Inventory Management System

Defining Your Inventory ...

The inventory of a business can be defined as all its current assets, such as raw materials, work in progress and finished goods.

Lump them all together and you have the stock or inventory of the company.

Note. Inventory includes raw materials as well as those items ready for sale.

This is an important point, as the management of your manufactured goods can be good, but your factory may be loaded with uncounted and unused raw materials.

Not good and very costly.

Any inventory management system must take into account all your inventory including raw materials and work in progress.

The Aim of Inventory Management ...

Managing your inventory efficiently means having on hand, at all times, sufficient stock to cover your anticipated sales and manufacturing needs over a set period of time.

Too much stock will cost you money.

While too little could mean lost sales or manufacturing delays.

So the idea is, to get the mix of in-hand and on-order materials, just right.

Assessing & Maintaining Basic Stock Levels

If you are new in business, with no history of sales to guide you, you will have to rely on the forecasts from your business plan.

If you have been in business for a few years, you will have records of past sales to help you set your basic inventory needs within your inventory management system.

Let?s take an example here.

You have estimated that you will be selling 100 widgets per month. You do not want to run out of stock before the next delivery, so you need to re-order in time to prevent this.

Here?s how you do it.

• Whether you purchase the widgets or make them yourself there is a lead time between ordering and then receiving the widgets. This must be taken into account within your inventory management system.
• To be on the safe side and allow you to cover the unforeseen, such as shipping delays, work stoppages etc, you also need to build a safety margin into your basic stock level.
• This safety margin figure can be based on an extra weeks stock or from previous order-level or throughput experience, and will vary between different types of goods. Don't be over generous here, holding extra stock costs money, but give yourself some 'just-in-case' room.
  • So, when reordering goods to maintain a basic stock level

    Required Lead time Basic Stock Level 100 per week 2 weeks 100 x 2 = 200 units

  • When your stock of widgets in hand, gets close to 200 units you need to reorder. But remember ...
    • This basic stock level would be okay if the world was perfect, but it is not and so you need to give yourself some extra margin.
    • If you have decided that an extra weeks stock will cover the unforeseen then your basic stock of widgets would be 300 units.
    • You re-order widgets when your in-hand stock is down to 300 units.

This is, of course, a very simple view of stock control and there are many more considerations and permutations that will factor into your stock levels. And that is also why most modern businesses utilise computerised inventory management systems.

A simple one off exercise like this, setting your minimum stock levels, needs to be done for every item you sell.

It is the only way to prevent your business running out of stock on essential items. Computerised inventory management systems help prevent this by notifying you of low stock levels based on your pre-set requirements.

Stock Control - Avoid too much, too little and too late ...

Managing your inventory not only means managing it to prevent stock outs but also to prevent over stocking. Excessive inventory costs your business money.

It costs to hold it, insure it, interest on purchase cost loans and extra overhead. And of course it reduces your liquidity. Not something that any business wants.

Watch your inventory levels carefully and always only have on hand what you know you can sell.

Be especially careful of stock levels on those items that are ?craze? or short shelf life items. Last season?s fashion items will not sell well, if at all, next season.

The standard practice here is to reduce prices to try and sell excess stock. It will help reduce stock, but will also reduce your return on investment. Far better not to have excess stock.

Use a good inventory management system and manage your inventory stock levels based on what you can sell, and you shouldn't have an over stocking problem.

Untie Your Money ... Inventory ties up money, in many cases too much money, money that could be used better elsewhere.

Learn how to manage your inventory, by using a good inventory management system, you will free up cash that will make a huge difference to your cash flow, the lifeblood of your business.

Here?s what you should aim for:-

• Reduce your stock turn over time
  To as low as possible using just-in-time inventory ordering. If you pay for your inventory on a monthly basis and can also turn it over on a monthly basis, your cost of inventory can be nil. Better still, if you turn over stock in 30 days but pay on 60 day terms. Just make sure that your essential goods supplier has agreed, and can manage or your terms could mean his collapse.
• Remember the 80/20 rule as it applies to inventory as well.
  It could be that 80% of your cash comes from 20% of your products. Spend more time managing the 20% by ensuring you don?t run out of stock on them.
• Manage your inventory based on the importance
  As well as demand and contribution of the product. Not only on the large but often slow moving items.

Keeping Track ... long gone are the days when your business ?closed for stocktaking? or they should be.

Modern technology has revolutionized the tracking of inventory to such an extent that by using software programs you will know how much of each item is in stock, how fast they are selling, when to reorder, and costs and profit margins per item.

A good tracking system will also help prevent theft.

With the computerization of inventory control, all the information regarding your stock can now be at your finger tips.

There is a huge range of point-of-sale and real-time checkpoint soft-ware systems available to the business owner. These include bar-code scanners, electronic cash drawers, and debit and credit card readers, all as part of a POS system.

Computerised Inventory Management Systems ...

Selecting a Point-of-Sale or back-end Inventory Management System

As mentioned previously computerided inventory management systems can make your stock control a lot easier and there are a vast selection of computerised inventory control systems to choose from.

As both you and your staff have to use these systems, here are a few pointers to help you choose the right system that will fit in with your inventory management system.

• If you are in a business in which there are a lot of similar businesses around the country, you should be able to purchase an industry-specific POS software package. Ask your trade association or local business group for recommendations.
• If you can't find an nidustry specific version, then have a look at the many off-the-shelf inventory management systems that are available. These can be very flexible and you can tailor many to meet your specific needs.
• Many standard accountancy software packages come with optional inventory control modules

If you are not quite sure what is available or what you want, find a software salesperson to explain and demonstrate.

You must be happy that the software is both user-friendly for you and your staff and that it provides what you need from your inventory management system.

• Always ask about security features of the system. Can the system be hacked and does it provide an audit trail?
• Make sure any system you invest in can be easily and cost effectively upgraded in line with new statutory reporting and tax requirements.

A good POS system is a virtual necessity in any modern business and in even in the smallest of businesses can pay for itself in a very short time.

For more on inventory management visit www.apics.org - APICS is the Association for Operations Management and if you are interested, the APICS initials stand for "Advancing Productivity, Innovation and Competitive Success".

Inventory management is not difficult provided you have a good inventory management system and constantly monitor your stock.