Considering the massive volume of products and materials that companies handle, it is essential to have an inventory of these. However, it is also very important to know how to do it so production times are optimized and, in the same way, delivery times are also met. For these reasons, inventory management is so important.
Nevertheless, before discussing this concept formally, it is essential to know exactly what an inventory is.
The Inventory
Classification of articles or materials that a business has, including the products that it has for sale. With inventories, companies keep track of merchandise and sales made during the business term. At the end of this period, user gets a final balance to compare with previous periods in order to take commercial actions taking these results as a reference. It also allows the business to formulate sales strategies such as giving priority to the oldest merchandise.
Carrying out an inventory also allows one to know the demand for a product in order to make purchases of key elements or supplies wholesale, thus generating a reduction in costs. This, in turn, makes it possible to maintain a constant production rate, considering that companies must maintain a minimum stock to ensure service in case of any eventuality such as an unpredicted increase in demand or any difficulty in relation to supply and avoid paralysis and delays in the production process.
Not having an inventory can cause production stoppages due to lack of key elements or a decrease in sales due to lack of production. A lack of products and materials exactly at the time, can cause dissatisfaction among customers and it is a consequence of both not taking an inventory or doing it improperly.
Aslo read: Demand Planning and its actual role in companies
For companies that handle complex production processes, it is important to find a middle point between the two possible ends: having an excess of inventory or not having enough. In this way, it’s worth pointing out that having too much inventory also implies drawbacks such as the high cost of storage and could increase risks of loss due to robbery or damage.
Normally, inventory is spread across different points within the supply chain as a result of multi-channel order fulfillment operations. For this reason, it’s very important the inventory visibility which consists of knowing what inventory is available and where to locate it. For any company it is vitally important to be very clear about the inventory it has in order to:
- Ensure orders fulfillment.
- Reduce delivery times.
- Avoid phenomenon such as shortage caused by excess sales which, in turn, causes a devaluation of the product.
Step by step to make an inventory
Identify assets to include
The most important thing, before starting, is to know exactly which assets you should include in the inventory and which should not.
Determine the places to inventory
Once it’s clear what the assets are, it is necessary to identify the points where to locate them. It is convenient to visit these places in advance to identify the assets and avoid omissions or repetitions.
Form a work team
Designating a group of workers to collaborate on inventory tasks optimizes time and efforts.
Tour, count and registration
A date and time must be set to carry out the inventory. It’s very important to make proper use of the spreadsheets to avoid omissions and/or repetitions.
Inventory types
Absolute
The real cost of all the materials that a company owns for a product elaboration or maintenance purposes, can take base on three categories: fundamental elements, products in process and finished products. This inventory doesn’t consider possible losses.
Net
Unlike the absolute, the net contemplates the supplies inventory and products losses. It’s the result of subtracting the absolute inventory from the inventory reserves intended to cover possible losses caused by expiration, damage or robbery.
But, in addition, there are other types of inventories that, in turn, are classified according to certain characteristics.
According to the location
In transit
Merchandise that is in route; also, the one that is already in the company’s facilities (but is still in reception control), is on internall distribution or is packaged.
In site
The merchandise that is in the company’s facilities. It can be found in different types of warehouses such as: fundamental elements, intermediate, packaging, tools or maintenance.
According to its function
Operational
Units replacement within the production processes.
Security
It’s a backup in case of fluctuations in demand levels. It also works when suppliers have delays in the replenishment process.
According to its condition
Finished products
Includes products that are already for sale or will be put up shortly.
Key elements
Necessary items and materials to product manufacturing.
Products in the manufacturing process
Includes products yet to finish.
According to the stage
Initial
Done before operations start.
Final
Performed at the end of each accounting period.
According to the periodicity
Perpetual
Digital made using a database software. The information is automatically updated with each movement, such as the entry or release of each product.
Periodic
It’s done by counting the merchandise physically and cyclically, which is, by intervals.
According to logistics
Reserve
Production surplus used as backup when the demand increases or in case of production process failures.
Cycle
It’s made up of both the merchandise and the key elements that are deliberately bought in surplus in order to reduce the cost per purchase unit.
Foresight
Includes the surplus of merchandise produced in periods in which demand levels fall, precisely to use as backup in high demand periods.
Decoupling
The one done between two processes with unequal productivity rates.
Although they are not exactly an added value, inventories in a certain way guarantee the availability of assets, products and fundamental elements, as well as the optimization of the different processes.
Through inventories it is possible to
- Deal with fluctuations, both in demand and in the market in general.
- Adopt an assertive stance in the face of changes that usually occur in the dynamics of offer and demand.
- Speed up production processes such as manufacturing and assembly, which makes programming processes more flexible.
- Optimize the processes for buying and selling supplies and key elements which, in turn, allows to take advantage of volume discounts.
For all these reasons it is, besides useful, extremely important to keep an inventory. However, consider that efforts to minimize the costs associated to it generate the need to use multiple tools and make decisions regarding:
- The number of units to produce.
- The moment to order or produce these units.
- The products or items that require greater attention and for which the rigor with which they will be quality controlled must be determined.
Inventory management
Inventory management constitutes the point where all the elements of the supply chain converge, which makes it one of its transversal axes. It basically consists of monitoring the articles or products from the moment of their manufacture until their arrival at the warehouses and from there to the different establishments for sale, thus ensuring that, at any moment, the products will be where they should be.
Besides key elements and semi-finished and finished products, it also includes the different types of packaging, spare parts and accessories that a company uses daily and of which there must be a record and control. It also contemplates the registration of products, the supply of merchandise and its dispatch.
The tasks related to inventory management are closely linked to factors such as control, registration and classification methods, rotation points and re – inventory models.
Its fundamental objectives are
- Reduce stock levels to the minimum possible.
- Guarantee the availability of products (finished or in progress) as well as fundamental elements and supplies when required.
These reasons make inventory management a critical factor in the dynamics of the supply chain. It must also meet the following characteristics
- Inventory tracking: to know the exact location of the inventory in the supply chain.
- Order management: determine prices, generate quotes and track both orders and returns.
- Transfer management: supply products to where it is most convenient.
- Reports and analysis making: identify and analyze the patterns that may appear in the different processes to, likewise, make forecasts of sales and demand behavior.
- Purchases: create and manage purchase orders.
- Shipping capacity: speeds up and technifies shipping and distribution processes. Also minimize failures such as delays and incorrect deliveries.
It’s necessary to have a control system through which it’s possible to
- Maintain an updated record of stocks.
- To know the stock level knowing when a product must is up to replenishing and its quantities.
- Generate alerts in case of irregularities that, in future, may cause problems.
- Prepare reports for the warehouse manager.
- Prevent the damage or expiration of products, which occurs when they have been kept in the warehouse for too long.
The stages of the inventory management process are
- Purchase: the products to deliver later, either to the warehouse or directly to the point of sale.
- Storage: the products to store until they are sent to the point of sale.
Keeping track of the stock products in store, produces an operations improvement, delays and paralysis are also avoided. To provide optimal customer service, each company must have enough merchandise and prevent products from being accumulated for too long, which would lead to cost overruns.
Types of inventory management
Periodic inventory management
Its main use is for financial reports. It’s essentialy a physical cycling count of the inventory. This inventory at the beginning of a period and throughout the process it’s updated with the new purchases. It calculates the ending inventory and thus determines the cost of the sold assets.
Code inventory management
Assigns each sold product a code or number. This number or code contains data such as the supplier, the physical characteristics of the product and even the number of stocks that are available at the time of sale.
RFID Inventory Management
Also known for the meaning of the acronym RFID (Radio Frequency Identification), it wirelessly transmits the product information via a unique serial number that is also used to locate stocks. This system is particularly useful for increasing inventory visibility and also makes easier automatic registration for both receiving and delivery processes.
Methods and indicators
Companies must become familiar with methods and metrics that help them organize merchandise for not losing competitiveness.
These mechanisms has the goal to properly distributing the merchandise and assigning the tasks of the operators according to certain requirements. The main objective is to facilitate the flow of products and ensure supply to customers or production lines without delay.
The MRP (acronym for Materials Requirement Planning)
Is a system wich organize in advance the processes of production, purchase and delivery of products. For this purpose, it has the sales history and is also supported by constant communication with suppliers.
The Economic Order Quantity
Is a mathematical calculation used to identify the quantity and the time to make a key elements order.
Its goal is to determine the optimal quantity of a required product and the frequency to order it, to reach a balance point between storage costs and cost of orders fixation, in this way it’s obtained a product’s quantity enough to offset the fixed cost of ordering without incurring in high storage costs.
The Daily Sales of Inventory
Is an indicator of the time products remain stored until they are sold or sent to the production lines. It’s a very important piece of information to identify the moment to make replacements.
Just – in – time
Is a system in charge of storing the essential number of items to attend the production lines and supply customers. Its main advantage is that it reduces the number of stocks in store and storage times, which also generates a cost reduction.
Within the accounting management, in addition, companies can use different mechanisms to determine the final cost of the merchandise that’s included in the inventory.
ABC
Also known as 80/20, it consists of dividing products into three categories according to their importance, quantity and values so that it is easier to identify the most valuable products which also require more attention and management efforts.
Class A
Products that do not sell very much and represent approximately 20% of the total inventory but their value can represent up to 80% of it.
Class B
The average sale of products that represent 40% of the total of the articles and have a value that is around 15% of all the inventory.
Class C
Products that sell very much that represent 40% of the inventory but are equivalent to only 5% of its value.
FIFO (First in First out)
It refers to the first existence to enter and the first to leave. The cost of first stock in warehouse would be the cost of each stock.
LIFO (Last in First out)
It’s based on the first existence to leave and the last to enter. The cost of the last stock in inventory would be the cost of the entire stock.
WAP (Weighted Average Price)
it’s, basically, the average of the different entry prices.
When inventory management has been done improperly, companies can experience losses from lack of organization. That’s why it is so important to have a resource control system that is also supported by techniques to adequately evaluate the products.
Software and inventory management system
Technology advances and the arising demand due to globalization, have transformed the way companies carry out inventory management. Supply chain operators therefore use technologies to technifying it and improve its performance. They will also anticipate anomalies in logistics costs, as well as identify where automation can offer significant benefits.
Resources such as spreadsheets and handmade orders, which could be obsolete, have given way to software, which greatly facilitates many processes like, for example, ordering, storage and, of course, inventory management.
It is still possible to keep a manual record of assets using paper and pencil or Excel files. This, however, is more expensive and they are also much more error – prone systems. In addition, the information will match only with the last count made while, with a computerized system, the management team can generate a report and see in real time how many units are left, how many have been sold and which products are selling the fastest in order to facilitate the constant information updating.
The ideal is to install a warehouse management program. This type of software allows companies to control the resources available in their warehouses, know the exact location of each item, keep track of the entry and release of products and even forecast when stocks will run out.
For this purpose, the WMS (Warehouse Management Software) identifies and registers the products from the moment they arrive at the warehouse, assigning them a location according to the needs of the company (slotting), thus achieving full traceability. The WMS knows at any time what the stock is, its origin, its location and its destination to minimize errors.
Technify
By technifying the production line, an inventory management system speeds out the processes for making orders and storing merchandise. In the same way, it simplifies the processes associated with business management, forecasting fluctuations in demand and accounting. Some of the most sophisticated ones can even establish an item’s location and even generate an alarm to reorder supplies after calculating form data such as the most recent sales.
Inventory management systems also manage product rotation in a more organized way, classify products by categories and attributes, carry out cyclical or complete inventory, and also make adjustments to inventory quantities and costs.
There are also inventory systems suitable for small businesses that can run on a single equipment. There are also larger cloud based software packages and inventory management modules used mainly for Enterprise Resource Planning (ERP) systems.
Inventory management software also includes the stocks that are entering, subtracts those that are sold and discards the losses from damage or robbery. To avoid running out of stocks or space to store them, the software itself makes calculations based on the speed with which stocks run out and an average time it will take to replenish based on recent sales data, sales rates and the time it takes suppliers to make deliveries.
Additionally, by scanning barcodes, the software can automatically update the figures for each product from the point of sale. Through the processing of RFID tags, the platform can track a product and know the moment of a shipment or a sell. In the same way, inventory management systems allow tracking materials’ lists for a finished product ready to be sold.
There are also different types of software
Specialized or parts of a comprehensive software
Most softwares are able to integrate together with a larger solution that also applies to different areas such as accounting or billing.
Free and paid
It’s necessary to establish, in the first place, the conditions that the inventory software must meet to, consequently, determine if a free one would work, or if on the contrary, it’s necessary to buy one. Is important to consider that free softwares can be very limited in functions and paid ones offer different payment methods.
Storage in the cloud
This kind of software in particular is very advantageous since it offers access to the information from anywhere. However, it is necessary to keep in mind that it requires internet access to run.
License or payment for use
These programs require a permanent license. Its use would be according to the requirements of each company, although they generally have a higher cost.
Since each company has its own needs, it’s necessary to consider different aspects when choosing one. These aspects are:
Security
You can collect all inventory information by the program you choose. In case of lose of information, the company will have to fix it by incurring a significant monetary investment. For this reason, it is important to make sure that the selected program has protection (especially when data is in the cloud) and that it also offers the option of making security backup.
Functions included
Some companies, for different reasons, require a single record of available stock that includes inputs and outputs. Others, require a function that allows them to keep suppliers tracking and customers together with report generating, facilitating decision making.
Management
The level of instruction of the personnel that will use the program is important to consider. Although these softwares are easy to use, it’s advisable to calculate the adaptation period to ensure its proper use.
Customer service and/or support
It’s very important to know what kind of customer service you will have, and if it has any cost, as well as its communication channels. Consider using guides and tutorials.
Devices
In order to freely access the warehouse management tool, it’s necessary to ensure the access to it through any device. For example, some of these programs have an application for mobile systems, but not all of them offer this option. Inventory management systems also serve to automatically generate all kinds of documents such as purchase orders, invoices and account statements. They also serve to automatically order products that are out of stock.
The pros and cons of Inventory Management
Among the advantages is the fact that greater control is applied over the number of products for sale, as well as the inputs, outputs and distribution of products. In the same way, it allows them to make sales projections, reducing the costs derived from the provision, detecting problems with the merchandise, monitoring production levels and cash flow, which results in a greater profitability.
It also helps to detect losses and robbery and to have a view of the demand curve to face it.
On the other hand, it has disadvantages such as bureaucratic processes and production problems. The processes must have a very rigourous design, so that the information in the system is truly reliable. It’s also important to keep in mind that implies a considerable amount of time. Besides, they involve a high storage cost and a very high consumption of time.
In addition, in the case of software, the process depends completely on technology and in case of not having internet access or if there is a technical failure, the process would suffer delays, generating losses and delays. On the other hand, none of these software can guarantee total accuracy which is why companies would require an additional system.
Likewise, there is a risk of fraud, robbery, hacking and data hijacking inherent in any computer system. In the same way, system must alert in cases in which dishonest employees have written checks to themselves and altered inventory records after access to the system has been granted.
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