Inventory management. It's not sexy, it's not exciting, but it's critical to profitability and it can make or break a business model.

While managing inventory may seem like a mundane afterthought, it should be a key part of a company's overall business strategy. That is the consistent response I got from some Seattle business veterans when I asked what advice they had for a start-up thinking about inventory management issues. Before I fill you in on what else these veterans had to say, let me introduce Sahale Snacks.

Josh Schroeter and a partner started Sahale Snacks a year ago, and have quickly found success in the healthy snack food market. Sahale Snacks is very much in the start-up stage with lumpy growth that ranges from 40% to 100% sales increases per month. While Josh and his team have been able to manage inventories thus far using spreadsheets, QuickBooks, and the "eyeball" method, they expect their methodologies to change in the near future. Josh wants to know how to be smart about managing sales spikes without investing in an inventory management system at this time. I set out to find advice for Josh from some veterans of inventory management in the Seattle area.

Jean Barber, CFO of Bartell's Drug, recommends companies tie their inventory policy to their strategy and brand. "If your business strategy and brand rely on high customer-service levels, then you should make sure you never have stock-outs. If pricing is your most important element, then you would want a different inventory management strategy." Barber believes inventory management should not be an afterthought. It is a critical element of your business model and one every company should consider early in their growth cycle. It is also something that may change over time as the business matures. While Bartell's Drug has years of success under its belt as a retailer, the business has adapted to consumer needs over time, resulting in new challenges to inventory management. SKU proliferation is significantly larger than it was when the business was founded. "Old Spice used to come in 2 scents, now it's up to 12," says Barber. Given these changing business dynamics, the biggest challenge Bartell's currently has is getting clean data from which to make decisions.

Tom Varga, CEO of CFO Selections, agrees that good data is a key to successful inventory management. He notes that the biggest challenge he sees when working with clients on inventory management is making sure those clients are tracking cost and item information in a financially sound way. "If a client has good data and good inventory counts, they are usually okay from an inventory management standpoint. The old rule of thumb, 'garbage in, garbage out' applies," says Varga. "I find that the quality of the underlying data depends on whether the client had a good finance or accounting person involved from the beginning."

Jeff Leichleiter, Director of Operations for Tim's Cascade Snacks, suggests that one way a smaller company can improve data quality and inventory forecasting abilities is to develop tight relationships with customers. By partnering with customers, Tim's has been able to get a better handle on sales forecasts, resulting in better inventory control, Leichleiter notes. Instead of delivering bags of chips to each 7-11 store directly, 7-11 has partnered with Tim's to handle store distribution out of a central, 7-11 distribution center. The 7-11 store managers have gotten more involved in telling their distribution center exactly how many bags of chips they need. This has enabled Tim's to more closely align the inventory in the 7-11 distribution center with the stores' needs. Leichleiter also recommends a close relationship with suppliers. "Partner with suppliers as much as possible, but make sure you know those suppliers' limitations," he says, "on the whole, supplier partnerships have been a winning strategy for our company, but I was burned a few times early on."

While quality data is a key part of a successful inventory management strategy, technology and software play an important role as well. The technology revolution has had a profound impact on inventory management practices. There is a plethora of software available to help companies of all sizes predict demand and manage inventories, and these software packages can often result in significant savings to the bottom line almost immediately. Leichleiter advises growing companies do their homework to find a software system that can grow with their business. "Know what the software has to offer and make sure it provides functionality you'll need in the future as well," he says. On a similar note, Barber says, "Get the best system you can afford from day one."

Now that Sahale Snacks has tips from veterans on inventory management best practices, how might they decide to choose an appropriate inventory management system? I'll explore that topic in next month's Venturer. Stay tuned.