In order to have effective parts inventory management, you must take into account the many variables that affect it and, in turn, that affect your business and its profits. Just because something is a standard “rule of thumb” or has been done some way for as long as you can remember doesn’t mean that that way is the best way – it may once have been, but making assumptions about parts inventory can easily reduce your profits and adversely affect your business.

One such old school “rule of thumb” assumption is that keeping your inventory count low at all times is important. This is not necessarily true: whether it is good or bad depends on your circumstances and how you go about accomplishing keeping your inventory low.

For example, you could lower the amount of inventory you have in your warehouse by increasing its turnover rate – that is, by making smaller but more frequent purchases from your suppliers. Do not assume that this is necessarily effective, however; are the costs associated with ordering and shipping more expensive than the cost of storing the inventory? If so, you’re spending unnecessary money simply because you’re assuming that keeping your back stock low is the most important thing.

Here are other downsides associated with smaller but more frequent purchases from your suppliers:

• Sometimes suppliers offer discounts for buying in bulk. If you are too afraid to have a little extra inventory, you can’t take advantage of these discounts. Sometimes the discounts are significant enough to offset your inventory storage costs entirely.

• If you are a manufacturer, you lose the efficiency of mass production.

• Shipping costs per item are usually higher when fewer items are ordered. (Think amazon.com and its free shipping if you order over $35 policy.) In addition, if you order 10 products now and 10 products next week, you’re paying twice as much shipping as ordering 20 products all at once.

• Processing expenses – time spent ordering from vendors, paying invoices, and receiving items and placing them in the correct location in your warehouse – will be higher because you are engaging in these activities more frequently.

Basically, even if your inventory levels are low, you may have increased your spending and reduced your profits despite the lesser inventory costs.

Careful analysis of your inventory can help you determine how to order stock in such a way as to keep your inventory as low as possible without spending more money and eating away at your profits.

Need help optimizing your inventory? Contact Acumen Information Systems today for more information.