Keeping Up with Inventory for Your Small Business

Here are some tips on how to strategically manage your supply chain to keep production humming

Manufacturing in the United States has changed a lot since the end of World War II. That’s when manufacturing jobs in this country hit an all-time peak with 17 million new jobs created and a 96 percent increase in industrial productivity. Unfortunately, real manufacturing output has fallen as more large manufacturers have gone offshore to manufacture everything from computer components to automobiles. Despite this, manufacturing still contributes trillions of dollars to the total U.S. GDP.

Nevertheless, small manufacturers are where manufacturing in the United States is thriving. Today, 98 percent of U.S. manufacturers employ less than 500 workers. 75 percent have fewer than 20 employees—meaning that these enterprises are no longer confined to major cities with large populations of potential workers, but are spread out all over the country. With that said, the challenges of manufacturing are a bit different for a large company like an automaker and a small manufacturer.

Small Manufacturers Face Challenges as They Strive to Grow

Like many of their small business peers, small manufacturers face the challenges associated with accessing adequate cash flow to fuel business growth and operations. Managing the supply chain of parts and raw materials to produce their manufactured goods can be a real challenge. RT Custer, the owner, and co-founder of Vortic Watch Company, a small engineering, and manufacturing firm based in Fort Collins Colorado, describes it this way:

“To keep my cost of goods at a manageable level, I need to order hundreds of parts. I’m then restoring hundreds of components of the watches, which is very, very slow. The lead times for all my components are very long. Managing my whole supply chain is complicated and the root cause of my cash flow challenges.”

The longer lead times (which can be six to nine months, according to Custer), make it critical for small manufacturers to have their manufacturing process, product development, and inventory management approach in hand.

Selling Version No. 1 While Developing Version No. 2

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It’s not uncommon for a new product to be in development while the current product is in production—even if the next version will replace the current version. “We’ve had so many ideas on how to make the process and products better that sometimes when that new idea gets implemented, and you start making money from it, it’s almost six to nine months later,” says Custer. “We sold Version 1 of our product for almost 18 months, even though we started developing Version 2 within our first six months. It took us over a year to develop.”

This is a very common challenge for manufacturers of any size but is particularly felt by small manufacturers. Fortunately, creating a culture of innovation helps prepare everyone for the inevitable need to start developing the next generation of products as soon as production begins on the current version.

Automakers have become adept at leveraging many of the same parts from a current production line into the development of the next. This keeps the cost of introducing a new product lower and enables them to enjoy some quantities of scale when buying parts or other raw materials.

Access to Capital Can Be Key to Managing the Production Process

Custer’s team has raised money with equity investors, crowdfunding and financing to get the capital they needed to keep manufacturing. They’ve even experimented with a 50 percent prepayment on orders. “It’s a great idea in concept,” says Custer, when talking about charging up front, “but you must have an amazing sales team to make that strategy work.

“As a business owner, you must think about your economies of scale—with cash flow you can only get to one level, but with financing, you can get to an entirely new place. This increases your margins, and your cash flow, and ultimately your revenue and profit for your business,” he adds.

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Additionally, Custer suggests that taking control of the creation process not only allows you to manufacture a superior product; it also helps you control costs. “In the watch industry,” he says, “we call that ‘bringing it in-house.’ Rolex is a great example of that—they are completely vertically integrated. They make everything themselves. That’s part of their brand and value—it allows you to maintain a phenomenal quality and control the costs of goods to a T. It’s very expensive to get to this point—you must buy every machine, hire and train every person. For Rolex, this is literally billions of dollars worth of investments.”

His biggest piece of advice for other small manufacturers? “Try to have as much control over the creation process as you can so you can control your costs.”

Manage Your Inventory by Managing Your Suppliers

“The most important thing is to pay your bills on time,” advises Custer. “Sounds simple, but if you give someone a PO, they make you 500 screws and you get net 30 and then you don’t pay them within 30 days, they will not make anything for you ever again. You can burn bridges fast.”

Small manufacturers rely on their suppliers for a lot of the parts and other materials they use within the manufacturing process. It’s critical to stay on good terms with your suppliers or you can bring your production to a standstill. Managing vendor relationships is important enough that communicating when you’re having problems is of paramount importance.

Custer shares this experience:

“There was a time I was going to be two days late and I called a vendor on day 29 and I told them I needed a few more days. They were astonished that I called and were so thankful that I asked for more time. It helped create trust between us. Integrity matters. We need more people to do that in our industry, especially if we want American manufacturing to thrive.”

Most of your suppliers are likely as interested in your success as you are. If you give them a reason to really partner with you, they will work hard to help you achieve your objectives. For those parts of the manufacturing process, you don’t make yourself, where you rely on other suppliers, open, honest and straightforward communication enables you to treat them like a partner in your success—a role they will likely take seriously. This is why vetting your vendors and suppliers is so important. Because so much of your process relies on them, you want relationships that will enable you to be successful.

The Key to Success: Put Your Customers First

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“The biggest thing that you can do as a manufacturer to grow your business is to take care of your customers and provide the best product and service possible,” says Custer.

Doing this requires you to have control of your manufacturing process, new product development, and your supply chain.

Ty Kiisel is a contributing author focusing on small business financing at OnDeck, a technology company solving small business’s biggest challenge: access to capital. With over 25 years of experience in the trenches of small business, Ty shares personal experiences and valuable tips to help small business owners become more financially responsible. OnDeck can also be found on Facebook and Twitter.

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