Systems and Processes for effective Inventory Control
Before we address the issues of effective inventory systems and control it is important to understand all the words associated with inventory. Inventory falls into three categories: raw materials, work in progress and finished goods. Using a bakery as an illustration. Sugar, flour, eggs, and butter are raw materials. Work in progress items are in process to becoming a finished product; for example, croissant dough, brioche dough, chocolate chip cookie dough and pie dough. Chocolate croissants, brioche rolls, almond croissants, chocolate chip cookies, and apple pie are examples of finished goods.
Merchandise is the word used to refer to the products that are finished and sold to different customers or businesses. In a retail bakery, it means the “merchandise” is sold directly to the customer. If it is a wholesale bakery, the “finished goods- AKA-merchandise” will be sold to other food service operations and then re-sold to the end user. Remember inventory refers to the assets which will be transformed into a final product. Back to the bakery, ovens, mixers, pans, refrigerators are not the assets discussed here.
All three of these inventory states are important to the business owner because of the value tied to them. Accountants value the inventory in three ways: FIFO, first-in-first-out, LIFO, last-in-first-out, and the weighted average method. The decision to use one of these systems will require looking at the cost of goods for the business and evaluating the tax implications of each method. It will vary from business to business. Inventory may be one of the biggest assets a business has and managing it properly is crucial.
Inventory Management as defined by Investopedia.com “is the practice overseeing and controlling of the ordering, storage and use of components that a company uses in the production of the items it sells.” Inventory management also refers to the monitoring and managing of all the finished goods that are sold. Good inventory control can positively impact the bottom line and bad inventory control can negatively impact the bottom line. Depending upon the business, if the inventory is not turning enough, space and waste may become an issue. In a bakery, too much of a perishable item will lead to waste. Think milk, cream, eggs, and fresh fruit. Flour and sugar take a long time to go bad, but at 50# bags they take up a lot of room. Incorrect purchasing of raw materials will prevent items from being produced. No chocolate croissants today as the kitchen manager forgot to order the chocolate. Now there are unhappy retail and wholesale customers, as well as lost sales. An inventory systems is how to prevent that situation. There are two different inventory systems: JIT: just-in-time and MRP: materials-requirement planning.
JIT inventory is ordered in when it is needed and prevents the business from carrying excessive inventory levels. This system requires excellent communications with the manufacturer of the raw materials and the end user. In the JIT system, the business may not incur storage issues and other costs will be reduced. The JIT user needs to be aware of running too tight on inventory. Depending upon the seasons, holidays, and market trends a purchaser should adjust their raw material purchasing. In a bakery in February, the normal chocolate order might even be doubled due to Valentine’s day and all the specific items needed during the week. If inventory levels are not adjusted after that week, large orders of chocolate will continue to be delivered. Chocolate is a high dollar item to a bakery and it then may sit on the shelves for months.
In the MRP system forecasted orders are used to plan the inventory needs. This type of system is seen often in manufacturing and fabrication industries. For businesses that use this type of system they may be able to keep inventory levels lower as well as the costs of holding the inventory. A disadvantage is either inaccurate or untimely information. Since MRP is based on forecasted orders, there are many people involved and if record keeping is messy then the right parts may be ordered in excess or sparingly. This system can also be very expensive.
Inventory is a big asset within a business and regardless of which system the business chooses there are additional factors to consider when managing the inventory.
- Supplier Assistance: Use the suppliers inventory systems. The vendor can see your purchasing data and create purchase orders from the data. Eliminating ordering mistakes.
- Inventory Control Personnel: Hire employees that specialize in inventory control. They will monitor what is going on and can help facilitate returns and develop better inventory strategies.
- Lead Time: Make sure your lead times are correct. Suppliers have established delivery times based on when the order was placed. Create a record and see if lead times are too long or too short for the business needs.
- Monitor Inventory Levels & Product Turnaround: Watch the levels of inventory. Is it too high or too low? Are items sitting on a shelf and not being utilized or are you running out of items? Which of your products take longer to sell and sit on the shelf? Create a report to know exactly that information
- Customer Delivery: How often is the customer ordering? How long does it take to get from order to customer delivery?
- Inventory Consultant: If the company can afford to, hire an inventory consultant. They can analyze current inventory systems, suggest changes and then monitor the changes.
- Purchase Software & Tracking Systems: There is software to help with purchasing and managing inventory. It can also be customized for each business’s needs. There are software tracking systems to monitor the inventory and turnaround times.
- Work In Progress: Some businesses rely on inventory to create other products. Find a system to manage these “work in progress” inventory items so the inventory stays current and prevents any production slowdowns.
- Computers and Automation: Are all your items barcoded? Are you using the handheld devices to take inventory? This data is used with software from #7 in a variety of ways.
- Warehouse Layout and Operation: How is the design of your warehouse? Is it organized and efficient?
“Inventory is money, sitting around in another form”, Rhonda Abrams, USA Today