How do you manage inventory? It seems like such a simple question, but there’s actually a lot of complexity in its answer. We are going to walk through what inventory is and the steps that are necessary to take in order to properly manage it.
What is Inventory Management?
What is inventory management? Inventory management is the process of keeping your parts, products, and assets organized across all of your warehouses. It involves monitoring and organizing item quantities, costs, locations, reorder points, vendors, and more.
Also encapsulating warehouse management, inventory management is extremely useful at maximizing your warehouse space and speeding up the receiving, picking, packing, and shipping processes. It keeps your inventory quantities balanced so you will have enough on hand to meet demand without going overboard and winding up with an unnecessary overstock.
Here are some ways that you can use inventory management in your business:
- Stay on top of seasonal sales trends via detailed reports.
- Restructure your warehouse.
- Put parts that are often used in conjunction with each other close together.
- Use auto reorder points to keep inventory flowing in and out at the optimal rate.
- Form mutually beneficial relationships with vendors to maintain supply chains.
What are the 3 Types of Inventory?
What is inventory? Inventory is everything you possess in all of your warehouses, stores, and other locations. It includes not only the finished products you intend to sell, but also a few other key types of items that are necessary to keep your business running. Here are the three types of inventory:
Parts
Parts can be anything from nuts and bolts to flour and sugar. They are any items that can be used to create a finished good, but they will not be sold in their current form. Basically, parts are the raw materials you need in order to make products, so it’s important to keep track of them. But they must be changed or used in some manner to make them more valuable to customers. After all, a computer company wouldn’t ship a motherboard, hard drive, and other equipment to customers and expect them to assemble a computer themselves.
Products
Products are the end result of putting together a number of parts. Products can be customizable, so you can add different parts depending on customers’ preferences. They come in all shapes and sizes, from baked goods and frozen ice cream to expensive electronics and vehicles. Obviously, different products have different shelf lives and require varying amounts of storage space. These are all factors that need to be taken into account when deciding how many products to have on hand at any given time.
Assets
Assets are different than parts and products, both of which are intended to be sold at some point. Assets are items (such as heavy-duty manufacturing equipment, brooms, paper towels, work uniforms, shelves, and vehicles) that are meant to be used in the day-to-day operations of a business, but not to be sold. Sure, they can wear out and be sold or scrapped at some point in the future, but that’s not their primary purpose. Assets make it possible to produce, hold, move, and eventually sell parts and products.
What is Supply Chain Management?
Supply chain management is the process of obtaining parts and products from vendors and then getting them into the hands of customers. It takes a lot of work to handle all of the vehicles, workers, inventory, and finances involved in maintaining a supply chain, but it is absolutely necessary to keep your business running smoothly.
Barcode scanners come in handy (no pun intended) when managing supply chains. Of course, the barcode scanners need to be connected to your computerized inventory management system, such as Fishbowl. When you scan a part or product’s barcode, you can instantly see detailed information about it, such as its quantity in stock, location in the warehouse, default vendor, and more. This information helps you reorder, receive, and conduct cycle counts faster and with greater accuracy than you could by hand.
Fishbowl’s supply chain management features allow you to:
- Track shipments.
- Monitor vendor performance over time.
- Stay up to date with payment terms.
- Instantly update inventory records when products are ordered, received, sold, and shipped.
- Monitor inventory levels at multiple locations.
Calculating Inventory Costs
There are a number of costs that an advanced inventory management solution will help you calculate. Here are some of the big ones, along with all of the costs that they are made up of.
Carrying Costs
Carrying costs (also known as holding costs and inventory costs) are the sum of all of the money that companies must spend to store their parts and products. All of the things that make up carrying costs include:
- How much the inventory depreciates during a certain period of time.
- Warehouse employees’ salaries.
- Essential insurance premiums.
- Security systems and personnel.
- Upkeep, such as storage space, heating, leases, and other bits of maintenance.
- Applicable taxes.
Landed Costs
Also known as the true cost, the landed cost of parts and products is made up of everything that goes into obtaining products and getting them to their final destination inside a warehouse. Landed costs are made up of:
- Taxes, including customs, tariffs, duties, harbor fees, and currency conversion.
- Shipping costs, including crating, packing, freight, and handling.
- Operating expenses, including employee compensation, due diligence, and brokerage and logistical fees.
- Risk management, including insurance, regulation compliance, quality checks, and buffer stock.
Inventory Storage
At its core, inventory management is about knowing what you have in stock. To properly manage your inventory, you need to know where every single item should be in the warehouse down to each aisle and shelf. Tagging items with barcodes and specific locations within your inventory management system allows you to keep track of them. It is next to impossible for an individual to commit all of these locations and items to memory, so it is important to have the assistance of some type of computer system to aid in this responsibility.
But you should not stop there because that is just the beginning of the inventory management process. Once you know where everything is, you can decide whether or not you would like your items to stay where they are or if they would be better off in new spots. For example, you can analyze the pick paths that your warehouse workers make to see if certain products are often sold together or if certain raw materials are often needed for manufacturing jobs. If one such part or product is at the front of the warehouse and the other one that is connected to the first one is at the back, your warehouse workers are spending more time than necessary to go and get them when they could save a lot of time if they were closer together, possibly even on the same shelf. Many changes of this nature can significantly boost efficiency. In addition, you can see which items you go through more often than others and then place the high sellers closer to the dock area for rapid receiving and shipping.
Armed with this information, you can decide the best ways to restructure your warehouse. Doing this will maximize efficiency and ensure your business is making the most of its resources, which is one of the primary purposes of inventory management.
Inventory Movement
Before parts can be compartmentalized and stored in a warehouse, they first need to make their way to that warehouse. How is this done? It begins with a purchase order. A warehouse worker might conduct a cycle count and, during his pass through the warehouse, he notices that a part is getting low. He can simply fill out a purchase order and send it to the appropriate vendor to replenish that item’s stock.
Even better, companies can create minimum and maximum inventory levels and keep track of inventory quantities at each of their locations in a digital inventory system. So then, when they scan and sell enough of a particular item, they will know that they need to reorder it. Still better, they can set up automatic reorder points and default vendors. These allow companies to automate much of the reordering process. When the number of items in stock reaches the minimum level, the inventory software can automatically generate a purchase order with the necessary quantity to bring it back to the maximum level. It will also already have the vendor on it, as well as the negotiated prices and payment terms. All a warehouse manager has to do is review and issue the purchase order.
Inventory Delivery
The goal of inventory management is not simply to obtain goods, but to make sure they end up in the right hands. It facilitates the movement of inventory from vendors to a warehouse and then to the customers. When you send out a purchase order or receive a sales order, it signifies that an order is about to be either delivered to your warehouse or shipped out from your warehouse. And when a shipment is made, depending on the shipper, you should receive a tracking number. This allows you to estimate the time of delivery and pinpoint the location and status of the shipment.
You can use this tracking information in two main ways. First, you can spot potential problems, such as delays, and strive to work with the vendor or customer to ameliorate them. It is better to find out about bad news early than to be ignorant of it and face a crisis later. Second, you can send an email to your customers letting them know when to expect their orders to be delivered and confirming what they will receive. If you have inventory software, it may even allow you to automate this process by filling out detailed information (such as packing list, total price, tracking number, and estimated arrival time) in a template that you have created prior to the sales order being received. This keeps your customers in the loop and it also maintains an open channel of communication between you and them.
How to Manage Inventory
Now that we have discussed what inventory management entails, we should note that there are two main ways to manage inventory:
- Manually
- Digitally
Manual methods include using sheets of paper, Excel spreadsheets, and workers’ memory. Each of these inventory management methods has its pros and cons. They are all inexpensive and they can work well when a company’s inventory load is small. But they lack any type of automation and they can easily lead to data errors, breaches, and even losses. Plus, they are not scalable, so they can’t keep up with heavy growth.
Digital inventory management involves software, barcode scanners, barcode printers, and other tools to streamline much of the inventory management process. This method is, of course, far more expensive than the manual ones – plus, it is more complex and it takes longer to be trained on. But the benefits include scalability, automation, accessibility, decreased workforce requirements, and improved data accuracy and security.