Getting Your Product Together
What is it that you are selling? How will you get it from being a great idea in your mind and into the hands (or minds) of your customers? Do you understand the process that something takes in leaving your hands?
Inventory Management
Managing inventory is about having what you need when you need it, and being able to move it. Salespeople prefer to have ample inventory available so that they do not lose a sale. For example, a car salesperson needs to have a good selection of cars available so that potential customers don’t walk across the street and buy from the competition. Financially, however, we actually want to keep as little inventory in stock as possible, because money tied up in products that we are storing until sold is money that we cannot use somewhere else.
The balancing act, then, is to figure out how much inventory to hold and how much our customers will demand. Products that are held in a retail situation (such as a bookstore) are often sold at a retail price, and then the price gets reduced on older merchandise so that the store can bring in different products. If the original supply of books, in this example, does not sell, the product may be returned to the manufacturer, who then has lost revenue to contend with. Working with all of these elements is what we refer to supply chain management.
Inventory has three forms that are common in all business, whether you are working in a computer assembly plant or a frozen treat company:
- Raw material (sugar, water, food coloring, flavor, wooden sticks, paper)
- Work in progress (frozen treat base being mixed in different colors and flavors)
- Finished product (orange, lime, and pineapple frozen treats ready for sale)
As you can see, your inventory includes resources involved in material production and labor. If you hold your inventory (and there are lots of reasons that companies do so), your money cannot be directed to other areas.
Reasons to hold inventory might include:
- Buffer or Pipeline: Inventory held to avoid production delays and to maintain efficiency.
- Cycle: Suppliers (or bulk pricing) may require that you order minimum amounts that are larger than you can use quickly.
- Contingency: Supply shortages cost money if production is stopped because of uncertain availability.
- Anticipation: Inventory that is stocked up in preparation for high demand period. (Example: Back to school supplies that flood stores before the school year begins.)
- Speculation: When supplier prices are expected to increase, the company purchases ahead of time to avoid the increase.
Understanding the Value Chain
Understanding your value chain helps to answer the question, “What business are you in?” by figuring out the value of your products. The frozen treat maker’s value chain looks like this:
At each link in the chain, we can identify participants who add value at that step. When a company participates closer to the raw product, they are termed as being integrated backward. If they work closer to the finished product, they are integrated forward. So, if your company steps into the chain at the beginning (perhaps you make the rounded stick from birch), you are integrated backward. If you are distributing the finished products to retail stores after marketing the range of colors and flavors, you are integrated forward.