cisco salaver inventory mgmt smb

Inventory Management for the Small and Medium-sized Business

by Tim Salaver, MBA, PMP, CSSMBB

The challenges of managing inventory are daunting for large businessesand require enterprise systems and multiple departmental databases tocontrol the information and process flows. Millions of dollars are spent andlarge amounts of resources are used to maintain inventory accuracy. If thisis such a problem in a large enterprise, how can a Small and Medium-sizedBusiness (SMB) accomplish this task with sometimes very limited financialand human resources? In many cases, SMB’s just react to demand anddon’t have the processes or knowledge to manage their inventories.

The vast majority of inventory systems intended for the SMB market do not have thecapabilities needed to perform an adequate physical inventory or cycle count. Inventoryis at the nexus of the Procure-to-Pay and Quote-to-Cash processes which all businessesperform whether they are in the manufacturing or services industries. Because inventoryis ubiquitous and a commodity in the normal operations of running a business, theknowledge needed to manage inventory is often taken for granted. In a healthcare setting,it is common to have clinical staff take on the role of inventory manager without any formaltraining. In a retail environment, the store manager or clerks count items without realizingthe reasons for their activity and its relationship to the financial health of the organization.

Inventory is a complicated part of every company’s way of doing business. To keep itsimple, think of the acronym PARTS in order to have effective and efficient inventorymanagement. The areas which will give every business what they need should bethought of in the following manner:

• Processes• Accuracy• Resources• Tools• Strategy

Inventory Management for SMBs

Inventory Management for the Small and Medium-sized Business

Efficient Processes are the Key to Managing Inventory Flow

The development of inventory processes are key to the overall success because it iswithin the inventory flow, whether it is physical or logical, that provide the greatest benefitwhen expectations are met in the Procure-to-Pay and Quote-to-Cash processes.

The Procure-to-Pay (P2P) processes consist of all the requisition, purchase order,receiving, warehousing, fixed assets, matching, and payables functions. Each of thesefunctions is related to the pull side of inventory or the supplier relationship which in supply chain management can help deliver increased customer satisfaction in providing the right products at the right time and at the right cost.

The Quote-to-Cash (Q2C) processes consist of all the sales operations, order processing,manufacturing, shipping, logistics, billing, and accounts receivable functions. Each ofthese functions is related to the push side of inventory or the satisfaction of the customer relationship which is key to the company’s success.

In both the P2P and Q2C processes, the company needs to add value to the raw inputin order to deliver value to the customer. It does not matter whether the company is amanufacturer, distributor, or a service; many companies should have these functionscentered on the proper management of inventory.

Many SMBs treat these activities as independent, disparate tasks, but that is far fromreality. The information and physical flow of inventory through the P2P and Q2Cprocesses requires a hand-off from one part of the company to another, requiring teamwork and a centralized view of inventory. There are not individual stores of inventoryowned by their own departments, but rather linked areas that in total provide the overallview of one of the company’s more important assets.

Inventory Accuracy is Not an Option

So much activity depends on the inventory, but nothing is more critical to customer satisfaction than inventory accuracy. APICS body of knowledge sets the expectationsvery high in having accurate inventory as should every company. However, that is not thecase and this is where SMB’s are sorely deficient. The role of inventory has to beparamount as it is within this environment that most problems occur that create dissatisfiedand unfulfilled customers. In valuing a company for a business loan or sale, one of thekey factors in determining the quality of the financial statements is the accuracy of theinventory asset account. Many a deal has been lost due to poor inventory information.However, how many customers have been lost due to inaccurate inventory information.

Inventory Resources Must be Skilled, Capable, and trained

Within many SMB’s the resources assigned the job of managing inventory are nottrained or adequately skilled for the role. Moving inventory is not the same as managinginventory so materials handlers or forklift drivers should not be expected nor do theyhave the appropriate skills to maintain accurate information. Within a healthcare setting,the inventory resources usually come from the clinical side with little to no understandingof how to manage healthcare supplies. Within a retail environment, the employees aresometimes not skilled enough to understand inventory, so tools are put in place to push

So much activitydepends on the inventory, but nothingis more critical to customer satisfactionthan inventoryaccuracy.


the inventory from the warehouse to the store based on daily sales data. In order forSMB’s to maximize their inventory investment, the resources needed to manage andcount the inventory must know how to determine the proper safety stock, calculate leadtimes, and set the appropriate target inventory levels. Training should be a program thatincreases the effectiveness and improves the operations of the inventory function. APICShas a comprehensive inventory management curriculum and certification program thatthousands of individuals and hundreds of companies have used to meet their needs.

Inventory Management Tools Can Ensure Customer and Employee Satisfaction

The physical flow of inventory is important as is the information related to the changesthat occur. Each product in inventory has many states and locations during its lifecycleand in every situation it is critical for customer and employee satisfaction that the toolsare in place that enable the employees to do their jobs and to meet the needs of thecustomers. As an example, there are many software applications targeted toward theSMB market. The vast majority is able to perform the inventory functions needed forvery simple inventory management; however, when adding cycle counts and physicalinventories capabilities, these applications are unable to perform these actions whichare inherent to an accurate inventory. The tools needed for inventory managementrequire an understanding of inventory concepts and management’s expectations. APICShas inventory management training which provides the knowledge regarding the selectionof the proper tools based on the working environment and customer needs. Whether theSMB is a manufacturer or distributor, the technology needed should enable the company’sgoals in achieving customer satisfaction and meeting management’s expectations.

Inventory Management Strategy Enables the Company Strategy

An effective inventory management strategy requires that SMB’s have the resourceskills and capabilities to effectively manage inventory flow from controlling raw materialsto delivering finished goods. Every company strategic plan requires an ability to executeand it is also the company’s expressed view of its market position which inventory management has both a direct and indirect consequence. For instance, in order for asmall dollar store to be the leading discounter in its community, requires that it have theability to source inexpensive and sometimes cheap product. In order to maintain its lowcost advantage over a larger discount retailer, the business needs to define a uniqueplace in its market. However, what makes the smaller retailer more valuable to its customers is determined by the product selection it is able to deliver in the execution of its strategic plan.

What Happens When the Parts Don’t Work

When the inventory management Processes, Accuracy, Resources, Tools, and Strategywork together the result for the business is profitability and greater customer satisfaction.When they don’t work so many negative consequences can occur, such as, waste,shrinkage, and obsolescence which are the three main issues that SMB’s need to dealwith. When any one of these occur the primary effect is added costs which increaseprices to the customer. That in itself reduces the products value or customer satisfaction.

To provide better context—waste is the inefficient processes, resources, and tools;shrinkage is the loss of product; and obsolescence is when the product is no longerwanted by the market. Within large corporations, various departments are held


When the inventorymanagementProcesses, Accuracy,Resources, Tools, andStrategy work togetherthe result for the business is profitabilityand greater customersatisfaction.

accountable for any one of these negative consequences and within the smallest ofcompanies; it is the responsibility of all. Every employee must mitigate or eliminatewaste, shrinkage, and obsolescence in the product life cycle. A culture of operationalimprovement and excellence should be the norm not the exception.

In APICS training, the student is asked to visualize not product but cash sitting on theshelves in the warehouse or store room. How much more different is the care taken topreserve and handle the product in that context? Inventory is an extremely importantasset and because of its ubiquitous nature in that it’s sometimes taken for granted thePARTS are allowed to deteriorate, allowing for inventory loss. Time is another factorwhich can contribute to the success or failure of managing inventory. There are so manySMBs that do not take adequate time to fulfill even minimal requirements to maintaintheir inventory.

When products are allowed to become obsolete this is primarily due to poor productplanning or even the lack of product management. The result is overstocks which canbe costlier than a stock out in that the company has wasted financial and operationalresources on the P2P processes in an item that will not flow through the Q2C processes.In this case, the company will have to use resources to dispose of the product takingwrite-offs against inventory valuation. This has an adverse affect on the company’sfinancial health.

Inventory theft is a consequence of doing business and in most cases cannot be avoided.Industries vary in what is acceptable, but that is when the information is known. Somany businesses do not have accurate inventory data so how can they possibly knowhow much is lost due to any circumstance. The bottom line is they can’t know at all andcan only guess what their loss may be. Breakage can’t be avoided, but it can be mitigatedthrough proper safety, material handling, and training. Shrinkage is also due to poorly orinadequately skilled workers.

What the SMB lacks in inventory management it makes up in zealous ownership of anidea, but as we witnessed during the dot-com boom and bust, companies neededeffective operations to deliver value to the customer. That value is the transformation ofraw materials inputted into the black box which we call the company. That box has a lotof hidden costs which the customers don’t have any visibility into, but the expected output from the box is a product that satisfies the needs of the market.

Inventory Management is not as difficult as building a rocket or as easy as sellinglemonade in front of your house, but an integral part of your business operations in itspurest form to not only generate profits but maximize them. The risk and danger in notimplementing effective and efficient inventory management is the loss of the business.Inventory management should not be taken for granted and the Processes, Accuracy,Resources, Tools, and Strategy or PARTS must be put in place to ensure that the SMBremains viable and meaningful to its customers.

For more information and training on inventory management and other tools to helpyour business grow, go to www.APICS.org. Within your geographical area, there is alocal chapter that provides classes, professional development meetings, and informationpertinent to your needs. Take the time to research how to best manage your inventory.Your customers will appreciate you for it.


Resources, Tools, and Strategy or PARTSmust be put in placeto ensure that the SMBremains viable andmeaningful to its customers

Tim Salaver, MBA, PMP, CSSMBB, [email protected] President, APICS Golden Gate Chapter, www.APICS-GGC.org

Additional Inventory Management Resources for SMB’S

Arnold, CFPIM, CIRM, J. R. Tony, Stephen N. Chapman, CFPIM, and Lloyd M. Clive, P.E.,CFPIM. Introduction to Materials Management. 6th ed. Upper Saddle River: Prentice Hall, 2007.

Brooks, Roger B., and Larry W. Wilson. Inventory Record Accuracy: Unleashing thePower of Cycle Counting. New York: John Wiley & Sons, 1995.

Mercado, Ed C., CPIM, C.P.M. Hands-on Inventory Management. Boca Raton: Auerbach Publications, 2007.

Novak, Stephen, CPIM, CIRM, CQMgr. The Small Manufacturer's Toolkit: a Guide toSelecting the Techniques and Systems to Help You Win. Boca Raton: Auerbach Publications, 2006.

Piasecki, David J. Inventory Accuracy: People, Processes, & Technology.Kenosha: OPS, 2003.

Wild, Tony. Best Practice in Inventory Management. 2nd ed. New York: John Wiley & Sons, 1997.

Fundamentals of Inventory Control, version 2.4. Chicago: APICS The Association for Operations Management, 2002.

Fundamentals of Operations Management, version 2.1. Chicago: APICS The Associationfor Operations Management, 2002.

Fundamentals of Materials Handling and Warehousing. Operations ManagementEducation and Research Institute of Canada (OMERIC), 1999.

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