Inventory Management & System (A Complete Guide)

Without having a good grip on inventory management, a business is going to quickly lose valuable assets, cash flow and control. And that can turn into negative business performance as well as bankruptcy.

Businesses who instead stay on top of their inventory and goods are able to respond to market changes, avoid over-extending themselves, and they are able to respond when market interest picks up. So, inventory matters a whole lot.

Inventory management applies a methodical approach like an ABC analysis to controlling a business’ supply chain for the purposes of receiving, stocking and consuming materials. Inventory management methods are also the tools used to control the flow of goods from ordering to closeout and removal, as well as providing the data for all the related accounting needed as well.

Different tools are used to gain inventory visibility and apply inventory management, ranging from basic notepads and consignment inventory to complex systems integrating barcode scanning and digital data for fast reports via live dashboards and alarms. Without a well-functioning inventory management system in place, bad things happen quickly such as:

• Losses to damage and poor storage
• Excessive days inventory outstanding
• Measuring with a poor inventory turnover ratio and similar metrics
• Missing received shipments and orders
• Over-ordering and having too much on hand over customer demand
• Under-ordering and not being able to meet market demand
• Fraud, theft and shrinkage
• Paying too much in inventory costs and losing valuable funds
• Making ordering mistakes and ending with the wrong materials

Think hard enough, and most businesses can find an issue above that they have already dealt with because of poor inventory management. Inventory management is literally the bridge that connects sales and business growth to the ordering side, making profits a reality for the accounting office and the bottom line.

Inventory management cuts across multiple industries as well. Supplies for construction projects, drop-shipping for e-commerce, traditional brick-and-mortar store supply, all-encompassing mega stores all need inventory to keep selling to customers and bring them back for more.

Inventory management and supply chain management also involve the logistics and facilities needed to contain, store, transport and move all the inventory in use or depend on. That means having sufficient storage, transportation resources for moving large amounts as needed, and a reliable and detailed information system to track it all.

Ask SMEs across the country, and inventory management techniques score among the highest if not the most critical daily issue for company operations.

Even more interesting, one of the biggest facility growth areas for SME businesses across multiple industries has not been new buildings for offices; instead, storage space and inventory movement facilities have become the primary structure growth in the last five years. That in turn drives up the demand for warehouse workers, who need information from warehouse managers, who in turn need to keep a grip on everything with inventory management systems and processes.

The technical goal of inventory management is first and foremost handling inventory costs. Businesses don’t want nor need to spend more than necessary to obtain materials or goods to then turn them around to consumers and produce revenue.

Inventory management techniques also help control the overall supply chain side of a business. This is particularly important if the business focuses on selling goods to customers or is in manufacturing or both.

Too many materials and goods end up becoming a major cost loss due to overspending. That’s money that could be used to hire more salespeople or maintain the company's fleet of delivery vehicles. Too little and the company can’t capture sales that produce revenue.

Within inventory management, multiple areas of operations are controlled, monitored and kept in line to avoid slippage. Without that proactive approach, each area of a company would run off and do its own thing without being coordinated. Sales people would over-commit, ordering people would miss needs or stock up too much, logistics and transport would lose things or miss connections and so on. Inventory management helps keep the ship running as one team.

Believe it or not, inventory management isn’t about the biggest warehouse, the fanciest loaders and trucks, or the best computers. It’s about having timely access to information so that company people can make the right decisions about what to do next with their supply chain.

Every hour, day, week and month involves inventory decisions again and again. Make the wrong one, and things cascade into bigger failures. Make the right one and the system runs smoothly, even improving operations along the way. Thus, inventory management is crucial and important in a business.

So producing, organizing, distributing and accessing inventory information goes to the heart of how any inventory management works. And there is a huge difference between smart inventory management vs simply tracking on spreadsheets and stocking materials and goods without a plan.

Second, once the data is captured, it has to be organized in some fashion that makes sense. Eventually, someone has to use the data, so it needs to be manageable and easy to organize for output, i.e. reports. That, of course, leads to how the reports should look.

The details depend on what information decision-makers need to move to the next step with inventory. Some just need a count. Others need a count, a location, draw-down data, and order receipt expectation. Still others need 20 more fields in addition to the above.

Reports come in all sizes and shapes but they all depend on one thing: input. And if the input is bad, so are the reports – garbage in, garbage out.

Third, with good data tracking, a database, and easy to use reports, company personnel can then make decisions on what to do going forward. That includes ordering, coordination with sales, shipping, transport, storage, draw-down planning, contingencies, and more ordering again.

Remember, people make systems happen, not the other way around. No matter how much is promised with the latest inventory management software tool, a company won’t see the benefits of inventory cost control until its employees know their roles correctly and act consistently, decoupling inventory from auto-drive.

This inventory management process applies a formula as the objective ordering point when new supply needs to be brought in and stocked. The Economic Order Quantity formula itself is derived from the company’s factors including costs, raw materials availability, demand draw-down rates, seasonal changes, worker availability, and market forces.

Economic Order Quantity EOQ tends to also be static until the formula is updated, usually with the prior quarter’s operating data.

Instead of watching fluctuations regularly in outbound versus inbound stock, this method focuses on simply maintaining a safety stock formula number deemed optimum for all operating conditions. When the inventory gets close or below, ordering for safety stock starts.

The safety stock formula method does not focus so much on seasonal issues or external factors, but it is affected by them. However, a safety stock approach always keeps inventory on hand, and it slows or speeds up with demand. How much safety stock is kept ends up being subjective.

Stock levels are driven by accounting, a FIFO/LIFO approach only drives new inventory orders and replacement as existing stock is depleted. This assumes at some point there was an initial capital outlay of supply to get started.

The accounting method is a very structured, stilted approach from traditional business operations in manufacturing, and the FIFO/LIFO approach is not responsive to fast-changing markets. Recovery is made building cost of goods sold in pricing at point of sale.

This process name is simply a label for a custom approach to inventory ordering. It’s highly driven by existing sales and demand for new stock, and the formula often changes based on what management thinks should occur next. The reorder point approach is an inventory system poor in objective support and high in subjective decision-making. Excess inventory happens a lot.

Again, generally used for inventory situations where significant numbers of the same goods are moved regularly, bulk shipping involves heavy use of palletizing goods and moving them around in a coordinated manner in large numbers.

As a periodic inventory system, bulk shipping relies of heavy consumption on a regular basis. Carrying costs can be painful if not. It’s not a good approach to inventory management formulas for small orders.

Raw Materials

Generally made up of commodities, this includes everything from bulk food materials to cut wood to metal ore. In most cases, raw materials tend to need a perpetual inventory system, and they are almost 100 percent used for creating manufactured goods or being combined with other materials. They frequently have carrying costs.

Work-In-Progress

These are mid-stages of materials that have been modified to some extent but are still going to be processed further.

Finished Goods

On the tail-end of manufacturing, finished goods are inventory that has completed the assembly process and are ready for packaging and distribution. These goods no longer need any further development, but they frequently need packaging and transport to selling stages and retail end points.

Overhaul or MRO

These are goods and inventory associated with repair and maintenance. This can range from inventory for machine parts in industrial settings to office supplies in service locations.

Go back to the tracking data as the first step. The proof is always in the numbers and metrics. If an order is made for 1,000 items of stock, and after a set period only 500 are consumed when 900 should be gone, something is wrong.

If, on the other hand, 1,000 are ordered and 1,200 are needed, then the supply side is not keeping up with the demand and procurement needs to be increased to match. To be able to see all these movements and what to do about them with proper inventory management, one needs:

• Track inventory with inventory management software to produce dependable input
• An organized database for inventory management
• A related and relevant reporting output system
• Staff who are trained and work as a team across different functions of inventory use

Successful inventory management processes occur where the information collection is working and makes sense. Think of it like how a doctor evaluates a patient - he or she has to collect observations to make a diagnosis. Without examining, the doctor is just guessing.

The procurement department takes the official role for ordering and the inventory management system as well as inventory control, along with the warehouse team and logistics staff. However, for a system to work efficiently, every function of a business that depends on inventory has a role to play in protecting the goods as well as providing the needed information and status reports accurately.

The most common signs of an inventory manager in trouble include:

• Inventory upfront is backing up but sales are not matching the high levels of supply on hand. There’s a disconnect between demand and ordering.
• A recognized inventory management system isn't being used.
• Things can't be found in multi location inventory management.
• Warehouse management is performing badly.
• No one seems to have a good sense on what safety stock is or how to apply it.
• No sales are occurring but buffer stock and storage are reaching maximum capacity. Someone’s not paying attention to overbuying activity.
• Sales and discounts are increasing to get rid of bad or stale stock. The inventory controls are failing to keep stock moving timely.
• Inventory holding costs are going up and physical inventory shows too much stock.
• Mistakes are being made in ordering, inventory counting, audit findings and draw-down rates. This is a sign of poor inventory tracking methods, poor tools for collecting data, or bad data input.

Data reporting on ordering, current inventory levels and draw-down rates provide the stock on hand perspective, and sales reports make up the demand planning side. The remaining element to add on top would be forecasts of what to expect at a given time of year. This is a repetitive function as a perpetual inventory management approach, and one has to stay on top of the reports to keep ordering in sync with operations.

Good peak inventory control takes historical data, ordering and market experience, and a good forecasting approach to hit the target well. Typical steps one can take to prepare include:

• Run preliminary inventory counts to know where current levels are at as well as expected draw-down rates in 30-60-90 days. Adjust safety stock accordingly.
• Shipping supplies are available via multiple channels.
• Temporary staff are already being scheduled to handle extra workload.
• Historical reports should be reviewed to see what previous peak seasons needed.
• Inventory should be placed and located where it will meet demand, not in deep storage that causes delays to retrieve.
• Finished goods are ready to package but there's not too much inventory.
• Plan for inventory control mistakes and screw-ups. If things go badly, what is your plan B?
  Developing that strategy when a crisis occurs is a mistake. Do the planning ahead of time and be ready to switch as needed when the risk comes up.

Again, effective inventory management is the lifeblood of many companies, especially those that depend on supply chains and products for generating revenue. Smart inventory management vs just stocking goods or supplies not only saves money by avoiding waste and fraud, it also generates better revenue returns by matching the materials needed to the demand efficiently. Otherwise, all the purchase order activity might as well be a sunk cost.

If you’re looking for an inventory management software that does all the heavy lifting for you and your business, check out ABSS premier. ABSS Premier is a perfect match for a growing business that needs integrated accounting software with advanced inventory and business management capabilities.

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