May 27

Written by: SuperUser Account
5/27/2010 10:54 AM

In his book Small Business Management, Michael Ames gives the following reasons for small business failure: Lack of experience, Insufficient capital (money) , Poor location, Poor inventory management, Over-investment in fixed assets, Poor credit arrangements, Personal use of business funds, and Unexpected growth . This is the fifth in a series of eight posts concerning the top causes of small business failure. We will work our way up to the number one cause; however each one is an important issue for any small business to consider. This post is on poor inventory management being a cause of failure.

1) Know how much you have: The first step in managing inventory well is to know what you have and to properly track changes. There are many blogs on this subject and there are many solutions to perform this task, including QuickBooks, Sage, NetSuite, and SAP to name a few.

2) Know how much you should have: Having the right amount of inventory is a BIG headache for businesses of all sizes. According to Aberdeen , bottom performers have NINE times more inventory than their top performing peers. They are also SEVEN times more likely to be in a stock-out . It is no wonder poor inventory management is a top cause for failure with such a huge variation in performance.

The cause for this huge variation in performance - it is not easy to know when to reorder the right amount of inventory. According to Aberdeen , the following are the most common reordering strategies:

- 26% of businesses order at a frequency, ie a regular monthly schedule because it is easy to simply order on a regular basis.
- 24% use a policy based on cost or service, ie the EOQ (Economic Order Quantity) formula because it is simple.
- 20% order based on speed or volume, ie ABCD categories that enable easy prioritization of the most vital items.

What all these methods have in common is that they are easy to deploy; however, none of them make it possible to quickly balance the universal needs to minimize costs, maximize cash flow, and maximize customer service. All of these methods produce mind numbing charts and spreadsheets that make it very difficult to understand inventory levels. At their core, today's Enterprise Resource Planning (ERP) packages are using outdated business models to set reorder points; therefore, it is very difficult/complex to obtain the right amount of inventory. For example, QuickBooks for small businesses relies on manual arbitrary settings while Sage, Microsoft, and SAP rely on the EOQ model, ABCD categories, and manual arbitrary settings.

One solution on the market solves the obvious problem that others seem to have ignored. Phitch sets inventory levels at maximum economic profit and communicates the status relative to this baseline using color-coded business alerts. Economic profit is often referred to as ECONOMIC VALUE ADDED or EVA (Trademarked by Stern Stewart). Phitch balances cost, cash flow, and customer service simultaneously using patent pending technology (US Patent Application serial numbers 61/001,611 and 12/075,524 filed 3/12/08 and PCT serial number PCT/US09/00172 filed 1/12/09).

While the analysis of Phitch is complex, Phitch makes it easy to understand and communicate inventory with enhanced color coded business alerts (ie Blue = surplus and Red = shortage). Phitch is an action/results based platform to place orders, set reorder points, set safety stocks, send emails, etc...Phitch makes it easy for an entire organization to understand, communicate, and take action and is poised to expand access from any device, including PCs, Macs, laptops, and smart phones across functional boundaries.

Doing inventory right does not have to be difficult. With the right technology, you can "know what you have" and be able to drive to the level "you should have".

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