I wrote this article for Intuit back in 2012, and some information was used to publish this special report: http://dpub.intuit.com/t/29292
Integrate your inventory management process
Businesses that handle inventory, know that managing inventory will make or break the business. In today’s global market, heavy competition, and all buyers-suppliers being interconnected with the Internet; the margins on the merchandise get smaller and smaller each year. Handling inventory may present so many costs, such as: warehouse costs, warehouse personnel, admin staff doing bookkeeping and paperwork management, spoilage, shipping costs, controlling and securing the assets, equipment to handle inventory, etc.
When the business starts small, it’s typically easy to handle when inventory quantities are low and most sales are done with “just-in-time” inventory, which means: only purchase when clients order. However, most successful medium and large size businesses owners will confess that it would have been impossible to increase the size of their business without significantly improving the way inventory is handled. Companies like Amazon and Wal-Mart attribute its success on its top-notch supply chain management: low product costs, having the right amount of stock to handle demand, high inventory turnover, fast and efficient sales fulfillment.
But small and growing businesses sometimes cannot make that shift into medium-large businesses, mainly due to the challenges of managing inventory. At the heart of all this is a system. In today’s world, this system would consist integrating business processes and having en effective computer system to handle accounting and inventory.
“I was always a kid trying to make a buck. I borrowed a dollar from my dad, went to the penny candy store, bought a dollar’s worth of candy, set up my booth, and sold candy for five cents apiece. Ate half my inventory, made $2.50, gave my dad back his dollar. “
Guy Fieri – Food Network
There are some great success stories of businesses making that shift, such as Carlos with Prime Tobacco Co.
Carlos owns a Cigar Wholesale and Distribution Business in Tampa, FL. Started as a Cigar Aficionado, and had many friends in the industry which he met in the many cigar bars in Tampa. Before starting his business, he was an Inventory Manager in a large wholesale electronics exporter. In the midst of his entrepreneurship endeavor, he never really focused on setting up strong inventory systems or accounting controls as the overwhelming amount of new orders caught him by surprise. At the beginning it was all about fulfilling the orders and meeting client’s expectations
Within two years of starting his business, he found himself in an interesting situation: the company had broken the break-even mark, sales started get larger and more complicated, product quality was getting more demanding… but most importantly, he realized that the most profitable sales where when he sold inventory that he had in stock. Naturally, the market paid a premium to get the product now, versus taking backorders the clients had to wait 2 weeks for. So Carlos decided to get a larger warehouse, invest in temperature control equipment to be able to keep the product fresh for weeks, and to increase his profit on sales (and potentially get new sales) from customer needing immediate product. With an entry level accounting software, there was a very manual inventory system that was very laborious, but gave him confidence that orders and purchases never fell through the cracks. Among other challenges, his wholesale clients are also now asking for longer credit terms which made accounts receivable management even more crucial and some for his retail clients were requesting consignment inventory to allow end-customer to purchase more
There was still risk of perishability when inventory sat in the warehouse too long, and he learned it the hard way. Some orders started to get returned due to quality and some clients started to get reluctant from buying product he had stored in the warehouse. The conundrum that Carlos was facing to reduce his reputation risk in the quality of his product was to either decide to stop carrying inventory and go back to backorder-only sales or essential transform the way he managed inventory. To achieve this he:
- Had to find a way to forecast sales of specific products, to help him purchase just the right amount of inventory
- Needed a real-time inventory report to always know what is available and how long is been sitting there to ensure sales staff focused on moving those first.
- Increasing the speed to fulfill sales faster.
- Being able to control inventory that his smaller retail customers were asking to send in consignment
“We want to turn our inventory faster than our people”
-James Sinegal , Co-Founder and former CEO of Costco
So the goals were clear. But the challenges were: potential high costs of a sophisticated inventory system, learning curve of new system and potential high re-training costs, and potential loss of control by giving up current manual system. Carlos started to do the research to use the same system he was using in his old job where they were managing ten times the amount of sales and had twice the amount of inventory to manager. However, this was one of those systems that take six months to implement and an additional six months to have the staff master; and the support was very limited to very specific consultants. Now the dream was shattered where the entire costs of the system was over a hundred thousand dollars.
So realistically, he needed a solution that would be implemented in less than a month, with a short learning curve like his current QuickBooks Pro being used to process sales and perform bank reconciliations, and lastly he needed to have support that was very accessible from the manufacturer, available documentation and accountants/consultants that understood it.
In September of 2012, he reviewed a few presentations from consultants that focused on working with “medium size” businesses, that presented solutions under ten thousand dollars for software, implementation, and training… and went with QuickBooks Enterprise with Advanced Inventory. He chose this solution because of the following features catered to his overall needs:
- Ease of use: The learning curve was relatively short, because most staff members already had worked with QuickBooks Pro in the past to do estimates and invoices. The company’s comptroller liked the ability to still be able to download transactions from the bank to reconcile the banks.
- User controls and flexibility: he was able to start with 5 users and have the flexibility to upgrade to up to 30 users. All staff members, including: admin staff, warehouse personal, and traveling sales people all had access to the system. And Carlos was able to have control over what user is allowed to do which specific functions, and have an audit-trail of all work being done.
- Database size: his list of known cigar bards was over 500, and each brand had an average of 100 different types of cigars when you counted the different sizes, styles, vintages, etc. QuickBooks enterprise was able to handle 50,000 items without any issues.
- Support: the are over 55,000 Certified Consultants in the U.S. so he had confidence that there would be help if needed. And the company’s CPA was able to still get the QuickBooks file to import to their tax software.
But, where he really saw the advantage, was on the Inventory Management features this upgraded inventory system had to offer:
- Auto-PO: He how had the ability to have the system suggest what products to buy based on the minimum amounts he needed to have based on the forecasted sales. Buying the right amount of inventory allowed him to take advantage of more “need-it-now” sales while lowering the risk of spoilage.
- Barcode Scanning: inventory staff members had limited access to QuickBooks Enterprise, but still where allowed to receive inventory as soon as the product came through the warehouse doors by immediately scanning it. And weekly cycle counts where attainable, before it was a weekend event and the company could only afford to do this once per month. Inventory was now closer to real-time and sales staff where able to offer available inventory just by looking at the system.
- Lot Tacking and FIFO Inventory Costing: in contrast to the other system being used, QuickBooks Enterprise keep track of the historical inventory cost via First In First Out which was aligned to the philosophy to make sure the older product was sold first to increase the average freshness of the cigars in stock.