If you ask Wikipedia ‘What is Inventory Management’ , the answer start like that:
Inventory management is the process of …
So the first (meaningful) word describing inventory management is process, and this is how inventory management should be viewed – as set of ongoing processes, who’s purpose can be described as: making sure you have enough inventory to cover customer demand, while keeping inventory costs to minimum
This guide will focus on the logistical aspects for inventory management. There are some important financial aspects to inventory management, which are not covered here.
Inventory Management Processes
This inventory management guide will focus on the different processes supporting inventory management.
Initial Entry To Stock
When you first decide to start managing your inventory, be it on a piece of paper, using an Excel sheet or a dedicated inventory management software, you first need to register the current inventory levels of all of your products.
You would usually want a printout of all your inventory managed products, along with their physical location.
Once all product quantities have been counted , the data is entered to the system (or written in an inventory notebook).
Once the initial entry to stock have been completed, its very important to update every inventory movement – receiving, issuing, scraping etc., to keep your inventory levels accurate.
A key inventory management process is replenishment. Its purpose is to keep your inventory levels sufficient to cover the demand for those products.
Replenishes can occur at multiple levels – from a supplier to a customer’s central warehouse, from the central warehouse to smaller regional warehouses, from regional warehouses to a store’s back-room, and from the back room to the end-customer facing shelf.
There are many replenishment models which determine what, when and how to replenish inventory but most of them follow the same basic rules:
- Minimum stock quantity – once inventory levels for a product goes below the minimum quantity, inventory is replenishment. This is also referred to as the stock re-order point or safety stock. The minimum stock quantity determines: ‘When should I replenish’.
- Order size – Once replenishment is triggered, you should determine how many units (pieces, liters, KGs) should be order. The order size can be determined using various models, EOQ is one of the more famous. The most simple model is using maximum order quantity. In that case, your order size is: Maximum quantity minus current available quantity. Your inventory levels follow a simple chainsaw model, going from minimum to maximum.
Example: Inventory situation over time, where: Minimum quantity – 40, Maximum quantity – 100, Order size – 60
Once a decision has been made to replenish inventory, a replenishment order should be issue. If you replenish inventory from your supplier, you would send them a purchase order. If you replenish from a warehouse, you would send them an inventory pull request.
Receive to inventory
Part of the replenishment process is receiving goods to the warehouse. This is usually performed with reference to the sourcing document (e.g. a purchase order). Actual received quantities are counted. Once goods receipt is complete, inventory levels increase.
Issue of inventory
Inventory is issued for various purposes, fulfilling customer orders being the most trivial.
Inventory can also be issued to a different storage site (e.g. another warehouse or from back room to shelf). Scrapping is another form of issue, where inventory was damaged to a point where it can no longer be used for any purpose.
In manufacturing companies, raw materials are issued to the production floor for use in the production process.
Usually a count document is produced, reflecting stock quantities of each product which are thought to be on hand. If a software is used to manage inventory, a count document is printed, listing all stock quantities of all products in the system.
A physical inventory count is then performed, writing down actual product quantities which are physically counted in the warehouse or in the store.
Once all counting has been completed, inventory levels are adjusted to reflect their actual quantities.
Although only an annual inventory count is usually mandatory, for proper inventory management, inventory should be counted as frequently as possible, to make sure you always know what are your real inventory levels.
A common method for inventory count frequency management is using the ABC model, where products are classified to groups, based on different criteria: fast-movers vs. slow movers, higher value vs. lower value, or any other criteria which might be useful.
Once products are grouped, a frequency is set for each group, so that the A products are counted weekly, B products are counted monthly, and C products are counted quarterly, for example.
Returns (from customer, to vendor)
Occasionally your customers will return products. A processes should be in place to handle customer returns, usually in the form of an inspection of returned product’s quality. A decision should be made:
1. Product in good quality – in that case, products should be received back into inventory and can be issued again (e.g. sold to another customer). In this case, inventory quantity is increased.
2. Product in poor quality – should be received to stock as damaged or broken inventory. These products will then be returned to a supplier using an issue from stock to vendor, or should be issued to scrap. In those cases, inventory quantities are reduced.
Certain businesses are required to be able to trace their inventory throughout its lifecycle. A good example are pharmaceutical companies, who must be able to trace finished products sold to customer, all the way back to the raw material that were ordered from suppliers.
To facilitate traceability, companies usually employ batch (or lot) management. Each piece held in inventory is part of batch of products that have similar properties – same manufacturing date or expiry date, for example. Every batch is tracked throughout its process,from the moment it is manufactured until it is received (or bought) by the end customer.
Products are also identified physically by their batch number, usually using a special label that has the batch (or lot) number printed.
In terms of inventory management, batches provide another level of inventory management, where different items from the same products are managed and identified uniquely by a batch number and batch characteristics.
Serial Numbers Management
Another solution that is implemented to support traceability is using serial numbers to uniquely identify each piece manufactured. Products are usually labeled with a unique serial number which is tracked throughout the different inventory management processes ( received from supplier, issue to production, issue to customer, return from customer etc.)
Serial number management provides the highest granularity of inventory management, since each piece is uniquely identified and tracked.