Inventory Management: More than FIFO

By Christina Suter on Feb 20, 2016 at 04:05 PM in Business Issues

Inventory Management: More than FIFO

How do you manage your inventory?

Having inventory costs money, even if your inventory is something that comes and goes with your job. Going back to my favorite example, the plumber- a plumber has to have pipes in his or her inventory in order to provide a service. So whether your inventory includes books, coffee beans, is your product first in first out, or last in first out meaning that whatever came in most recently goes out next?

With perishables, your inventory has to be rotated, the first thing that you put in has to be the first thing that goes out. With non-perishable inventory, freshness doesn’t count, when rotation matters is when you change your branding. Things that age out, things that go out of style and whose value depreciates have to be rotated to the front in your inventory. How long do you hold onto your inventory? Even the car industry, whose inventory sits on lots for months, and all costs thousands of dollars, has redone their way of managing their inventory. Now, they want you to custom design your car online first so that they don’t have cars sitting on their lot for months at a time. The more inventory on the shelves, the more sunk cost because you have spent money that you aren’t making back.

How quickly does your money (inventory) turn over?

If I have $100,000 and I buy 10 items of inventory and then I get my $100,000 back plus an additional $100,000 from my mark up sale price. That allows me $200,000 now for my next round of purchasing to restock and it doubles how much I have because I was able to quickly get rid of the inventory.

If you sell on etsy, amazon or ebay and you have inventory, it’s costing you money. If you can sell it all in 30 days, even if you have to sell it for less than you could get it, that’s more profitable than leaving it in your inventory for months. The capacity to turn the inventory over brings you more money. If you can get your product shipped from the manufacturer straight to the customer, that’s even better because you don’t have inventory and they don’t have as much as a wait time.

Assignment #1:
Write down your existing inventory management. Do you keep your inventory in your garage? Has it been there for a year or more? Calculate the value of your inventory? Mentally sort your inventory based on how long you’ve had it. Anything you’ve had sitting there for months, discount it. If you can move the money that’s trapped in that inventory that gives you money to do more with today. Turn the current equity into current money and buy things that turn over quickly.

Assignment #2:
Look at your sales record and catalog what sells the most and what sells the fastest. Focus your marketing on those items. Put them on the front page of your website. Pay a fee to highlight those on Amazon. Leverage the branding of being known for something into the time is money concept. If you can order quicker and send it to your client faster, even if at a lower price point, you'll earn more money at the end of the year.

What if you did just-in-time inventory meaning you sell everything and have the new products sent to you second-day air? How fast could you turn those products over? It's cheaper to hold 7 of something and reorder 7 than it is to order say 40, and hold onto 40 over time. Use your equity to turn your inventory over faster.