McMaster DECAU, 1
Consulting
Terms
Accounting: The art of analyzing the financial position and operating results of a business house from a study of its
sales, purchases, overhead, etc.
Activity-Based Costing: Activity-based costing (ABC) aims to provide a dynamic and realistic means of calculating
the true cost of doing business. It precisely allocates direct and indirect costs to particular products or customer
segments.
Barriers to Entry: Barriers to entry are those things that make it difficult for a new company to compete against
companies already established in the field. Examples include such things as patents, trademarks, copyrighted
technology, and a dominant brand.
Black-Scholes Equation: The Black-Scholes equation is used to determine the value or price of a stock option. It is a
comparatively simple formula, with only a few common variables, developed by Fisher Black and Myron Scholes in
1973. It makes some simplifying assumptions about free-market economics, but it has become an industry
standard.
Continuous Improvement Plan: A Continuous Improvement Plan is a set of activities designed to bring gradual, but
continual improvement to a process through constant review. The Shewhart cycle is among the best known.
Deming Cycle: The Deming Cycle is a set of activities (Plan, Do, Check, Act) designed to drive continuous
improvement. Initially implemented in manufacturing, it has broad applicability in business. First developed by
Walter Shewhart, it is more commonly called the Deming cycle in Japan where it was popularized by Edwards
Deming.
Direct Distribution: Model used by organizations to move products from production to buyer without the use of
wholesalers and retailers. By eliminating the number of parties involved in the distribution process, significant
savings can be realized. An organization using direct distribution must sell and distribute that product using their
own warehouses and sales staff.
EBITDA: EBITDA is an abbreviation for Earnings before Interest, Tax, Depreciation and Amortization. It reports
what the company would have earned during the period if it did not have to pay interest on its debt; didn't have to
pay taxes; and had depreciated the full value of all assets at their acquisition. It is roughly equivalent to the
Operating Income line in the Income Statements.
Emotional Intelligence: One of the most important ideas to hit the business world in recent years. It is based on
the notion that the ability of managers to understand their own emotions, and those of the people they work with,
is the key to better business performance.
Expenses: The costs of doing business that result from generating revenue. They include parts, salaries, utilities,
etc.
Fiscal Year: A twelve-month accounting period that usually, but not necessarily, starts on January 1.
McMaster DECAU, 2
Game Theory: The premise that no matter what the game, no matter what the circumstances, there is a strategy
that will enable you to succeed.
Gross Profit: Gross Profit equals sales revenue minus the cost of goods sold.
Gross Revenue: Gross Revenue is money generated by all of a company's operations, before deductions for
expenses.
Hoshin Kanri: A corporate-wide management approach that combines strategic management and operational
management by linking the achievement of top management goals with daily management at an operational level.
It is particularly associated with change management.
Indirect Distribution: A chain of intermediaries through which a product moves in order to be made available for
purchase by a consumer. An indirect channel of distribution typically involves a product passing through additional
steps as it moves from the manufacturing business via distributors to wholesalers and then retail stores.
Key Performance Indicators (KPI): Quantifiable measurements, agreed to beforehand, that reflect the critical
success factors (of the company, department, project).
Market: A group of customers of a type considered likely to buy a particular product.
Merchandising: The planning and promotion of sales by presenting a product to the right market at the proper
time, by carrying out organized, skillful advertising, using attractive displays, etc.
Situation Analysis: The 5C analysis is an environmental scan on five key areas especially applicable to marketing
decisions. It covers the internal, the micro-environmental, and the macro-environmental situation.
 Company, Collaborators, Customers, Competitors & Climate (context)
Request for Proposal: A document issued when an organization wants to buy something and chooses to make the
specifications available to many other companies so they can submit competitive bids.
Request for Quotation: A document issued when an organization wants to buy something and chooses to make
the specifications available to many other companies so they can submit competitive bids.
Sales Forecasts: Prediction of the future sales of a particular product over a specific period of time based on past
performance of the product, inflation rates, unemployment, consumer spending patterns, market trends, and
interest rates. In the preparation of a comprehensive marketing plan, sales forecasts help the marketer develop a
marketing budget, allocate marketing resources, and monitor the competition and the product environment.
Target Market Identification: The process of using income, demographic, and life style characteristics of a market
and census information for small areas to identify the most favorable locations.
Vest / Vesting: To give someone control over their stock or stock options. When employees are given stock
options or restricted stock, they often do not gain control over the stock or options for a period of time. This
period is known as the vesting period and is usually 3 to 5 years. During the vesting period the employee cannot
sell or transfer the stock or options.
McMaster DECAU, 3
Financial Ratios & Calculations
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝐷𝑒𝑏𝑡
𝐷𝑒𝑏𝑡 − 𝑡𝑜 − 𝐸𝑞𝑢𝑖𝑡𝑦 𝑅𝑎𝑡𝑖𝑜 =
𝐸𝑞𝑢𝑖𝑡𝑦
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑜𝑓 𝐶𝑎𝑠ℎ 𝑅𝑎𝑡𝑖𝑜 =
𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
𝐵𝑟𝑒𝑎𝑘 𝐸𝑣𝑒𝑛 𝑃𝑜𝑖𝑛𝑡 =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛
𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛 =
𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡
𝐺𝑟𝑜𝑠𝑠 𝑀𝑎𝑟𝑔𝑖𝑛 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑
𝑀𝑜𝑟𝑡𝑔𝑎𝑔𝑒 𝐴𝑚𝑜𝑢𝑛𝑡
𝐿𝑜𝑎𝑛 − 𝑡𝑜 − 𝑣𝑎𝑙𝑢𝑒 𝑅𝑎𝑡𝑖𝑜 =
𝐴𝑝𝑝𝑟𝑎𝑖𝑠𝑒𝑑 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑃𝑟𝑜𝑝𝑒𝑟𝑡𝑦
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 =
Marketing Mix
Product/Service
Consumer products can be categorized as convenience goods, for which consumers are willing to invest very
limited shopping efforts. Thus, it is essential to have these products readily available and have the brand name well
known. Shopping goods, in contrast, are goods in which the consumer is willing to invest a great deal of time and
effort. For example, consumers will spend a great deal of time looking for a new car or a medical procedure.
Specialty goods are those that are of interest only to a narrow segment of the population—e.g., drilling machines.
Industrial goods can also be broken down into subgroups, depending on their uses. It should also be noted that,
within the context of marketing decisions, the term product refers to more than tangible goods—a service can be a
product, too.











What does the customer want from the product/service? What needs does it satisfy?
What features does it have to meet these needs?
Are there any features you've missed out?
Are you including costly features that the customer won't actually use?
How and where will the customer use it?
What does it look like? How will customers experience it?
What size(s), color(s), and so on, should it be?
What is it to be called?
How is it branded?
How is it differentiated versus your competitors?
What is the most it can cost to provide, and still be sold sufficiently profitably? (See also Price, below).
Place
Distribution (also known as the place variable in the marketing mix, or the 4 Ps) involves getting the product from
the manufacturer to the ultimate consumer. Distribution is often a much underestimated factor in marketing.
Many marketers fall for the trap that if you make a better product, consumers will buy it. The problem is that
retailers may not be willing to devote shelf-space to new products. Retailers would often rather use that shelfspace for existing products have that proven records of selling.





Where do buyers look for your product or service?
If they look in a store, what kind? A specialist boutique or in a supermarket, or both? Or online? Or direct, via a catalogue?
How can you access the right distribution channels?
Do you need to use a sales force? Or attend trade fairs? Or make online submissions? Or send samples to catalogue companies?
What do you competitors do, and how can you learn from that and/or differentiate?
Price
Pricing is one of the most important elements of the marketing mix, as it is the only mix, which generates a
turnover for the organisation. The remaining 3p’s are the variable cost for the organisation. It costs to produce and
McMaster DECAU, 4
design a product, it costs to distribute a product and costs to promote it. Price must support these elements of the
mix. Pricing is difficult and must reflect supply and demand relationship. Pricing a product too high or too low
could mean a loss of sales for the organisation.





What is the value of the product or service to the buyer?
Are there established price points for products or services in this area?
Is the customer price sensitive? Will a small decrease in price gain you extra market share? Or will a small increase be indiscernible,
and so gain you extra profit margin?
What discounts should be offered to trade customers, or to other specific segments of your market?
How will your price compare with your competitors?
Promotion
Promotion involves a number of tools we can use to increase demand for our products. The most well-known
component of promotion is advertising, but we can also use tools such as the following:
Public relations (the firm’s staff provides information to the media in the hopes of getting coverage). This
strategy has benefits (it is often less expensive and media coverage is usually more credible than advertising) but it
also entails a risk in that we can’t control what the media will say. Note that this is particularly a useful tool for
small and growing businesses—especially those that make a product which is inherently interesting to the
audience.
Trade promotion. Here, the firm offers retailers and wholesalers temporary discounts, which may or may
not be passed on to the consumer, to stimulate sales.
Sales promotion. Consumers are given either price discounts, coupons, or rebates.
Personal selling. Sales people either make “cold” calls on potential customers and/or respond to
inquiries.
In-store displays. Firms often pay a great deal of money to have their goods displayed prominently in the
store. More desirable display spaces include: end of an aisle, free-standing displays, and near the check-out
counter. Occasionally, a representative may display the product.
Samples
Premiums




Where and when can you get across your marketing messages to your target market?
Will you reach your audience by advertising in the press, or on TV, or radio, or on billboards? By using direct marketing mailshot?
Through PR? On the Internet?
When is the best time to promote? Is there seasonality in the market? Are there any wider environmental issues that suggest or
dictate the timing of your market launch, or the timing of subsequent promotions?
How do your competitors do their promotions? And how does that influence your choice of promotional activity?
Types of Business Ownership
Sole Proprietorships
The vast majority of small businesses start out as sole proprietorships. These firms are owned by one person,
usually the individual who has day-to-day responsibilities for running the business. Sole proprietors own all the
assets of the business and the profits generated by it. They also assume complete responsibility for any of its
liabilities or debts. In the eyes of the law and the public, you are one in the same with the business.
Advantages
Disadvantages


Easiest and least expensive form of ownership to organize.

Sole proprietors are in complete control, and within the
parameters of the law, may make decisions as they
see fit.
Sole proprietors have unlimited liability and are legally
responsible for all debts against the business. Their
business and personal assets are at risk.


Sole proprietors receive all income generated by the
business to keep or reinvest.
May be at a disadvantage in raising funds and are often
limited to using funds from personal savings or
consumer loans.

Profits from the business flow directly to the owner's
personal tax return.


The business is easy to dissolve, if desired.
May have a hard time attracting high-caliber employees or
those that are motivated by the opportunity to
own a part of the business.

Some employee benefits such as owner's medical insurance
premiums are not directly deductible from
business income (only partially deductible as an adjustment
McMaster DECAU, 5
to income).
Partnership
In a Partnership, two or more people share ownership of a single business. Like proprietorships, the law does not
distinguish between the business and its owners. The partners should have a legal agreement that sets forth how
decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to
the partnership, how partners can be bought out, and what steps will be taken to dissolve the partnership when
needed. They also must decide up-front how much time and capital each will contribute, etc.
Advantages
Disadvantages

Partnerships are relatively easy to establish; however time
should be invested in developing the partnership agreement.

Partners are jointly and individually liable for the actions of
the other partners.

With more than one owner, the ability to raise funds may be
increased.
Profits must be shared with others.

The profits from the business flow directly through to the
partners' personal tax returns.




Prospective employees may be attracted to the business if
given the incentive to become a partner.


The partnership may have a limited life; it may end upon
the withdrawal or death of a partner.
The business usually will benefit from partners who have
complementary skills.
Since decisions are shared, disagreements can occur.
Some employee benefits are not deductible from business
income on tax returns.
Types of Partnerships that should be considered:
1. General Partnership
Partners divide responsibility for management and liability as well as the shares of profit or loss according
to their internal agreement. Equal shares are assumed unless there is a written agreement that states
differently.
2. Limited Partnership and Partnership with limited liability
Limited means that most of the partners have limited liability (to the extent of their investment) as well as
limited input regarding management decisions, which generally encourages investors for short-term
projects or for investing in capital assets. This form of ownership is not often used for operating retail or
service businesses. Forming a limited partnership is more complex and formal than that of a general
partnership.
3. Joint Venture
Acts like a general partnership, but is for a limited period of time or single project. If the partners repeat
the activity, they will be recognized as an ongoing partnership and will have to file as such as well as
distribute accumulated partnership assets upon dissolution of the entity.
Corporations
A corporation chartered by the state in which it is headquartered is considered by law to be a unique entity,
separate and apart from those who own it. A corporation can be taxed, it can be sued, and it can enter into
contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of
directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve
when ownership changes.
Advantages
Disadvantages

Shareholders have limited liability for the corporation's
debts or judgments against the corporations.

The process of incorporation requires more time and
money than other forms of organization.

Generally, shareholders can only be held accountable for
their investment in stock of the company. (Note however,
that officers can be held personally liable for their actions,
such as the failure to withhold and pay employment taxes.)

Corporations are monitored by federal, state and some
local agencies, and as a result may have more paperwork
to comply with regulations.


Corporations can raise additional funds through the sale of
stock.
Incorporating may result in higher overall taxes. Dividends
paid to shareholders are not deductible from business
income; thus it can be taxed twice.

A corporation may deduct the cost of benefits it provides to
officers and employees.

Can elect S corporation status if certain requirements are
met. This election enables company to be taxed similar to a
McMaster DECAU, 6
partnership.
Limited Liability Company (LLC)
The LLC is a relatively new type of hybrid business structure that is now permissible in most states. It is designed to
provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a
partnership. Formation is more complex and formal than that of a general partnership. The owners are members,
and the duration of the LLC is usually determined when the organization papers are
filed. The time limit can be continued, if desired, by a vote of the members at the time of expiration. LLCs must not
have more than two of the four characteristics that define corporations: Limited liability to the extent of assets,
continuity of life, centralization of management, and free transferability of ownership interests.
Product Life Cycle
A new product progresses through a sequence of stages from
introduction to growth, maturity, and decline. This sequence is
known as the product life cycle and is associated with changes in
the marketing situation, thus impacting the marketing strategy and
the marketing mix.
The product revenue and profits can be plotted as a function of
the life-cycle stages as shown in the graph below:
Introduction Stage
In the introduction stage, the firm seeks to build product awareness and develop a market for the product. The
impact on the marketing mix is as follows:
 Product branding and quality level is established, and intellectual property protection such as patents and
trademarks are obtained.
 Pricing may be low penetration pricing to build market share rapidly, or high skim pricing to recover
development costs.
 Distribution is selective until consumers show acceptance of the product.
 Promotion is aimed at innovators and early adopters. Marketing communications seeks to build product
awareness and to educate potential consumers about the product.
Growth Stage
In the growth stage, the firm seeks to build brand preference and increase market share.
 Product quality is maintained and additional features and support services may be added.
 Pricing is maintained as the firm enjoys increasing demand with little competition.
 Distribution channels are added as demand increases and customers accept the product.
 Promotion is aimed at a broader audience.
Maturity Stage
At maturity, the strong growth in sales diminishes. Competition may appear with similar products. The primary
objective at this point is to defend market share while maximizing profit.
 Product features may be enhanced to differentiate the product from that of competitors.
 Pricing may be lower because of the new competition.
 Distribution becomes more intensive and incentives may be offered to encourage preference over
competing products.
 Promotion emphasizes product differentiation.
McMaster DECAU, 7
Decline Stage
As sales decline, the firm has several options:
 Maintain the product, possibly rejuvenating it by adding new features and finding new uses.
 Harvest the product - reduce costs and continue to offer it, possibly to a loyal niche segment.
 Discontinue the product, liquidating remaining inventory or selling it to another firm that is willing to
continue the product.
The marketing mix decisions in the decline phase will depend on the selected strategy. For example, the product
may be changed if it is being rejuvenated, or left unchanged if it is being harvested or liquidated. The price may be
maintained if the product is harvested, or reduced drastically if liquidated.
Product Mix
Product mix, also known as product assortment, refers to the total number of product lines that a company offers
to its customers. For example, a small company may sell multiple lines of products. Sometimes, these product lines
are fairly similar, such as dish washing liquid and bar soap, which are used for cleaning and use similar
technologies. Other times, the product lines are vastly different, such as diapers and razors. The four dimensions to
a company's product mix include width, length, depth and consistency.
Width
The width of a company's product mix pertains to the number of product lines that a company sells. For example,
if a company has two product lines, its product mix width is two. Small and upstart businesses will usually not have
a wide product mix. It is more practical to start with some basic products and build market share. Later on, a
company's technology may allow the company to diversify into other industries and build the width of the product
mix.
Length
Product mix length pertains to the number of total products or items in a company's product mix, according to
Philip Kotler's textbook "Marketing Management: Analysis, Planning, Implementation and Control." For example,
ABC company may have two product lines, and five brands within each product line. Thus, ABC's product mix
length would be 10. Companies that have multiple product lines will sometimes keep track of their average length
per product line. In the above case, the average length of an ABC Company's product line is five.
Depth
Depth of a product mix pertains to the total number of variations for each product. Variations can include size,
flavor and any other distinguishing characteristic. For example, if a company sells three sizes and two flavors of
toothpaste, that particular brand of toothpaste has a depth of six. Just like length, companies sometimes report
the average depth of their product lines; or the depth of a specific product line.
Control Systems in Business
Document Control
Most businesses have controls that assure standardized documents, such as guides, specifications, work
instructions or policies and procedures. Document control procedures usually include a master list of documents.
All documents must receive approval before use. The approval process may include naming the document,
assigning a control number and a date. Typically, documents must undergo approval before use, identified with
dates and given control and revision numbers. Revisions must also receive authorization. Some control procedures
may also include a method of distribution and assign responsibilities for updating documents.
Marketing
McMaster DECAU, 8
The marketing function develops a plan and establishes marketing objectives. Typically, the schemes include
controls to measure, monitor and regulate marketing campaigns and related activities. Targets or performance
objectives cover a wide variety of standards, such as sales volume, market share and profits. Management employs
a range of reports to track progress and make comparisons, including variance analysis or expenses-to-sales
analysis. Sale control mechanisms include budgets, sale quotas, credit criteria and sales force automation.
Financial Controls
Companies use financial reports, such as income statements, balance sheets and cash flow statements, to form the
core of financial control systems. Balance sheets help business owners and managers determine the financial
strength -- business liabilities and assets -- at a specific point. This report can help owners determine if a firm has
the resources to grow or survive during economic downturns. Income statements, or profit and loss statements,
track revenues and costs over a particular duration. Managers can review itemized expenses to identify items out
of line with the budget, or increase the budget as warranted. Cash flow statements provide a business with
projections of revenue and costs for each month over, at minimum, a 12-month period. This statement helps keep
a business on track to meet it income targets
Human Resources
The human resource aspect of businesses must focus on systems for hiring, training and recruiting staff. Controls
also extend to the development and management of existing employees. Businesses require techniques for
assessing employees' skills, and assuring the business has staff with the necessary skills and abilities to move the
organization toward its objectives. HR must also put in place workplace rules and policies that keep the business in
compliance with union contracts, safety regulations and labor laws.
Quality Control
Business must have quality control, or QC, procedures in place to review and check the quality of materials,
products or service. The QC procedures depend on the function. For example, the manufacturing process may
require controls at specific phases, such as pre-production, during production and the finished product. The
manager will need to determine what quality assurance methods to use. Business owners may use statistical
techniques to ascertain the quality of raw material on arrival to the plant, or may perform visual inspections of
finished products.
Consumer Buying Behaviour
Actual purchasing is only one stage of the process. Not all decision processes lead to a purchase. All consumer
decisions do not always include all 6 stages. Always consider personal, social and economic risk.
1.Problem Recognition(awareness of need)--difference between the desired state and the actual
condition. Deficit in assortment of products. Hunger--Food. Hunger stimulates your need to eat. Can be stimulated
by the marketer through product information--did not know you were deficient? I.E., see a commercial for a new
pair of shoes, stimulates your recognition that you need a new pair of shoes.
2.Information search—
◦Internal search, memory.
◦External search if you need more information. Friends and relatives (word of mouth).
Marketer dominated sources; comparison shopping; public sources etc. A successful information search leaves a
buyer with possible alternatives, the evoked set.
Hungry, want to go out and eat, evoked set is
◦chinese food
◦indian food
◦burger king
◦klondike kates etc
3.Evaluation of Alternatives--need to establish criteria for evaluation, features the buyer wants or does
not want. Rank/weight alternatives or resume search. May decide that you want to eat something spicy, indian
gets highest rank etc.If not satisfied with your choice then return to the search phase. Can you think of another
McMaster DECAU, 9
restaurant? Look in the yellow pages etc. Information from different sources may be treated differently. Marketers
try to influence by "framing" alternatives.
4.Purchase decision--Choose buying alternative, includes product, package, store, method of purchase
etc.
5.Purchase--May differ from decision, time lapse between 4 & 5, product availability.
6.Post-Purchase Evaluation--outcome: Satisfaction or Dissatisfaction. Cognitive Dissonance, have you
made the right decision. This can be reduced by warranties, after sales communication etc.
After eating an indian meal, may think that really you wanted a chinese meal instead.
Channel Management
Channel management, as a process by which a company creates formalized programs for selling and servicing
customers within a specific channel, can really impact your business. To get started, first segment your channels by
like characteristics (their needs, buying patterns, success factors, etc.) and then customize a channel management
program that includes:
1.Goals. Define the specific goals you have for each channel segment. Consider your goals for the channel
as a whole as well as individual accounts. And, remember to consider your goals for both acquisition and retention.
2.Policies. Construct well-defined polices for administering the accounts within this channel. Be sure to
keep the unique characteristics of each segment in mind when defining policies for account set up, order
management, product fulfillment, etc.
3.Products. Identify which products in your offering are most suited for each segment and create
appropriate messaging. Also, determine where your upsell opportunities lie.
4.Sales/Marketing Programs. Design support programs for your channel that meet THEIR needs, not what
your idea of their needs are. To do this, you should start by asking your customers within this segment, “how can
we best support you in the selling and marketing of our products?” That being said, the standard considerations
are product training, co-op advertising, seasonal promotions, and merchandising. Again, this is not a one-size fits
all, so be diligent about addressing this segment’s SPECIFIC needs in these areas.
Techniques of Inventory Management
Just in Time Delivery
Just-in-time delivery, or JIT, is an inventory system that works to reduce the amount of inventory that a company
will have on hand. In JIT the company purchases inventory only a few days before it is needed for sale or
manufacturing, so the inventory arrives just in time for use. By keeping inventory levels low, the company will not
only save money, but will also be able to introduce new technologies and advancements to the market faster,
because it doesn’t have months of inventory sitting on its shelves or waiting in the supply chain. The major
drawback to JIT systems is that with items arriving a day or two before they are needed, one hiccup in the supply
chain can grind production and delivery to a halt. All the partners involved in the JIT system need to be reliable and
have redundant systems in place to correct problems quickly.
Dropshipping
Dropshipping is an inventory process by which a company can sell a product to a consumer without ever having
the product in inventory. The company enters an agreement with a dropshipping company, and when a product is
sold, either over the phone or on the web, the dropshipping company sends the product to the consumer in return
for a fee or a percentage of the sale. Dropshipping is ideal for small companies that don’t have a lot of cash
available to warehouse and ship their own inventory. The downside of dropshipping is that the seller has no
control over the shipping process and can’t offer different shipping times and rates, or control mistakes in the
process.
McMaster DECAU, 10
Bulk Shipments
Bulk shipping is an old staple of inventory management. The idea is that it is cheaper to purchase and ship goods in
bulk, so you plan to replenish your inventory less frequently than you normally would. Since you will receive less
frequent shipments, you will have to lay out extra money on purchasing and warehousing the inventory, but if
you're reasonably sure you will sell the product, then bulk shipping can save a good deal of money.
Record Keeping
The basis for all inventory management is record keeping. Small companies may be best off keeping track of the
inventory manually. This will reduce the cost associated with buying and maintaining a computerized inventorycontrol system. Larger companies should use a dedicated inventory software program that will allow them to
monitor inventory levels among numerous different products and materials.
Physical Inventory
Physical inventory should be done at least once a year, and as often as once a month, depending how likely items
are to be missing. Set aside a time to do the inventory when items will not be needed or moved around. If the
inventory records are computerized, then enter or scan the physical inventory information and have the computer
compare the records. If the inventory is managed manually, then someone will have to record the current
inventory and then compare it to the record.
Cleaning Out Old Inventory
Storing inventory is not free. Inventory represents an investment in a product or material. Even if the product is
relatively cheap, it costs money to house and manage the inventory. A company should always work toward selling
its older inventory by running sales specials that are likely to entice buyers.