Automating Inventory Control - Part 1
In my cover article last November, I covered the critical issues surrounding your hidden investment - your data. In this column, I will look into your visible assets - your inventory.
Before we go much further, let me ask you some hard, probing questions about how you manage your business with regards to inventory control:
- Do you know what you have in stock?
- Do you know the net value of your stock?
- If you have multiple service vehicles, do you know what inventory they carry?
- Do you know which items you are selling the most of? The least of?
- Do you know which items are bringing you the most profit?
- Do you know what has been ordered and what is backordered?
- Do you know which items are used when you perform a task?
- Do you know what you have sold your clients and when? What were the serial numbers? Warranty expiration dates?
If you answered "I don't know" to any of those questions or cannot get an answer within five minutes, get ready to take notes. If you answered "Yes" to all of those, you are dismissed from class, although refreshing yourself on this topic wouldn't hurt. If you want to be able to answer these questions, then definitely keep reading.
What Is Inventory Control?Simply put, inventory control places your inventory at the center of your accounting/management processes, which results in a proactive approach.
Let's look at the three key words: control, center and proactive. The reason we all went into business for ourselves was to be in control of our own business. Your inventory is the biggest, quietest and most ignored aspect of a business that needs to be reined in. Just as you would control the jobs your people are working on to increase your profits, you should be controlling your inventory to ensure it is ending up on the jobsite.
The "center" part refers to the accounting/management approach to put your inventory at the center of your business processes. I try to teach clients that inventory is your boss and it drives your business.
I do need to expand a little on my definition of inventory here. Inventory includes all things you resell to your clients, to include time and materials. When an inventory approach is at the center of your business, job costing, management, accounting and making more profits become easier.
Because you have put your inventory at the center of your business and you are actively seeking to control it, you have now moved from a reactive position to a proactive position.
Like Mr. Miyagi said in the "Karate Kid," the best way to avoid a punch is not to be there. By proactively managing your inventory, you are avoiding the punches and pitfalls of inventory mis-control.
Why Worry?Well, we are all capitalists, and the reason why inventory control is so critical lies within the business checking account. Inventory control, or the lack thereof, affects the bottom line of business by decreasing (or increasing when not used) your cost of doing business, which is why major businesses have inventory control at the center of their business management approach.
Let me give you some crucial reasons why your business should have an inventory control solution:
- Automated Purchases: Inventory control can let you know when you are out or getting too low, and put the item into a reorder status. The order then can be printed out and sent to your supplier.
- Dead Stock: It's a retail term. If you have inventory that has not been sold in six months, it is dead and leeching away at your business. Current estimates state the average business has more than $10,000 of dead stock that could be better used to make money instead of depreciating.
- Increased Billable Hours: You resell your labor to your clients, so why not consider it an inventory item? By treating it as an inventory item, you are able to better track your hours being "sold" to clients, and improve cash flows. One client we set up with an inventory control solution saw his cash flow increase the first day the solution was in use because his company was tracking labor better.
- Planning: Because you are seeing live data, you are able to plan more effectively for your business.
- Theft: When your staff knows you are tracking inventory, in-house theft plummets. Here is a dramatic example: When a service company makes employees responsible for the materials on vehicles, and they know the vehicle's inventory is tracked at the main office, moonlighting with your materials ceases.
- The Bottom Line: That is what gets better. Every item listed above, plus a whole lot more benefits I didn't spell out, help you run your business more effectively, efficiently and proactively.
The sad part is that inventory mis-control is an issue we see routinely as a consulting firm for both the retail/supplier and service industries. The worst cases we see are clients who have the capability to do inventory control, but don't.
So, now what? Time to apply inventory control to your business. What follows are the four basic phases of an inventory control solution that apply to a contractor or service business (see Figure 1). We'll deal with the first phase now and the remainder next month.
Phase 1 - Automate Your BusinessFigure 1 shows, the first step to implementing an inventory control solution is to automate. Yep, it is expensive, but in this case the rewards are worth it.
What do I mean by "automate?" Automation is the use of computers to track the inventory from purchase order, arrival, delivery and installation/sale to a client. This is an incremental approach that uses the data from ongoing processes and man-hours not dedicated to direct inventory control to develop your inventory control data.
Why "automate?" The simple answer is, again, money. The time involved in a manual inventory check is massive and the results are out of date the moment the item is accounted for.
Because inventory control uses incremental man-hours, you can free up a person from doing manual inventory control to start making money for your business! Secondly, your customer service will improve because you can now track serial numbers of items, warranties, installation dates and other information.
First you need an inventory control program and computer to handle it. Because I am lazy and hate extra work, I suggest to my clients that they find a software package to handle all aspects of their business by only entering the data once in one program.
In other words, you need a truly integrated accounting package that meets all of your businesses needs today and for the next few years.
The software should have the standard accounts payable (purchase orders/bills), accounts receivable (invoices), inventory control, job costing (planning) and the general ledger to tie it all together.
Other aspects like the need for dispatching, payroll and additional features should be duly considered.
Let me give you all a fair warning now, the starter accounting packages like QuickBooks, Peachtree and others do not handle inventory control effectively. Please understand, I am not bad-mouthing these programs; I love QuickBooks, ran my business on it for three years, and heartily recommend these programs to start-up businesses who are not inventory based or are on a tight budget.
But the exception of those who are starting a business as you read this column, I would highly suggest paying the "big bucks" for the specialized software. Think back to my client who saw an increase in billable hours the day his program was implemented.
A solid inventory control program will pay itself off in one to two years if you implement it completely. Why? Increased billable hours and decreased inventory costs.
The degree of automation of your business is directly proportional to the number of people who interact with your inventory.
The simple rule is that every person in the office should have access to the inventory control program. For the one- to two-person shops, I say one computer. For more than that, I'd recommend the installation of a network and increasing the number of computers to match the number of people who are managing the business.
For those in direct contact with inventory, I'd suggest looking into using bar-coding technologies to automate tracking even further. New technologies, as alluded to by Maurice Maio in his article "The Next Generation Of Automation - For Us" (July 1999), will dramatically change the way you can track your business in the next two years.
Here is an example that is less than a year away from being a reality. While at a jobsite, your tech can:
- Scan the bar code of each item he takes out of the van using an integrated bar code scanner/handheld PC/modem.
- Track billable hours on the same device.
- Generate an invoice in the field to be given to the customer right there using a portable printer in the van from the data used above.
If the customer wants to pay by credit card, it, too, can be processed in the field.
All this is transmitted via cell phone while he is on the way to the next job. Eventually, your customer will be the only one with a paper copy as you use an entirely paperless business process. The bottomline of how far you should automate really does depend upon your budget.
We'll continue next month with more on controlling inventory.