Companies that carry inventory such as manufacturers, distributors, and retailers always need to be on the lookout for better ways to manage inventory availability in order to reduce their inventory carrying costs and improve profitability.
Manufacturers and distributors often make a significant investment in inventory and consider it a key factor in their company’s operating strategy. Cost-cutting efforts often focus on inventory because of its value and visibility and it is a key measure of company health.
Carrying inventory serves an important operational purpose – it reduces the time a company needs in order to serve its customers. It is quicker for the distributor to deliver the goods to the customer if the inventory is placed in a nearby warehouse. Similarly, in the case of manufacturing, finished goods inventory allows shipment on the same day instead of asking the customer to wait until the item is produced. With the immediate availability of raw materials and parts, it is possible to start production when a make-to-order product is ordered.
There are only two basic parts of inventory management:
- Knowing what you have
- Managing acquisition (replenishment)
Inventory tracking is all about keeping a running count of what comes in and what goes out. Depending on the size of inventory, inventory balance can be as simple as tracking on paper file cards or on Excel spreadsheets.
In the case of more large and complex situations, the same task is done using inventory management software. On other hand, complex and more active situations call for the use of inventory management software that does exactly the same thing—keeps a running count of additions (receipts) and subtractions (issues) and the resulting balance. Use of inventory management software is not limited to this task and can do much more, including accurate tracking of multiple quantities of a specific item in multiple locations, tracking lots and serial numbers, recording and enforcing expiration dates and FIFO/LIFO (first-in-first-out, last -in-first- out) picking, inventory valuation, automated data collection, quality control holds, usage analysis and replenishment management, and much more.
The result of receipts (inventory coming in) and issues (inventory going out) is the actual amount of inventory on-hand. Replenishments (receipts) are controlled by the inventory manager.
Replenishment managed through some form of “order point” management, either formal or informal is an example of the simplest situation. Walking through the warehouse or stockroom from time to time and looking for empty spaces or bins with smaller than usual quantities is a simple and informal order point. In another approach items are stored in two containers, one is the main supply and the other is in reserve, this is called the “Two-bin order point”. Reserved supply is used when the main supply is exhausted and reserved supply replaces the position of main supply and empty container serves as re-order signal. As long as replenishment is completed before the reserve (now main supply) is used up, you won’t run out.
The two-bin order point is actually a primitive form of Kanban (a common inventory control technique that uses physical tags or containers to trigger replenishment). The order point can also be computerized and is embedded in many inventory management software products.
Inventory management benefits
Fundamental requirements for having the inventory you need to satisfy customers and avoid disruption caused by shortages, it is always necessary to know how much inventory you have and also managing replenishment. Without good information and controls, you will likely have more inventory than you really need and still suffer from unnecessary shortages. Good inventory management pays off in higher customer service and satisfaction, lower overall inventory investment, fewer backorders, and lost business, reduced disruption, and lower cost of expediting.
In upcoming topics, we will discuss important inventory control strategies one by one for smarter inventory control.