BWSmallBiz -- Inventory October 17, 2008, 5:00PM EST

Taking Stock of Inventory Management

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A PEOPLE PROBLEM

The largest software companies—IBM, Microsoft, SAP, and Oracle—have long designed enterprise level inventory (or supply chain) management platforms for big businesses. These can cost hundreds of thousands to several millions of dollars. These same giants have only recently turned their attentions to the small and midsize business market. Some well known supply chain management systems produced by Microsoft include Great Plains and Solomon, now lumped together under the name Microsoft Dynamics GP. These can also be quite costly, running into the tens of thousands of dollars.

Then there are a group of smaller developers that have designed for entrepreneurs for years. Stone Edge, for example, which Carroll uses, has both a standard and premium level, and costs between $1,500 and $6,000. Microsoft's Business Essentials package, which includes an inventory management component, runs about $2,250 per user. That leaves some entrepreneurs to cobble things together on their own. They've come up with some pretty ingenious solutions, often using QuickBooks and other relatively affordable off-the-shelf packages as foundations.

But your inventory management system is only as good as the people who use it. It won't make up for a lack of strategy, inefficiency, or poor insight into your own supply and demand. "The mistake is thinking the software itself will solve the problems," says Mark Ferguson, Steven A. Denning Professor of Technology and Management at Georgia Institute of Technology in Atlanta. He says a lot of entrepreneurs buy "really sophisticated supply chain software packages and then basically all they are doing is automating bad processes."

With any inventory management system, there are some basics to consider. You need to decide if you want to host the system on your own servers or outsource it. Both have advantages and drawbacks, including cost, accessibility, and the ease of updating software. Any inventory management system needs to support your accounting method, which should keep track of inventory on what's known as either a "first in first out" or "last in first out" (FIFO or LIFO) basis. Both examine the movement of inventory for tax consequences, which in turn affects your profit-and-loss statements. Your system should keep track of goods as they are received and shipped, giving you a view of everything in your warehouse. You want results in as close to real time as possible, and the information should be available to your sales force, preferably online, so no one is making mistakes at order entry time.

Super Lawn Trucks, a $4 million business in Fort Valley, Ga., happily uses QuickBooks Pro—at a total cost of less than $1,000—for its inventory management needs. The 20-person company makes customized truck bodies for landscaping contractors. Tony Bass, its president, says the software gives him an eagle-eye view of what's coming in from suppliers and the expected delivery dates. He makes heavy use of QuickBooks' invoicing features, which let him see all of his supplier information, part descriptions, and products that qualify for a volume discount. QuickBooks tells him what he already has, what he needs for current orders, and when he needs to put in new purchase orders.

Best of all, the system gives him a view of how sales and reorders affect his balance sheet and profit-and-loss statement. Bass sets reorder points, based on historical trends, on each part he uses, and the software generates weekly reports telling him what he needs.

To reach this level of efficiency, Bass spent about four months analyzing invoices. He dissected data looking for part names, place of origination, volume discounts from vendors, shipping time, and, of course, costs, inputting it all to QuickBooks. That has helped him cut turnaround time for his truck bodies from six weeks to less than a month. "You can make a big impact on cash flow based on how you manage your inventory," he says. Every time a part is pulled from inventory, Bass's system ties that part to a profit-and-loss statement on his balance sheet, telling him the immediate cost to his business. He has also halved the number of employees devoted to inventory, saving about $50,000. "It's not good enough just to have the data, you have to look at the reports, and you have to take the time to analyze it," says Bass. That still sounds much better than suffering through yet another inventory day.

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Quittner is a staff writer for BusinessWeek in New York.