Adding Inventory…A Good Thing?

For as long as I can remember, I have been working to reduce inventory.  My experiences have always been with companies that employee a few hundred people or more and have revenue of at least $100 million a year.

Now I am working with a company of two people and revenue of under $10,000.  It is the very small company that my wife has started out of our home.  Last year was year 1 and it went pretty well.  Well enough that this year we decided to take a few more calculated risks in order to grow the business and reach more customers in the area.

Because my wife is the marketer, salesperson, developer, manufacturer and everything else ‘er things have to be run a little differently.  We have kept the manufacturing batches rather small so far.  One batch of 8 bars of soap per run.  With more risks we have to add inventory.

One risk we have taken is adding our product to local store.  We own the product until it is sold at the store.  This almost doubled our inventory since we have to have inventory ready for internet orders and the events we do around the area.

Another lesson we learned last year was 90% of the events we participated in are from Sept. – mid-Dec.  It was very hard last year to make only the soap sold in the 5 days or so between events.  This year we are going to participate in bigger events, plus some of the same events from last year.  As we get more and more repeat customers, the making just-in-time is going to be harder and harder.  So this year we will building inventory of our main products ahead of time.

While we will be adding more inventory earlier, we believe this is the right thing to do this year.  We can’t afford to hire someone to work for us and trying to raise two kids while running a business is hard enough to do without pulling all-nighters to make product.

We know it will tie up cash for a little longer but we are willing to take that risk this year.  What are your thoughts?

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Posted on March 16, 2011, in Manufacturing, Waste and tagged , , , . Bookmark the permalink. 5 Comments.

  1. Hi Matt,

    Great question. The Toyota Way Fieldguide, I believe, states that we sometimes have to chose one waste over another. This has been my real life experience as well. Until we get to the point of truly having Zero Losses, even lean managers will have to decide what is the optimal inventory level to support the business. You understand the down side to inventory. My hunch is that most small businesses do a decent job of optimizing inventory over time since they are making decisions that affect their own wallet. Inventory can get out of hand more quickly when we are making decisions with other people’s money (stock holders). Strive for the right balance.

    Chris

    • You nailed it, Christian. In my experiences I have seen somewhere around 70% of the time I am trading off wastes. One great example is the waste of a standardized checklist. Completing the checklist adds no value to the product. It just helps ensure you do the things to add value to the product. But, I would much rather take the time to do the checklist instead of having to do the rework if something when wrong because I didn’t follow the checklist.

      Same with our inventory as we build the business. Pick the high selling staples of the product line and build ahead some what so we don’t get burned out and frustrated during the high selling season. It is more of trading $ cost versus personal sanity cost for us in this case.

  2. I recently visited a soap manufacturer which was a little bit bigger than what you are describing here. It was the exact same situation though. Building up inventory to meet the demand which was unknown since they get orders through internet and local events that the owner visited. I think it is a trade off between building inventory and customer satisfaction because it was important for them to ship the product as soon as they receive the order.

    Batch process was another thing. They had to form the bars of all the ingredients they mixed for a particular type of soap.

  3. This is a very common approach to a number of seasonal businesses and products. We have a cable plant this year that won’t have enough capacity in the peak season but can handle the total annual volume. Expansion is very capital intensive. Cable is not installed in the winter months in most of US because the ground is frozen. So this year we came up with a plan to produce the high running cable types over the winter to support this season volume.

    I have also seen this with consumer products like school supplies, holiday supplies. Really this is an artifact from have chunky demand patterns and trying to level load the production over a longer time period. It is a better technique then expanding which expensive and permanent.

    • Tim, you are right about the seasonal business. It is something we struggle with because the product shouldn’t really be seasonal once we get up and rolling. The outlets to sell our product is very seasonal though. It is much less capital intensive for us to build ahead with the stock than it is to hire more people. Capital equipment wouldn’t be a huge expenditure. It would be about a break even to our inventory costs. In our specific case it is about time and labor costs.

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