Inventory Management

Introduction
Inventory management is the active control program which allows the management of sales,
purchases and payments.

Inventory management software helps create invoices, purchase orders, receiving lists,
payment receipts and can print bar coded labels. An inventory management software system
configured to your warehouse, retail or product line will help to create revenue for your
company. The Inventory Management will control operating costs and provide better
understanding. We are your source for inventory management information, inventory
management software and tools.

A complete Inventory Management Control system contains the following components:

• Inventory Management Definition

• Inventory Management Terms
• Inventory Management Purposes
• Definition and Objectives for Inventory Management
• Organizational Hierarchy of Inventory Management
• Inventory Management Planning
• Inventory Management Controls for Inventory
• Determining Inventory Management Stock Level

OBJECTIVES OF INVENTORY MANAGEMENT

Through the end of the 1980's, most software packages for distributors placed an emphasis on
sales and accounting related modules. In the early 1990's, many distributors recognized that they
needed help controlling and managing their largest asset, inventory. In response to this need,
several computer software companies developed comprehensive inventory management modules
and systems. These new packages include many new features, designed to help distributors
effectively manage warehouse stock. But after implementing new software, many distributors
don't feel that they have gained control of their inventory. These wholesalers continue to face
many of the same challenges they experienced with their old systems:

• Stockouts and lost sales are common while warehouses are bulging with inventory
• On-hand and available-for-sale quantities in their computer systems aren't accurate
• The return on investment from inventory is not satisfactory

In some cases, the problem lies in the computer software. Some packages still do not have the
necessary capabilities for effective inventory management. In other situations, a distributor is
using a software package that is too complicated. His buyers don't have the knowledge, time,
and/or skills to take advantage of the system's capabilities. But the most common reason
distributors do not achieve their inventory management goals has nothing to do with the
computer system they utilize.
Despite what many data processing salespeople will tell you, computers do not provide solutions
to inventory management problems. Computers are tools. They must be used in the proper
business environment in order to work effectively. This environment is comprised of several
elements. All of them must be present in order for your new inventory management system to
live up to its potential. If your system is not performing up to this potential, be sure you have
implemented each of the following characteristics of good inventory management:

1. Protect your company against theft - Make sure that the only people in your warehouse
belong in your warehouse. Pilferage is a larger problem than most distributors realize.
2. Establish an approved stock list for each warehouse - Most dead inventory is "D.O.A"
(dead on arrival). Order only the amount of non-stock or special order items that your
customer has committed to buy. Before adding an item to inventory, try to get a purchase
commitment from your customer. If this is not possible, inform the salesperson who
requests the item that he or she is personally responsible for half the carrying cost of any
part of the initial shipment that isn't sold within nine months.
3. Assign and use bin locations - Assign primary and surplus bin locations for every stocked
item. All picking and receiving documents should list the primary bin location (in either
characters or a bar code). With correct bin locations on documents, order picking is
probably the least complicated job in your warehouse. Assign inexperienced people to
this task and your most experienced warehouse workers to receiving inventory and stock
management.
4. Record all material leaving your warehouse - There should be appropriate paperwork for
every type of stock withdrawal. Under no circumstances should material leave the
warehouse without being entered in the computer. Eliminate "no charge/no paperwork"
material swaps. Product samples should be charged to a salesperson's account until they
are either returned to stock or charged to the customer.
5. Process paperwork in a timely manner - All printed picking documents should be filled
by the end of the day. Stock receipts should be put away and entered in the computer
system within 24 hours of arrival.
6. Set appropriate objectives for your buyers - Buyers should be judged and rewarded based
on the customer service level, inventory turns, and return on investment for the product
lines for which they are responsible.
7. Make sure every employee is aware of the cost of bad inventory management - Inventory
loss through theft, breakage, or loss must be paid for with net profit dollars. If your net
profit before taxes is 4%, it takes $2,500 in new sales to make up for a $100 merchandise
loss!
8. Ensure that stock balances are accurate and will remain accurate - Implement a
comprehensive cycle counting program. A good cycle counting program can replace your
traditional year-end physical inventory.
9. Determine the most advantageous replenishment path for each item in each warehouse -
Assign one of these "paths" to each item in each warehouse:
1. Distributive purchasing - The warehouse replenishes stock with a purchase order
issued directly to the vendor
2. Central Warehousing - The stock of one warehouse is replenished with a stock
transfer from a central warehouse
 3. Cooperative Purchasing - Several branches "pool" their needs and issue one
vendor purchase order in order to meet the vendor minimum order within a
reasonable amount of time
10. Specify guidelines for setting the reorder method an other purchasing parameters to
maximize inventory turns and minimize stockouts:
1. Minimum/Maximum quantities
2. Economic order quantities
3. Order up to a specific stock level
4. Safety stock quantities
5. Preseason buys
11. Document replenishment procedures:
1. Line buys
2. Non-stock items
3. Price-break purchasing
4. Preseason buys
5. Importing material
12. Establish customer service, inventory turnover, and return on investment goals for the
following 24 months for each branch and major product line - After each month end
close, compare the goals to the actual results.
13. Initiate an on-going dead stock and excess inventory control program - Excess inventory
is usually considered to be any quantity of a product greater than a 12 month supply.
1. Transfer excess stock to a branch that needs the material
2. Return the stock to the vendor
3. Lower the price of items with excess inventory
4. Substitute surplus inventory for lower cost items that are still popular
5. Offer special commissions for the sale of surplus merchandise
6. Sell the excess inventory to a competitor
7. Donate excess stock to a non-profit agency
8. Throw it out, take the "write-off" for your financial statement, and free up room in
your warehouse
14. Make inventory management considerations part of corporate strategic planning.

Benefits of holding inventory

Avoiding Lost Sales

Losing business is the last part where you, as a business owner wants. Without the necessary
goods in hand, which are ready to be exploited, most businesses will surely lose its business and
market share.

There are some customer are willing to wait, especially when the product they want must be
made to order or it is not sidely available from your competitors. Thus, your business must
prepare itself to provide the goods or product demanded by your customers.

For instance, Shelf Stock are items that are stored and sold with little or no modification to your
customers. Let take an example of an automobile industry. An automobile is an item of Shelf
Stock. The cutomers may or may not request minor variations, the basic item produces by the
factory and it’s sold as a standard item. The same principle applies to for many items from heavy
machinery, consumer products or light industrial goods.

Gaining Quantity Discounts

The other benefits of holding inventories is your company can make bulk purchase on raw
materials and gain quantity discounts. The suppliers of raw materials are willing to give generous
discounts by reducing the price of supplies and components parts if it is purchase in bulk.

As a business owner who are willing to place a large order of certain materials from regular
suppliers may allow your company to receive discounts on regular prices, thus it will lower your
cost and achieve competitive price in your market. These discounts will reduce the cost of goods
and increase profits earned on sale.

Reducing Order Cost

By ordering in large numbers, your business will reduce the cost it incurs. Some of the cost
involves when making an order is forms that must be completed, approvals need to be obtained,
and the goods arrive must be accepted, inspected and counted. Then, an invoice must be issued
and payment must be made. The cost of receiving materials may be vary according to the
numbers of orders made. By making bulk orders, the number of orders will reduce and lessen the
cost involved.

Achieve Efficient Production Runs

Start up Cost incurred when a company sets up its labor/manpower and machines to produce
goods. The cost then absorbed when production begins. The cost will reduce to begin the
production of the goods if the process of producing run longer.

Take this as an example; let say it cost $10,000 to setup machinery and assembly line to produce
sofa chair. If 1000 sofa chairs are produced in a single-three day run, the cost of absorbing the
start-up expenses is $10 per unit (10,000/1,000). If the run could be doubled to 2000 units, the
absorption cost will would drop to $5 per unit (10,000/1,000).

When your company frequently setting up its production line, it will increase its start-up cost.
Holding an inventory to make sure the production line will never ran out of raw materials will
ensure longer run in your production line, hence lower the start-up cost.

Reducing risk of production shortages

An inventory is needed to stored large amount of raw materials and unprocessed components.
Manufacturing companies deals with thousands, if not millions of components. If one single
component ran out of stock, the entire production line could be halted. Just imagine million
dollars of machinery and manpower halted in the production line just because a shortage of nuts
and bolts in the component stock, your company are at risk of losing tons of money!
To avoid that risk, your company must equip itself with its own inventory management system.
The system will prevent the shortage of vital raw materials and components needed to produce
goods. The system will manage and notify any shortages before it’s materialized. The inventory
management system are suitable to maintaining large quantities of stocks and always keep your
inventory on check!

Lowering Inventory Costs

Recent industry reports show that inventory costs as a percent of total logistics costs are
increasing. Despite this rise, many organizations have not taken full advantage of ways for
lowering inventory costs.

There are a number of proven strategies that will provide payoff in the inventory area, both in
client service and in financial terms.

Some of these strategies for lowering inventory costs involve having less inventory while others
involve owning less of the inventory you have.

Regardless of which techniques you employ, proactive inventory management practices will
make a measurable difference in your operations.