Inventory Management for Small Businesses: Strategies for Success

We find ourselves in an era where consumers are well-informed, contributing to a business landscape marked by intense competition. This necessitates maximum efficiency at every level for companies, particularly where inventory management is concerned. Inventory often stands as the most substantial asset on a company’s balance sheet, thus requiring meticulous handling. The efficient management of inventory is pivotal, given that a significant portion of a company’s expenses is tied to inventory investment, this comprises of holding, transportation, and management costs. This is especially crucial for the profitability of Small and Medium-sized Enterprises (SMEs).

Effective inventory management extends beyond mere forecasting and replenishment; it involves the strategic optimization of services and profits through inventory control. Organizational effectiveness pertains to the efficiency of internal processes within an organization and by extension, inventory management.

Primarily, effective inventory management necessitates the judicious determination of optimal quantities to order and maintain at a given time due to the attendant costs. The consequences of holding excess inventory include the tying up of capital, leading to potential deterioration, obsolescence, and vulnerability to damage, pilferage, and burglary. Conversely, insufficient inventory levels result in sales interruptions due to stock-outs, strained consumer relations, and underutilization of machinery and equipment. Achieving an optimal balance in inventory levels is contingent upon the possession of the requisite knowledge, skills, and abilities for planning, monitoring, and controlling inventory. Consequently, small business managers equipped with fundamental knowledge of inventory management strategies, coupled with the skills and abilities to implement these strategies, stand to enhance their inventory management practices, thereby improving overall business sales and profitability. It is imperative to recognize that regardless of the chosen approach to plan, monitor, and control inventory, the unit heads or managers must possess a comprehensive understanding of “know-what,” “know-when,” “know-how,” and “know-why,” elements which cannot be overlooked or assumed.

Secondly, the impact of inventory management and managerial competence on financial performance finds support in the Resource-Based View (RBV). The RBV posits that organizations can sustain performance by effectively leveraging their held resources. Given the inherent nature of small businesses, where management is often centralized around the owner/manager, their business-related knowledge, skills, and abilities emerge as pivotal resources for augmenting financial performance. This perspective aligns with the Dynamic Capability Theory, which emphasizes a firm’s capacity to integrate, construct, and adapt internal and external competencies to navigate swiftly evolving environments. In the context of inventory management, firms must be cognizant of the volatile nature of customer preferences, steering clear of overstocking items that might detrimentally impact financial performance. Therefore, the cultivation of dynamic capabilities becomes imperative to ensure efficient inventory management, mitigating the risks of failing to meet customer demands on one hand, and averting undue investments in inventory on the other.

Traditionally, organizational success is often quantified in monetary terms by accountants and senior managers. However, effectiveness is defined not only in financial metrics but also by the ability to attain specified inventory levels, as measured by indicators such as inventory turnover.

Contemporary inventory management systems, rooted in established models like Economic Order Quantity (EOQ), Activity-Based Costing (ABC), and Just-in-Time (JIT), continue to form the foundation of efficient inventory systems. Despite the emergence of advanced systems like MRP/MRPII and ERP, little research has been conducted to evaluate the potential competitive advantage these systems may offer SMEs.

Safety inventory plays a crucial role in mitigating uncertainty, acting as a buffer against unforeseen events that may lead to inventory shortages. Supply Chain Management (SCM) is a holistic approach aimed at integrating suppliers, manufacturers, logistics, and consumers to optimize inventory placement.

Given that inventories represent a substantial investment for businesses, the challenge lies in determining the optimal inventory level to achieve service-level targets while managing costs effectively. Balancing service levels, holding costs, and manufacturing costs is key to enhancing profitability.

Statistical analysis from various studies has revealed that over half of the existing SMEs in the market are ineffective at inventory management, potentially stemming from a lack of theoretical knowledge. Additionally, many SMEs often experience inventory shortages due to Just-in-Time (JIT) ordering but refrain from holding safety inventories due to associated costs, making them reliant on their suppliers’ supply chain management for efficient service delivery. Moreover, the implementation of ERP systems, such as SAP, has been deemed too expensive for small businesses, leading many to adopt more affordable solutions like Pastel for inventory management.

Dedicated Freight Corridors: Importance in bringing down logistics cost

Article by- Rachee Dhabarde

What is Logistics? :-
Logistics means movement of physical goods from one point to another in the value chain of a product.

Logistics in India:
The logistics in India mainly happens by Road. Then most of the logistics takes place by railways, waterways and airways. In terms of cost, waterways are the cheapest mode of transport followed by the railways. Currently, the railway tracks for passenger trains and the fright transport trains are the same. The logistics industry in India is expected to grow at a compound annual growth rate (CAGR) of 15.5% between FY2019 and FY2024. The logistics sector employs around 22 million people and a potential to create another 1.2 million jobs by 2025.

Logistics by railways in India:
As mentioned above, currently in India, same railway tracks are being used to transport the goods and the passengers. This basically has two negative impacts on both the goods and the passenger transports. Firstly, the passenger trains have the highest priority in terms of transport clearance. If any clash happens between a goods train and a passenger train travelling on same track, the passenger train is given the first priority to go ahead. This results in a big halt for the goods train which eventually results in a huge delay for the goods transport. This delay means goods which were supposed to reach the destination in 2 days reach it after 8 days.
This basically results in a huge cost for the company delivering as well as receiving the goods.
Secondly, the use of same tracks for both types of trains means the tracks has to undergo frequent maintenance activities. This is because tracks have to bear the weight of both types of trains resulting in high amount of wear and tear. So the tracks require frequent repairs and not doing so may result in a fatal accident.
In terms of profits, 63% of the profits gained by the railways come from the freight transport while the remaining 27% comes from the passenger trains. Even so, the passenger trains take upper priority in terms of transport. Also, the expenses done on the passenger trains are 110% of the revenues earned. This is mainly because of the salaries of the maintenance staff, electrical supply, washroom cleanings, water supply expenses, customer helpline attendees’ wages, railway police salaries and other administrative costs associated with the passenger trains. In contrasts, freight trains require bare minimum maintenance and runs on a very little
overhead costs. We can say that the passenger trains are like the spoilt kid of Indian railways who has high demands and low returns while the Fright trains are hardworking elder child who has low demands and brings high value to the family.

Dedicated Freight corridors- a sense of justice to freight trains?
To tackle the problem of interruptions to freight trains from passenger trains, Indian government has launched Dedicated Freight Corridors (DFC) project. As the name suggests, the project will focus on building
dedicated railway tracks for the freight trains where only goods carrying trains will run uninterrupted. A new company, DFCCIL or Dedicated Freight Corridor Corporation of India Limited has been formed to take care of the DFC project.

Under the DFC project, 2 DFCs, Western and Eastern DFC has been planned. Out of this, around 600 km of track is currently operational on the eastern DFC while the western DFC is under construction. The DFC project is planned to be completely operational by March 2023. The Western DFC tracks measures around 1504 km while the eastern track measures 1856 km.

DFC Symbol–

The DFC tracks are being made attached to the proposed logistics parks. The problem with Indian logistics parks was that it had no connection with any railway track, so the intermediate transport was used be
done by road. This added to extra unnecessary expenses in the logistics costs. Now, the DFC trains will halt at the logistics [arks directly and loading and unloading can take place easily at the logistics park itself.
The trains that will run on the DFC tracks will have a specially made WAG-12 engine. The engine is being made in collaboration by a French company Alstom and Indian railways. It is a two section engine being
manufactured in Madhepur and have maintenance facilities in Saharanpur and Nagpur. Wag-12 is a 3 phase engine which is more powerful than single phase engine and it weighs 180 ton. The power of the engine is
12000Hp capable of carrying 6000 tons of load. That is equivalent to 600 trucks of loads..!!

Why the project was needed?
Currently, the logistics cost in China is 6% while for India its 30%. That means, a good manufactured for ₹100 reaches at ₹ 106 to customers in China while for ₹130 in India. This puts India behind the competitive
advantage over China in terms of logistics. So tackle this problem and compete with china, DFC was very necessary. Also, in terms of infrastructure, current freight platforms are only 700 meters long while the DFC platforms will be 2 Km long. So a huge amount of goods can be loaded and unloaded simultaneously. This will reduce the time taken to transport the goods. Current average speed of freight trains is just 30 Km/hr while the DFC trains will have a whopping 100 Km/hr speed. That’s a huge reduction in time taken for the fright transport. This is estimated to bring the logistics cost to 18%. Still less than China but this will be start. By using DFC, 24-hour goods transportation can be done and round 13000 tons of goods can be transported at a time as the DFC trains are double-stacked. That means one container on top of the other for the whole length of the train. Also, level crossing is avoided in DFC which means less accidents plus time saving. This will lead to saving of insurance money as well as delay costs. In conclusion, the DFC project will act as blessing for the logistics industry in India, bringing down the cost of logistics by reducing supply time, maintenance cost, saving time for transport and most of all, creating a positive image of India as a cost efficient manufacturing hub for many international firms. This will surely help to boost India’s 3 Trillion dollar economy target.

JUST-IN-TIME INVENTORY

                                     

JIT is a type of inventory management that calls for close coordination with suppliers to ensure that raw materials arrive at the exact time when manufacturing is supposed to start, but no earlier. It aims to have the minimum amount of inventory on hand to meet demand.

How does JIT work ?
JIT inventory management guarantees that stock will arrive at the exact time it is required for manufacturing or to satisfy consumer demand, but not earlier. The objective is to reduce waste and improve the effectiveness of your business operations. Since quality rather than the cheapest price is frequently the primary goal, JIT necessitates long-term agreements with dependable suppliers.

JIT is an example of a lean management technique. All components of any manufacturing or service system, including humans, are connected in JIT. They share information and depend on one another to produce effective results. The name Kaizen, which means “transformation for the better” in Japanese, is where this technique got its start. The business strategy has its roots in Japan and aims to continuously enhance operations while including every employee, from CEO to assembly line workers.

KANBAN – A critical element for the JIT Inventory System
The “nervous system” of lean JIT production, kanban regulates inventory movement and work-in-progress production. When it comes to reducing manufacturing waste brought on by overproduction, kanban is essential. 

Push inventory tactics are used in more conventional mass production techniques and are based on the anticipated quantity of sales. The pull approach used by Kanban allows for greater production floor flexibility because a business can only generate items in response to genuine customer requests. On a factory floor, Kanban uses cards—either paper or digital—to monitor the status of output. Kanban cards track the flow of inventory through the manufacturing process and can indicate when it’s time to place an order for additional stock.

Benefits of JIT
Just-in-time results in reduced scrap ,better quality products ,reduced cycle and setup times, higher productivity, higher workforce participation, etc. In addition to these benefits, JIT also improves relationships with suppliers.
It is clear that implementing a JIT system is a task that cannot be undertaken lightly. It will be expensive in terms of management time and effort, both in terms of the initial implementation and in terms of the continuing effort required to run the system over time.

Let us look more into the supplier side benefits of JIT.
Supplier gets a long-term guaranteed contract, steady demand and a good price. In return to these suppliers agrees to quality components (e.g. zero defects), guaranteed delivery times,
a “partnership” with its customer, contingency plans to cope with disruptions, common disruptions might be: the effect of bad weather, a truck drivers strike blocking roads/ports, a flu outbreak reducing the supplier’s workforce.

Criteria for supplier’s selection :
1) Good industrial relations (“involvement”, “value”, “dignity”, “ownership”), no strike deals
2) Close to production plant (else potential transportation delays)
3) You believe that the supplier can met their promises with respect to the list of factors given above that they are agreeing to.

You can decrease the total number of suppliers if they meet these requirements; in fact, it makes sense to do so. Why do you need five suppliers if five already meet all of these requirements? Obviously, for safety concerns, you can elect to have more than one supplier. A factory fire or an earthquake can affect even the best-run suppliers, but probably no more than two or three providers. Cost-wise, having a single supplier may be appealing, but one must weigh the danger versus the savings.

Some successful companies practicing Just-in-Time systems

Apple

Technology giant Apple has also used JIT concepts to improve the efficiency of its production process. The unique aspect of Apple’s JIT strategy is how they work with their suppliers to meet their objectives. With only one main warehouse in the

US and 150 major suppliers worldwide, Apple has built solid, strategic connections with its suppliers. This production outsourcing made Apple leaner, cut expenses, and decreased overstock as a result. The majority of their inventory is at their retail stores because they have just one central warehouse in the US. Apple started utilizing drop shipping, further adding to the JIT mix. This lowers the price of storage, shipping, and wastage.


Factors attributing Apple’s success
1) Apple is relieved of this obligation because to suppliers’ willingness to maintain stock on hand.

2) Keeping stock in their retail locations

3) Procedures for drop shipping internet purchases

McDonald’s

JIT inventory is used by fast-food businesses like McDonald’s to provide daily service to their consumers. These fast food restaurants typically have everything they need on hand, but they may wait until after the order has been received to assemble and prepare their hamburgers and sundaes, for example (except for a few finished products at peak times). This harmonizes the procedure so that customers always receive orders with the same consistent experience.


Factors attributing McDonald’s success
1) Standardized procedures ensuring consistency

2) JIT method increases customers satisfaction as items are made more freshly


JIT helps business owners save money and reduce wastage, while still providing their customers with the products they want and need in a timely manner. As excess inventory is vastly decreased by ordering inventory stock on a “just when you need” basis, business owners will not need to keep large quantities of inventory stock parts reducing all the costs associated with this.