Best Practices – Inventory Management – The Purchasing Function


Your purchasing processes directly affect your inventory and your company’s cash flow.  It’s a fine line between having the inventory you need to produce a product or complete a customer order and having too much inventory.

Among the consequences of too little inventory are:

  • Delayed shipments therefore slower cash flow.
  • Unhappy customers and more time spent on customer service.
  • Higher freight costs and expediting fees.

Excess inventory affects a company’s financial health in several ways:

  • It ties up cash that could be used to grow the business.
  • Aging inventory loses value and at some point becomes obsolete resulting in write-offs.
  • Inventory handling costs are increased – more time to count it, more square footage required to store it to name a couple of costs.

A lot has been written about “Just In Time”, “Lean” and “Kanban” Process Systems.  These types of inventory management processes are designed to make sure you have only what you need for production and shipping and no more.  While the concept is laudable, the reality for a smaller business is the time to manage this type of purchasing may be simply too time consuming or expensive.

The bottom line is to make your company efficient, tie up less cash and produce predictable and consistent results, and the purchasing function is one key to making this happen.  Designing a formal purchasing process that helps your company function more efficiently will maximize the return on your inventory.

  • Do you want to use approved requisitions for consumables and parts or would this be too time consuming?
  • Do you do custom manufacturing that requires engineering drawings and vendor approval with a purchase?  Plan to keep a copy of the drawing in your system attached to the part number.
  • Can you set minimum/maximum levels for quantities on hand that trigger purchases?  This is a major time-savings step that takes very little time and increases the effectiveness of your purchasing department.
  • What is the “economic order quantity” for each item?  If you purchase 20 instead of 10 do you get a price break?
  • Will your vendors stock, stage or package product for you?  Sometimes your warehouse is too small to carry all of the safety stock you need – will your vendor help out?

A good buyer will work in partnership with your management and production team and your suppliers to make sure the relationship is helpful and profitable for all parties.

The final article will discuss what to look for in Inventory Management Software for your company.