.
Some business executives say this is a good learning experience for their employees, as they get to see how other employees handle their inventory, and it also helps to alleviate the in-store blindness that affects employees when they see the same thing day in and day out. Some employees might even think of this as is a fun change of pace.
Proper ordering: Managers or other appointed employees should order properly to ensure that last minute purchases of product are a very rare occurrence. Technology can be very helpful in the ordering process. In this age of information, you should already know how much inventory you use in the day-to-day operations of your business and when your deliveries are arriving.
There are times when last minute purchases are necessary, but it should never be because management doesn’t know how to order. This should only be done in the case of unforeseeable circumstances. An example of unforeseeable would be loss of product due to equipment failure or a delivery was shorted.
Another would be if your business had an unexpected busy day – that’s unforeseeable. However, if it occurred during a known regular busy period, then that is foreseeable and the staff should have ordered to handle the additional sales. Management needs to be keenly aware of the business’s regular busy and slow periods to properly handle inventory ordering.
In addition to the higher costs of having to buy back-up inventory last minute, another cost factor is the fact that someone may have to leave the business to get the product. You are now paying someone to drive to get product rather than performing their usual work duties.
Informed management: Your management should know and understand their materials budget. It’s not enough for the manager to be able to tell you what their costs are; they need to be able to tell you how much over/under budget they are. The manager should be able to provide you with comments on what they can do to improve or maintain their costs. Many business executives have their managers involved in the budgeting process; this is a good tool for teaching managers to think about budgets and controls and how to improve gross profit.
Involve all your staff: Involve the entire staff in the control and management of costs. Communication is key in this area. If there is an issue with high costs of a particular item, the entire staff should be informed that management is aware that there is a problem. There should be memos posted to the employees on what they can do to help in the area of reducing costs.
An example from the restaurant industry: If a manager found takeout containers tucked away in the back of shelves, inform your staff that inventory should be stored properly. Involvement is important to your success. Just ask yourself this question: Will your results be better if we have 3 people working on this issue or 43?
Use technology: Quickbooks and some other business software have inventory-tracking functions. If used properly and completely, they can calculate your monthly inventory costs. Using these systems will track your product usage and it will help with ordering accuracy.
How does your company’s inventory control measures compare with other businesses in your industry? Click here to get a complimentary industry-specific benchmarking report. Your report will provide you with a wide series of financial metrics so you can see where your company compares with others in your industry.