In Inventory control, the fundamental thing is to strike a balance between the questions How little and how much. Your industrys basic stock should give a reasonable collection of products and should be enough to fulfill the normal sales demands. If you have just entered into business then you would not have any history of sales or stocking figures to indicate, but you can project such figures based on your business plan.

Basic stock should be calculated based on lead-time, that is, the length of time between reordering and receiving a product. For example, if a product sells 100 units in a week and your lead-time is 5 weeks then you must reorder before the basic stock level falls below 500 units. If you do not reorder until you actually need the stock, you will have to wait 5 weeks without the product.

If your inventory is not sufficient then you can lose sales and cost of back orders is also time consuming. In the midst of production if you run short of raw materials or parts it can be crucial and will increase your operating costs. Labor cost will be higher since your workers would not be working till the stock materials arrive and when they arrive they would have to be paid for their overtime jobs. And if there is immense demand for your product you may even get tempted to buy inventory at a higher price.

You should always keep a safety margin while determining basic stock figures to save yourself from such shortcomings. You should be able to evaluate the factors that might lead to delays, like your supplier who might have a tendency to be late, or your goods being imported. With experience you would be able to calculate this safety margin.

Excess Inventory is a no, no

If your business is in the category of seasonal product line like the woolens, festive gifts, or fast-perishing raw materials like fruits and vegetables, you should avoid excess inventory. These have too little shelf life and once the season is gone they are hard to sell. But products which contribute to peoples basic needs like some kinds of machinery and their parts, have more breathing space because it takes longer for these products to become outdated.

Irrespective of your type of business, however, surplus inventory should be avoided. The overhead costs, like the extra interest on the loan, if any, rent or property tax for dumping the unsold inventory and an increased cost on insurance will bother you from time to time. Excess inventory also leads to reducing your liquidity that should be anyhow avoided. There is this example of a retailer who gets an opportunity to buy 500 gallons of antifreeze at a mind-blowing discount, but this time it was mild winter in the country. Though he can wait till next years winter but the cost of space that could have been utilized for some better product goes a waste.

To get rid of the unwanted inventory you tend to sell it at a lower price and in turn you end up losing on profits. This surely solves the problem of overstocking but return on investment simultaneously gets reduced. So your business plan goes down the drain that had projected full price for your products.

Once you have faced the problem of over stocking you should be cautious, but not overly cautious, otherwise you may end up facing inventory shortage. Hence, the safety margins should always be realistic so that you can stock what you can sell.