Just as with Transportation, Inventory is usually just part of having a business. Inventory is what lets you get a product to your customers without making them wait so that you can meet their needs before your competitor does. The key with Inventory is to have as little as you possibly can.
Consider three kinds of physical inventory: raw materials, work in process and finished goods. Raw materials- all those things you need to make whatever product you have, are necessary for you to start the work that will make you money. When you can get them at a discount, businesses, just like people, tend to stock up and count the “savings.” The problem is that all that extra stuff hasn’t made you any money yet. It has consumed some of the cash you need to run your business, and it is probably taking up space you could be using more productively. Beyond that, there is a risk. What if that stuff is perishable? What if your business changes and you need to use a different material? Take a look at the raw materials you use, and ask yourself: What if you could get just what you needed, right when you needed it? How much space would you save? How much cash would you free up? Maybe that “good deal” really was worth buying more than usual, but take a good look at your raw materials, and you’ll probably find some opportunity.
Work-in-process feels virtuous. After all, it’s the physical representation of all the excellent work that is going on right now. Just as with raw materials, though, it takes up cash. Also, since it is currently being worked on, it is probably taking up the maximum amount of space, in a place where people are working. Imagine if all that work was focused on only some of that work in progress. Maybe it would get done sooner and get paid for sooner too. Ask yourself: what if there were fewer jobs in progress at a time and the first one just got done faster, then the next, then the next? How much space would that save? How much faster could you get paid?
Some businesses just love finished inventory. When your customer wants something, you have it to sell them. The bad news is that if a customer doesn’t want something, you still have it, and it’s taking up cash. It makes people feel good to have inventory because it covers up problems. Have a process that doesn’t always work the way it should? Inventory to the rescue. It gives you time to get things going again before you run out.
Maybe it is just easier to make a big bunch of something all at once. Inventory seems like a small price to pay to be extra efficient and make big batches. Still, it ties up cash, and now you also have all the raw materials that could be used to make something else, all tied up in lots of inventory that may not be what your customer wants next, soon, or ever. If what you make is perishable, finished goods are extra risky. Remember the overproduction examples of the bread loaves that didn’t sell. Overproduction caused that, and the extra inventory is now getting stale.
I know someone who had a home business selling high-end skincare products. She’d buy products from the distributor and give people free facials, hoping they’d buy some of the products. The more she would buy at a time, the less it cost her, and the more she’d make with each sale. It was a good business some of the time, but when people bought less of something that she’d stocked up on, there was a lot of skincare product in her basement waiting to get sold. Much of that ended up being sold at a yard sale years later, for far less than it cost her. The waste was really clear then.