Today we’re going to talk about a subject I’m sure has been weighing heavily on your mind. Of course, I’m referring to inventory.
Anything you buy for your business to stay in business is inventory. This includes merchandise, supplies, raw materials, parts or anything you can use to make money.
If your primary business is video production, your inventory includes raw tape stock, cassette cases, labels, spare bulbs for your light kit, gaffers tape, batteries for your wireless mikes or walkie talkies, extra quarts of oil for your production van and so forth.
Or maybe you create how-to videos, but hire another company to shoot and edit the actual production. Then your inventory is the number of copies of How to Run a 19th Century Steamship you have on hand. (My guess is, you have plenty.)
Get on Track
Whatever the actual widgets or gizmos in your inventory, you’ll probably want to keep track of how many there are and when you need to order more. I don’t have an MBA, but I have been accused of having common sense. That’s really all you need to understand why inventory is important.
Let’s say you keep a million 20-minute cassettes on hand for use as raw tape. Unless you run a major dubbing facility, this probably places you in the “more money than sense” category. But we’re not here to make value judgments, we’re here to talk about inventory.
When you ordered the million cassettes, you paid to have them shipped to your shop. Now, while you wait for jobs requiring a whole bunch of shooting (333,333.33 hours–38.05 years–worth or so), you must pay to store all that tape.
If the storehouse catches fire and burns to the ground, you lose all the money you invested in the tape. Unless you have insurance–but then you must pay for the insurance. If you’re unable to use all the tape right away, the oxide will deteriorate (in five or ten years) making it unusable. Or mice could eat it. Or technology could pass you by–digital camcorders might not need tape at all.
Okay, you say, seeing the logic of not keeping a million tapes on hand, I’ll only keep one 20-minute cassette in my inventory. This may be overcompensation.
A client calls on the phone and says, “I have a job for you.” This is always pleasant news and you agree to visit the client’s place of business right away. You grab your single 20-minute tape and hurry over there.
When you arrive the client tells you, “I want you to videotape this once-in-a-lifetime demonstration, which will start in ten minutes. The demo will take one hour and can never be duplicated. But I knew you would never fail me.”
You smile a sickly smile and head for the phone. Calling your tape supplier, you offer tremendous rush fees if they will deliver several tapes to your present location. They agree and you begin taping the demo.
After 15 minutes goes by, you begin to sweat. At 18 minutes, you feel faint. At 20, you know you’re in big trouble. The demo goes on without you. After the demo is over, your order of tape shows up. Traffic was bad, the delivery boy says, wiping fresh pizza from his mouth. You will, of course, still have to pay the rush charges.
Meanwhile the client is livid. You missed the last 40 minutes of the demo? Why? You ran out of tape! Of all the unprofessional…get out and stay out. And I think I’ll call all of my high-powered friends and make sure that you never work for any of them ever again either!
A sad and horrible scenario. And one you avoid by memorizing the following charts and graphs.
One from Column A….
My business is small enough to keep track of inventory by sight. Are there enough widgets on the shelf to get me through the month? Yep. I’m done. But you might be the CEO of an international corporation, in which case, you can hire people who understand this stuff. For the rest of you, here are some ways to keep up with your inventory.
You want to keep your inventory at an optimum level. Finding that level involves trial and error; a million is too many, one is too few. Keep track of the costs of not having enough inventory (rush charges, loss of a sale and so on) and the costs of having too much (storage costs, inventory eaten by rodents and so on). Then create a table like this:
Inventory level (units) Cost of Stock Shortage Cost of Extra Inventory Total
1000 $ 50 $ 2500 $ 3000
750 $ 150 $ 1875 $ 2025
500 $ 500 $ 1250 $ 1750
250 $1500 $ 625 $ 2125
On this chart, your optimum level is 500 units, because that’s where you have the least cost of shortage and extra inventory.
Note: This chart will require some speculation on your part. Try to use actual costs for your business wherever possible.
Don’t Fall Below….
Once you know how much inventory you want to keep on hand, you need a way to track it. If you have a business like mine, you can probably keep the numbers in your head, or make a guess based on what you see on the shelf. Hmmm, the last time I reached into the cassette labels box it felt like there were only a few left. I better order some more.
But if you are busy running a production company and don’t want to keep your finger on the pulse of your inventory (and who can blame you), then you need a system. This way you or your employees can reorder supplies efficiently.
In one company where I was the production manager, we assigned the day-to-day inventory to one of my employees. He kept a chart listing all the different types of supplies in constant use, such as different formats of videotape, audio tape, gaffers tape (the sticky kind) and so on. About once a month, he went around to the storage cabinets and noted how many units of each remained. Also on the chart was a do not fall below number. This was the absolute minimum number of units we needed on hand.
The employee reordered anything approaching the critical do not fall below level. If he didn’t (see stock shortage descriptions above), then all chaos broke loose. Of course, the rest of the production staff also kept an eye on inventory levels, gently reminding the employee between his monthly checks if there might be a problem. Hey, dimwit, better order some more T-60s. Another advantage of this system is that you always have somebody to blame if you run out of tape.
Buy Low, Sell High
You can save money when you buy supplies if you use common sense and understand how your suppliers use discounts. First, the unit price of just about any item goes down when you buy a lot of units at one time. This is because there’s always a set amount of work associated with filling your order. The supplier answers your call and puts the order into the system; the shipping department puts your order into a box, addresses the box and ships your order. They must complete these steps, whether you order one unit or one hundred. Obviously, if the cost of this effort is spread out over a hundred units, the cost to you will be less per unit. (But this doesn’t mean you should order a million units–unless you need them.)
Some suppliers will give you a price break if you order so many units within a given period, say January to March. This encourages you to come back to them when you need more doodads, instead of running over to Doodad City just because the items you need are on sale there this month.
Find out if your supplier has a peak ordering season. Suppliers sometimes offer discounts so you’ll buy when everyone else is either buying or not buying. If people are buying, the supplier can acquire huge quantities and get rid of ’em quick. If people aren’t buying, the supplier needs to unload the merchandise to improve cash flow. You just have to ask.
Let’s say that the gaffers tape supplier sells the heck out of the sticky stuff in December (it makes a terrific Christmas gift). If all of the merchandise sells out before the beginning of the year, the supplier may pass the storage savings on to you.
If you’re rolling in cash, you can usually get a break by paying right away. Many businesses use the old 2/10, net 30 rule (accountants love it when I talk this way). This just means that you can take 2 percent off your bill if you pay it within 10 days, but otherwise you have to pay the entire amount in 30 days.
Just in Time
Manufacturers often use an inventory system called Just-In-Time Management. The goal of JIT: to have no inventory at all. If you were building cars, it would work like this. You know you will produce 15 cars on Wednesday. That morning, 15 cars-worth of raw materials show up on the shipping dock. This stuff goes to the assembly line, where it turns into cars. These cars then go to dealerships where people buy them and drive them away. The paint’s barely dry. (Of course, this is only a theory.)
Now say you have just produced a video for a company; you know they’ll want a bunch of copies, but you don’t know how many. Do you buy a couple of hundred VHS cassettes and start duplicating the show? Do you let these copies sit on a shelf while you wait for the duplication order to come in?
Or do you wait until you have the order, buy just the number of cassettes you need to fill it, dub just this number and then just deliver the order to the company? Just-In-Time, so to speak.
A warning: JIT can be tricky. You need to develop a good relationship with your supplier to avoid rush charges (hey, you waited until the last minute, bub!). And if you try to get your raw materials and the supplier is out, you miss filling the order. We know what happens next. You’ll never work in this town again!
Let’s Get Small
Another inventory concept with a great name is shrinkage. Shrinkage is when your inventory goes away and you don’t know what happened to it. Your employees might walk off with videotapes, one of your customers might be a kleptomaniac, or those mice could eat the tapes–cassettes, boxes, labels and all.
What can you do about shrinkage? Put a lock on the door of the cabinet where you store your tapes. Install a hidden camera to catch the light-fingered bums red handed. Or write it off on your taxes as a cost of doing business.
Control that Inventory
So keep track of your inventory and you’ll sleep better at night, become more profitable and win the praise and admiration of the members of your community. Also, eating videotape is probably not good for mice, so you’ll be doing something nice for the animal kingdom.
And you thought inventory wasn’t interesting.
Videomaker contributing editor William Ronat is the co-owner of a video production company.