The system includes all aspects of managing a company’s inventories: purchasing, receiving, warehousing, storage, tracking, shipping, turnover, and reordering. Ideally, each of these aspects makes up a separate subsystem. However, different companies have different ways of dealing with these aspects in relation to inventory control. Some treat each aspect as a subsystem while others do not.
Computerised inventory control systems have made it possible to combine the various functional subsystems of inventory management into a single cohesive system. In the modern business environment, even MSEs have come to rely on computerised inventory management systems.
A computerised I/C system may be too much of a good thing for small establishments like retail outlets, shoe stores, convenience stores, and the like. These types of businesses can continue using manual systems or partially computer-assisted systems.
However, they may still be found to have a good inventory control system. It is not computerisation that makes a good inventory control system but something more fundamental.
Elements of a Good Inventory Control System
Inventory management has four important functions:
• Counting and monitoring of inventory items
• Recording and retrieval of items storage location
• Recording changes to inventory
• Anticipating inventory needs, including inventory handling requirements
A good inventory control system support all the above functions of inventory management to achieve the ultimate goal – Maximizing cash flow:
Counting and Monitoring of Inventory Items
The nature of inventory is that it is always moving or flowing through different channels. An effective I/C system should be able to count and keep track of every inventory item as it moves because the company incur cost the moment each item comes in and that cost not only has to be recovered but also contribute to the company’s profitability.
Tracking inventory and assessing its values as it makes progress through the processes is the primary reason for developing the system. For a business that deals only with finished goods, the task is relatively simple: it basically involves counting cans, kegs, or boxes. The task becomes more complex for manufacturing firms, where there is conversion of materials inventory into finished products inventory. In a manufacturing set up, tracking inventory flow goes hand-in-hand with:
- Handling raw materials
- Controlling materials in process
- Managing finished products
The more common use of an inventory control system is constantly counting finished inventory for sale. This is because items with retail worth have greater value and offer a more accurate picture of a company’s net worth.
Recording and Retrieval of Item Storage Location
A crucial feature of a good inventory system is the inventory database, the repository of data related to every inventory item. This is the key to effective inventory tracking. The database contains everything there is to know about inventory: item identification, date acquired, quantity acquired, vendor identification, unit cost, reordering parameters, purchasing lead time, quantity used, date used, place/process used, persons responsible for transactions, warehouse location code, item status.
A non-computerised inventory database works fine, but it is many times slower and more error-prone than a computerised version.
The Current trend toward inventory management automation has introduced the concept of real-time intelligent information processing in the warehouse. Automation uses combinations of hardware including material handling and data collection technologies. The "intelligent • bCrLf" part of the system is powerful software that automatically controls all aspects of warehouse operations, including management of the inventory database.
Part of a good inventory control system is a stock locator database, which is preferably computer-based. This database, in tandem with the inventory database in a modern space management system, helps in proactive decision making. It captures and maintains records of: stock number, lot number, number of pallet loads in each storage location, grid coordinates of the reserve area, individual rack tier positions, and pallet load capacity of all storage locations.
An equally important part of the system (whether automated or not) is a sensible effective warehousing design. Small businesses, especially those involved in processing fairly large volumes of materials and goods, can reap great benefits from a user-friendly and properly organised warehouse layout. A well-designed warehouse makes locating and retrieving stored materials efficient and lends support to the inventory database system.
For example, when a materials releasing clerk requests for retrieval of a specific item from storage, the inventory database system links the item’s location code with its actual physical location information in the stock locator database. Warehouse personnel use the location information for actually retrieving the item from storage. If the warehouse is efficiently designed, retrieval of the item takes only a short time. Quick retrieval contributes to quick delivery to the customer.
Recording Inventory Sales
An inventory database does not operate by itself. It needs input before it can process output.
Since the database is at the core of a good inventory control system, assurance must be provided that all transactions involving inventory are captured by the system: purchasing, purchasing returns, receiving, storage, requisitioning, retrieval from storage, delivery to end-user, spoilage/damage.
The business has to design effective triggering mechanisms that signal system operators to perform appropriate database update procedures the moment an inventory transaction occurs. Effective feedback mechanisms also need to be put in place to confirm that updates have been performed promptly and correctly.
Moreover, data quality control must be exercised at all times in order to guarantee that all data items that the database captures are accurate and valid.
Anticipating Inventory Needs
One of the most important factors of success in cash flow management is keeping inventory levels at minimum. The business only keeps stock of enough goods and materials to prevent a stock-out situation that could paralyse operation.
To achieve this objective, the business has to anticipate future inventory needs as accurately as it can in order to respond effectively to seasonal customer demand (and thus take advantage of sales revenue opportunity) without placing itself into a situation called over overstocking.
If the company’s inventory control system is sound, its inventory database system can produce detailed reports, summaries, and analyses which can assist management in planning future purchases and/or production schedules. Report details like for example, vendors and purchasing lead time, can guide management in scheduling purchase orders. Unit cost details help management make purchase volume decisions and set aside funds for the purchase.
Inventory Management Secret
Inventories are assets that do not work until sales are made. Therefore, turning those inventories is critical to the company’s financial growth and success.
Inventory turnover is the primary criterion for a good inventory control system.
There is no magical mathematical equation or formula for determining just the right level of inventory based on previous sales, but every business has the capacity to know the tastes and behaviours of its customers, to understand its products, and to make wise management decisions.
Business can use this knowledge to achieve inventory turnover that translates to maximum profit margin – and cash flow.
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