Manage for Success: Inventory (Newsletter #3, July 2001)

Proper management of inventory is one of those necessary functions that all too often is neglected by record companies, large and small. Inventory equals dollars -- every CD or cassette in inventory or overstock represents money that is no longer available for other use.

Do you know exactly, or even approximately, how many pieces of every catalog number and configuration you own, and what this represents in dollars? Do you know how much of this is active, saleable stock, representing titles still in demand by music lovers and distributors? Do you know how much is overstock and obsolete, in other words, no longer salable? Do you know how much inventory is sitting idly in your distributor’s warehouse and which will eventually come back to you as returns?

If you truthfully answered "yes" to all of the above you’re in great shape and don’t need to read the rest of this article, but I’d like to hear from you to find out what you’re doing to manage this task so well. If you answered "no" to any of the above, please read on.

There are, at minimum, two functions to proper inventory management -- knowing just how much to manufacture at any given time for your realistic near-term needs, and being able to keep accurate track of everything related to inventory.

There are different elements to consider in purchasing inventory for the record business -- new releases, and catalog -- and how to handle these differs. For a new release you want to manufacture just enough to fill your distributor’s initial orders to his accounts and still leave them with a few weeks worth of additional stock. You also might want to have available at your warehouse (or pressing/duplicating plant if they maintain inventory on your behalf) another round or so, but I suggest you keep this quantity low, particularly if your plant can go back to press and be able to fill your orders rapidly.

[Sidebar: establish standard "lead times" with your suppliers so you’ll know that a print run or manufacturing order will usually take one working week (or whatever applies.) This way you’ll know how far ahead to place orders.]

The same philosophy applies to manufacturing "DJs" -- make just enough to fill your needs, but no more. (You can always convert a small portion of your good stock to DJs if necessary by drilling a hole in the bar code, or removing the shrink wrap and disfiguring the bar code by running a "magic marker" through it.) Your distributor should be able to tell you what he will need to send to his accounts, and your promotion, publicity, and marketing people should estimate their needs based on prior experience with the particular genre of this release, and knowledge of your marketing plan. (You have a comprehensive marketing plan, don’t you?)

When ordering paper goods (CD folders or booklets and inlay or tray cards, cassette J-cards, etc.) talley your total needs by counting your distributor’s initial orders, adding an appropriate quantity for you to keep at your warehouse, plus total needs for DJs, add enough for one or two modest re-pressing orders, and then round up to your printer’s appropriate price break. In other words, if you need 4000 to send to your distributor and 2500 for DJs, and the price break falls at 7500, then that gives you just enough printed material for a couple of repress orders of 500 each.

[Sidebar: be aware of how your printer charges. Small print runs cost proportionately more because much of the expense involved is labor -- make ready (setting up the press and hanging plates) and then cleaning the press after the run. It’s frequently advantageous to order a bit more than you think you’ll need initially because 10,000 sets might cost only slightly more than 7500, and may be more economical in the long run, since a 2500 piece reorder can be very expensive.]

If, on a recent release, you sense a buzz that something is actually happening -- airplay success, much favorable press, or a sparkling artist tour -- keep a close watch of stock at both your warehouse and your distributor’s. You want to be able to fill orders quickly if sales start to climb rapidly. But don’t build inventory in anticipation of something good happening -- it might not occur. Therein lies frustration and much cursing, because valuable dollars can be quickly tied up in product you may not be able to sell, or at least not for the next thirty or sixty days, if ever!

To properly evaluate your requirements you need to accurately track what you distributor is selling, and to whom. How much is pipeline filling, and how much has actually sold through to customers who purchase at retail or online? Keep in close touch with your distributor’s sales and inventory managers, and consider getting access to SoundScan, an indicator of actual, as opposed to hoped-for, sales. You need to know the exact status of every title. And you want to be able to fill customer reorders quickly to provide prompt service.

You also need to know about airplay and if frequent rotation is generating real consumer sales, or merely hype. You need to have a good "b-s" detector to separate truth from fiction because it’s easy to get hyped by your own staff.

As for catalog -- you need to know not only what your distributor is sitting on but also what he expects to be shipping out, or taking back in returns. If retail and distributor counts are low, then you may want to have on hand just enough finished goods for a reorder. Having additional "back-up" print materials is good insurance, provided that they’ll be usable in future and not excess.

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Talking about good insurance…

If you are experiencing difficulty in running your label, and would like to talk about management solutions tailored to your particular needs, please contact me.

Or if you have topics you'd like discussed in future newsletters please feel free to email suggestions.

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Well now, you say, I understand the philosophy, but how do I keep track of all this? Obviously it’s not too hard for just a few titles, but a growing catalog can become a huge task. There are a number of ways.

1. Ledger Cards: These are very old-fashioned, and are all right if you have just a few titles, but are very cumbersome when your catalog grows. They can provide a clear audit trail of exactly what transactions have occurred, and when, but they’re a lot of work and not very flexible.

2. Spreadsheet: This can be made to work very well, showing at a glance exactly what you have, and where it is. But as a catalog grows it will become quite large and eventually rather unwieldy, and may end up being hard to handle. Properly designed, though, it can be a simple, and very effective tool.

3. Relational Database: You can use Access, FileMaker, or any other sophisticated database program to manage inventory, but you had better be a whiz at database design, or be prepared to hire a specialist in your program of choice, particularly one who is familiar with inventory management, and hopefully, the record business, to set up the program so it will function to your specifications.

4. "Canned" Inventory Management Program: Quite a few are available. But examine your choices carefully to be sure you’re getting what you need. It needs to work well for your purposes and way of doing business without you having to do a lot of finagling. And it needs to be able to relate to your accounting software and be affordable.

5. Accounting Program: Some, such as MYOB, have an inventory module built in. Others, such as ACCPAC, have inventory modules separate from, but associated with, your accounting software. This might be ideal because inventory management will tie in directly to your accounting. Just be sure that your production staff has access only to the inventory module and not the rest of accounting, which should be off limits except to those who properly require access. On the same basis, only authorized personnel should be able to enter inventory data.

OK. Now that that’s behind us, just what to you want in an inventory management system? I suggest it needs to provide most, if not all, of the following capabilities:

Bills of Materials: a detailed break-down of what components comprise a finished product. For example, a new release CD will need to have its particular booklet or folder, plus its associated inlay (tray) card, plus shrink-wrap (not an inventoried item), perhaps a special sticker, and maybe a generic customer information bounce-back card. Each of these items has an associated cost.

Invoice Purchase Order: a print or press order to your supplier which also lets you know you can expect a certain quantity of new product in five or ten days time, depending on established lead times.

Manufacturer Confirmation: a notice from your supplier telling you exactly how many pieces they manufactured or printed (they could be over or under your ordered quantity), and location and or disposition. This might come in the form of a fax, email, invoice, etc.

Customer Purchase Order from your accounts: provides information to your shipping department, and when shipped, removes product from inventory (for one or many items) and provides invoicing and sales data.

Inventory Status: is a quick glance at part of your data, such as a query for the quantity available to ship of a given new title. It’s available at a moment’s notice on your computer screen. Further digging can provide the detail that shows you all the transactions that brought you to your present count.

Inventory Report: tells you what you have and what location it’s in, by finished goods, components, etc. by catalog number and by configuration. This is extremely detailed and is the heart of inventory management. In it you would set up minimum amounts of what you want to maintain or have available on hand, as well as a reorder trigger if you’re below your established minimum. It can even be set up to automatically print out a suggested purchase reorder. It should also show your cost per part and total inventory value. Normally this is too big to see on a computer screen, (although you can look at parts of it in the Inventory Status screen as mentioned above) so it should be printed out and maintained for a period of time as a historical document and as a part of your company’s financial data.

Scrap Report: this can be set up to let you know what obsolete inventory you may wish to dispose of in order to recapture dollars.

Any of these methods can be made as simple, or comprehensive as you need. Ideally you can start with something modest, and then build it up to become a very sophisticated and necessary management tool. But be careful that you enter data as transactions occur and that you don’t ever get behind the curve and not know what your inventory status is. That way lies madness, and needless expenditure of necessary operating funds.

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Copyright 2001 Keith Holzman, Solutions Unlimited. All rights reserved.