Taking Stock of Your Stock: Inventory Management 101

Your stock, or inventory, is made up of ‘goods and materials a business holds for the purpose of resale’ (wiki). These goods and materials making up your overall inventory can be in any form across the production life cycle and are divided into 3 categories.

Raw materials

(The input) – includes materials, parts, packing goods and consumables needed to manufacture e.g. fuel, glue and power.

Work in progress

(The production process) – partially finished goods currently going through the production stages. Also includes rejects or defects.

Finished goods

(The output) – finished goods at distribution centres or warehouses which are ready to sell to customers, goods in transit. Also includes returned goods.

Why hold stock?

Although it might seem to be an obvious question, the answer to this has evolved over centuries through various industrial breakthroughs. Three main reasons why inventory (and more importantly, the correct amount of the right inventory) has become more important are:

  • Improve lead times

    Gain a competitive edge in a time conscious, demanding economy.

  • Meet uncertainty in the demand

    Despite sophisticated forecasting methods, ad hoc requests and orders are an integral part of any business and the ability to react quickly enough can determine growth and success.

  • Ability to bulk buy to reduce costs

    Economies of scale allows giant retailers and wholesalers to drown the market with unbeatable prices and offers due to their exponential purchasing and inventory capabilities.

With the credit economy booming allowing businesses to borrow more money and increasingly limited space, the need for sophisticated inventory management processes continues to grow.

Inventory Management System

Elements to consider within your inventory management processes

  • Replenishment lead time

    How quickly can your suppliers deliver the raw materials to you? Does this affect your production cycle times and result in loss of business?

  • Costs of storage

    How much inventory can you store? Is the cost of storage low or high? Is your business model able to become leaner for increased profit margins?

  • Inventory forecasting

    Do you know when you need to increase orders of certain goods or materials? Do you have peak annual periods (i.e. Christmas) where you know the % increase of inventory required? What happens during quieter periods – does this increase cost of inventory storage restrict cash flow?

  • Inventory valuation

    Do you have visibility of your inventory value? This is especially important for insurance purposes (i.e. a warehouse fire which destroys everything – how much would you need to replace it and continue doing business?)

  • Quality controls and management

    Do you have strict quality measures in place to reduce wastage and defect goods?

  • Returned and defect goods

    – what are your current return and defect figures? What processes do you have in place to reduce this?

How does inventory software help to answer these questions?

  • Complete audit trail

    An entry is made and a corresponding report can be generated for each transaction along the production chain (allowing you to tighten up certain processes)

  • Stock definition and division

    e.g. unrestricted-use stock, stock in quality inspection, or blocked stock – providing improved visibility of stock at any given time

  • Special stock management

    e.g. stock which is assigned to a vendor does not appear on figures for sellable stock

  • Analysis

    Customised analysis and reporting based on individual business requirements

A smart inventory management system which is linked to your entire Material Requirements Planning (MRP) and Enterprise Resource Planning (ERP) system(s) brings your business to a new level in terms of forecasting, cash flow capability and meeting customer demands.

To learn more about SAP Business One Inventory Management read this.

To speak with a specialised ERP consultant about how your inventory management system could be improved, contact us today.


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