I have a son who is almost three years old now. He likes it when I read him stories before bed. The other day while looking for a new book for the two of us to read at night, I came across one full of nursery rhymes.

One of entries in the book was a classic that many of you will probably remember. The title: “Old Mother Hubbard”. You probably also remember the first few lines of this one, but in case you haven’t or are in need of a refresher, here they are:

Old Mother Hubbard went to the cupboard, To give the poor dog a bone;

When she came there, The cupboard was bare, And so the poor dog had none.

After reading the whole nursery rhyme it is clear that inventory issues are not the primary concern, and thankfully so! But as a small business owner, the first few stanzas do remind me of how important inventory control is for just about every small business. Just ask yourself as a consumer, how many times have you been told “Sorry Sir/Ma’am, out of stock”. That line is a common refrain in the Philippines, and I believe much of the reason for it is because the use of inventory management systems are the exception to the norm rather than actually being the small business norm.

In my earlier article from October 13th titled “Happiness is a Positive Cash Flow”, I touched on the issue of inventory management and how it related to cash flow. In this article I will discuss two methods or systems related to inventory management. They are very simple but very effective methods to keep the costs of maintaining an inventory at a minimum, and at the same time reduce the chances of actually running out of inventory at any given moment. Both of the methods I outline below can be used in just about any small business setting — from a simple sari-sari store, to a full service restaurant, or any other small but inventory-driven enterprise.

The first method is known as ABC Inventory Management. I’ve also heard it called other names like 1-2-3 Inventory Management and Gold-Silver-Bronze Inventory Management. Essentially this system of inventory control aims to group your overall inventory into three broad categories. The first, category “A”, includes those items that are generally most expensive to have on hand in your business. It includes those items that are most costly to you in terms of actual cost as an input or product, and they usually take the longest to sell. For example, in a restaurant, such items include the finest bottle of wine, the best cut of steak, or most costly seafood entree. Yes, a restaurant probably makes a good profit on these items and that’s why they have them on the menu, but usually they are not the items that are ordered by most of the restaurant patrons on any given night.

Category “B” items are those that are not as costly as Category “A” items, but are still somewhat costly. And while their turnover is more frequent than category ”A” products, they are not as cheap to have on hand nor sell as fast as category “C” items. You can think of these items as those that definitely have a consistent rate of turnover, but are also high-value products that take up a good chunk of your monthly cash outlay to have on hand. For example, in a hardware store, such items would include quality hand tools, high-grade plumbing and electrical fixtures, etc. They do not include category “A” items like a full-steam bath enclosure with sauna and heat lamp, but they may include items such as a decent wall-mounted water heater, or a sturdy and well-crafted kitchen faucet.

Category “C” inventory items are those that form the bulk of your inventory, but sell rapidly and have the lowest profit margins on a per unit basis. The bulk of your sales will generally come from these items, and you probably rely on a high volume of sales from these items to maintain a positive and generally healthy daily cash flow. For example, in a sari-sari store this would include things like milled rice, packages of instant noodles, small candies, etc.

Once you have broken down your inventory into the three categories, you can then know with confidence where you should spend the bulk of your time monitoring the different items you have in stock. You will want to start by monitoring your category “A” items closest. You do not want to have too many category “A” items in your inventory as it means you have too much money tied up in expensive items that do not bring in sufficient cash flow on a daily basis. Try to not go overboard when ordering or re-stocking such items. You can always special order such items and make your customer feel special by offering a discount if he or she can wait for the order to arrive. Next, you will want to monitor your category “B” items. Again, try to make sure you don’t have any oversupply issues with these items, but at the same time don’t scrimp when ordering these items because you don’t want to lose out on a sale because you were too cautious when ordering. Sales of category “B” items really can boost gross profits, but not if you have too many on the shelf and do little to create sales of these items through promotions and marketing efforts. Finally, with category “C” items, be sure to have plenty of stock, and buy in volume wherever possible to leverage bulk discounts which you can in turn use to help maximize any profit margins on these items. Doing so will mean greater chances to maintain healthy cash flow on a day-to-day basis.

The second method I would urge small business owners to consider for an inventory management system is known as the Two Bin Inventory Management System. It doesn’t get any simpler than this system, but it works. As the name implies, you have two actual bins filled up for each of the various items you are selling. Your staff should take stock out of the first bin until empty. When it is empty, you reorder stock and start selling from the second bin. When new stock arrives, you replenish both bins and start over. With this method, you should overcome most of your inventory issues and in theory have the ability to perpetually sell your products and hardly ever run out of any items. It is a very simple system that is easy to learn and follow.

If you follow one of these two inventory control methods, or a combination of both, chances are you will probably be a leg up on most of your competition. They probably will stick to reordering only when they have absolutely no stock left on the shelf, and that will allow you to increase your business over time. As your business grows you can consider using a PC to help you track your inventory and plan accordingly, but in most cases and most small businesses, simply following one of the above two systems will likely be all you need and won’t cost you very much to implement.

So if you are a small business owner you may want to try and implement one of these methods of inventory control. By doing so you just might find your staff has fewer and fewer opportunities to use the words: “Sorry sir, no stock”