Inventory control is a strategy companies use to keep an appropriate level of materials, supplies and finished products on hand. Weighing the pros and cons can help small business owners determine the appropriate levels of inventory to stock.
When a company holds a high level of inventory, it ties up business funds that the company could use in other areas such as research and development or marketing. New product development and marketing can bring additional business to the company, but holding high inventory levels does not. The cost of the inventory is not recouped by the organization until the company sells the inventory or uses it to build customer orders.
Warehousing is another cost of holding excess inventory in a business. The cost of warehousing can include the warehouse space, utilities and maintenance of the storage area. Some supplies may require additional maintenance, such as temperature control to preserve the quality of the material. Companies that reduce inventory levels can store materials in a smaller area in the business and use the extra space for new product development.
Storing excess inventory can lead to quality problems such as degradation and potential obsolescence. Companies may stock high levels of inventory in anticipation of demand or for an existing order, but customers may change specifications or require different materials for future products. In this situation, the company must purchase new materials and supplies to build according to the new customer specifications. Businesses can identify and isolate quality problems easily with a smaller inventory quantity, as well.
An excess inventory of finished goods can provide a buffer for increases in customer demand. The business is taking a risk by building and storing finished products in anticipation of customer demand, but it can reduce the lead time and improve customer satisfaction.
Bulk Purchase Savings
Small businesses can obtain a savings when purchasing some supplies in bulk quantities. Suppliers may give discounts to customers who order larger quantities. The business can also save on shipping costs for one large order instead of multiple shipments of smaller quantities.