Having the right products in the right place, at the right time is the number one goal of inventory management. That means knowing when to order, how much to order and where to store stock, which require full real-time visibility into inventory.
Inventory management allows organizations to track the acquisition, storage, and sales of products at every stage to ensure product availability and optimize production costs. This helps businesses keep track of stock levels, so informed decisions can be made about how much to produce and when.
There five key principles of inventory management:
- Demand Forecasting
- Warehouse Flow
- Inventory Turns/Stock Rotation
- Cycle Counting
- Process Auditing
Demand Forecasting: Demand forecasting is essential to the planning process and allows companies to improve the ability to determine future demand by relying on internal data such as historical and external data. The external data includes information on weather, seasonal variations, supply chain constraints, etc. This data is then used to determine how much supply needs to be produced to meet demand. When done correctly, using a well formulated ERP solution, such as CloudSuite Distribution, demand forecasting can help companies make informed decisions that help create enough supply to fulfill customer demand. This provides insight to possible supply chain constraints and could even share insight on how to gain an advantage over competitors.
For example, if a Lawn Mower retailer realizes that shipments for one of the best mowers could be delayed due to congestion at the ports, demand planners can evaluate the impact of the reduced availability and how it might affect their downstream sales. The demand forecast might have to be reduced (if there are no mowers available—there will be no sales) but predicted sales of similar mowers that are available may need to be increased.
Warehouse Flow: Certain steps need to be taken, in order, to provide a successful process. Every warehouse needs to define where and how products are moved. This is called warehouse management process flow, and it’s important to have in place before the order fulfillment process begins.
A well-designed warehouse management process flow can save businesses time and money. It defines all the stages in many warehouse operations, so the focus can be on getting work done. There are multiple reasons a distribution organization would want to have a warehouse process flow in place. Warehouse process flow can keep your processes organized and flowing for maximum efficiency or it can help determine who needs to be hired and where within the warehouse to keep you on track.
Inventory Turns or Stock Rotation: Inventory turnover is a financial ratio showing how many times a company turned over its inventory relative to its cost of goods sold (COGS) in a pre-determined period. Companies then divide the days in the period, which is typically a fiscal year, by the inventory turnover ratio to calculate how many days it takes, on average, to sell their inventory.
The inventory turnover ratio can help businesses make better decisions on pricing, manufacturing, marketing, and purchasing. It is one of the efficiency ratios measuring how effectively a company uses its assets. A somewhat low inventory turnover ratio may be a sign of weak sales or surplus of inventory (overstocking), while a higher ratio signals strong sales but could also indicate inadequate inventory stocking. Inventory turnover measures how often a company replaces inventory relative to its cost of sales. Ideally, the higher the ratio, the better.
As problems go, ensuring a company has sufficient inventory to support strong sales is a better one to have than needing to scale down inventory because business is lagging. A low inventory turnover ratio can be an advantage during periods of inflation or supply chain disruptions, if it reflects an inventory increase ahead of supplier price hikes or higher demand.
Cycle Counting: Cycle counting is a method of checks and balances by which companies confirm physical inventory counts match their inventory records. This method involves performing a regular count and recording the adjustment of specific products.
Warehouse managers and supply chain professionals often prepare plans for staff to audit inventory. The most efficient inventory management plans lead to minimal transaction error rates and extremely high stock record accuracy without taking away from staff’s essential tasks. Regardless of whether a company uses periodic or perpetual inventory practices to track their inventory, regular cycle counting is a necessary auditing process to manage inventory counts.
The goal of cycle counting is to identify and rectify any inventory record discrepancies, this is where an ERP Solution would be helpful within the organization. As with any process, it is beneficial to understand your performance. Is business improving and how business compares to industry standards.
Process Audit: An audit process is a series of steps followed to perform audits on any compliance certifications or standard operating procedures. It can mean any audit, such as GDPR, SOX, ISO, annual financial audits, etc. Each of them has their own unique series of steps. Auditors and/or legal teams are the only people who are capable and authorized to perform these audits. Unlike certification standards, most business processes follow a common method of function.
Processes form the fundamental values of any business. You always want to operate at high efficiency to enable quick processing and make faster steps towards the business goals. To keep your processes at peak efficiency, you must audit them regularly. Having an ERP system in place keeps these processes in order so when an audit is performed, it runs smoothly without any major delays.
By having an ERP solution with Inventory Management in place, your business will have the right products in the right place, at the right time. Providing overall visibility into orders and stock safeguards product availability and optimized production costs. Copley Consulting Group can provide the services and implementation needed to ensure you can make the best and most informed decisions at every stage of your organizations process.