We're heading into our second StitchUp this week, centered around products and inventory so I figured I would do a quick top five post about how to manage inventory. However, thinking through the best tips to provide, I thought it may make sense to think about inventory in a broader sense. Inventory is more than just a pile of "stuff" you have. There are complex details that vary from business to business depending on your size, how you produce, what you produce and so on. So for this post, let's talk a little higher level and dig into exactly what 'inventory' means.
Inventory isn't just inventory
I spent the first 10 years of my career working for major manufacturers. You may have heard of them; Kraft Foods, Philip Morris U.S.A, and the Campbell Soup Company. Not one day went by that we didn't have to think about, talk about or handle inventory. Interestingly enough, if you asked someone within the same company a question about inventory, depending on which area of the company they worked in, you would get a completely different answer. This is because inventory means many different things to different people. Inventory isn't just inventory and it's far from a simple topic.
Here are a few examples of what I mean. If you type the word "inventory" into your Google search, you get about 557,000,000 results. Do the same thing with the phrase "what is inventory," and you get about 342,000,000 results. Looking for an actual definition of inventory? Pick one:
Merriam-Webster (there are several):
- a: an itemized list of current assets: as (1): a catalog of the property of an individual or estate (2): a list of goods on hand
b: a survey of natural resources (this one gets the WTF? award)
c: a list of traits, preferences, attitudes, interests, or abilities used to evaluate personal characteristics or skills
- the quantity of goods or materials on hand
- the act or process of taking an inventory (I always though you weren't supposed to use the word you were trying to define in the definition, but who am I to question the internet?)
Dictionary.com (quite a few here too):
- a complete listing of merchandise or stock on hand, work in progress, raw materials, finished goods on hand, etc., made each year by a business concern.
- the objects or items represented on such a list, as a merchant's stock of goods.
- the aggregate value of a stock of goods.
- raw material from the time of its receipt at an industrial plant for manufacturing purposes to the time it is sold.
- a detailed, often descriptive, list of articles, giving the code number, quantity, and value of each; catalog.
Wikipedia (this one depends on your country):
British English: a list compiled for some formal purpose, such as the details of an estate going to probate, or the contents of a house let furnished.
USA and Canada: a list of goods and materials to the goods and material available in stock by a business.
A complete list of items such as property, goods in stock, or contents of a building.
As you can see, inventory's not so simple. There is a plethora of information on the topic and it's defined differently everywhere you look. Not only is it defined in many different ways, but there are many terms and phrases that surround it.
Terms and phrases associated with inventory
- Average Costing
- FIFO - First in, First out
- LIFO - Last in, First out
- WIP - Work in process
- Finished goods
- Raw materials
- Inventory turnover
- Holding cost
- COGS - Cost of goods sold
This list goes on for days and none of the aforementioned is "simple." Most people didn't go into business to be an accountant. Heck, accountants wouldn't even say this topic is simple. Have you ever asked an accountant a question about inventory? I swear their favorite answer is "It depends." I don't know about you, but that answer sucks! The problem is, while that is an extremely unsatisfying answer, it's a very good answer. There are so many variables at play when it comes to inventory, and running a business carrying it, that it really does "depend."
So where does this leave us? It leaves us with quite a bit of homework and still no clear cut answer about what inventory really is. Inventory means something different to every company. It might mean something different to people within the same company, depending on their function. It also forces us to make sure we are smart about how we run our operations and manage our inventory. This is why companies like the major manufacturers mentioned above spend millions upon millions of dollars to invest in systems that enable them be more efficient with their inventory. Why? Because technology is a major competitive advantage and inventory is hard. Companies like Oracle and SAP exist and make billions because of complex problems that exist when it comes to managing inventory.
This is part of the reason that we started Stitch Labs, because there was a hole in the market for affordable solutions for companies that are looking for powerful tools, but can't afford to spend thousands, let alone millions of dollars on software to help them run their business.
We know first hand that if you're not paying attention to your inventory, you will eventually be sunk. You need to carry enough to satisfy demand, but not so much that you tie up all your cash; and there are so many variables to be aware of (e.g. seasonality, the economy, trends, time to replenish, etc). If anyone ever does figure inventory out perfectly, they deserve to make billions. It's a constant balance and we all need to make sure we have an understanding of it so we can be successful.
Let's talk about it
If you have inventory successes or nightmares, we'd love to hear about them. Feel free to leave a comment below and make sure you join our StitchUp this upcoming Thursday, April 26, at 1PM PT. We're recording each event and, if you sign up, you will have access to the videos.
You might enjoy several other posts we've done about inventory. Be sure to check them out: