Supply Chain For Small Business

Business Options

Making the decision (if there's an option) whether or not an enterprise invests in carrying its own inventory brings with it major implications for the cost structure and working capital requirements of the enterprise. If a business has to, or chooses to, invest in carrying its own inventory then, along with that decision comes complexity and risk as well as the need for an allocation of capital to pay for the inventory.

There's an opportunity cost associated with every business decision involving the allocation of capital. What's spent on inventory cannot be spent on updating and deploying a fully integrated information technology platform. Hiring a supply chain manager to try and forecast requirements and manage the inventory, achieve required service levels while attempting to minimize tying up excess capital and risk of obsolescence, may mean forsaking a digital marketing manager that could be focused on nurturing new customers and developing valuable web traffic.

**The Resources Required and Risks Associated with Physical Inventory Assets**
Resources	Risk
Management	Supplier shipping delays
Information technology	Forecast accuracy
Working capital	Stock-out's
Warehouse space	Inventory obsolescence
Warehouse equipment	Working capital
	Shrink and damage

Manufacturing Enterprises

If a business enterprise is involved in manufacturing then there's no option except for it to carry inventory - both in raw materials and in finished goods. In order to decide how much inventory is needed the enterprise must rely on a sales forecast. Relying on a sales forecast is inherently risky as it will never be accurate. Depending on what raw material and finished product manufacturing lead times are, will affect how far out the enterprise has to reply on the forecast. The further out the less accurate it will be and the greater the risk of future inventory obsolescence.

Technology can be used to reduce this risk. Customers may provide actual inventory on-hand and sell-through data to the enterprise in order they can forecast future demand more accurately. As more and more items join the "Internet of Things" and are directly connected providing detailed data on consumption then the information can also be used for more accurate forecasting. However, in order to do so investments have to be made in technology and human resources to gather and interpret the data in order to make it useful.

Investing in an Enterprise Resource Planning (ERP) system with material planning (MRP) capabilities will also be unavoidable for a manufacturing entity. Establishing Bills of Materials (BOMs) for all its products along with lead times for the individual components and tying all this into the inventory management system along with vendor lead times are additional costs that will necessarily be incurred to competently manage the supply chain.

Virtual Enterprises

For a reseller enterprise that is able to operate as a "virtual" business the risks associated with carrying inventory can be eliminated along with the allocation of capital and operating expenses that would otherwise be tied up in the warehouse. Technology can be utilized to tie into manufacturers and distributors inventory in their distribution centers. Resellers can deploy their e-commerce site showing inventory availability leveraging what's available at their suppliers facilities rather than their own. Instead of paying for inventory in advance it pays only when it's sold. Instead of paying for a warehouse, warehouse equipment and personnel it leverages the investments already incurred by the supplier. Instead of paying higher freight rates it gets the supplier to drop-ship direct and use its more favorable rates. Complexity, working capital requirements and operating expenses are all reduced or eliminated.

Conclusions

Whether in manufacturing or distribution, information technology should be leveraged to eliminate or reduce the carrying risk of inventory and the potential for obsolescence. Ultimately, the fittest and most efficient businesses survive and managing the supply chain for small business should be high on the list of priorities to ensure potential write-off's are minimized. Bottom line - an efficient supply chain and working capital optimization go hand-in-hand.

Click on the link below to download a free copy of our Business Projection Model to see just how much cash you can free-up by fine-tuning your inventory carrying costs.