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Inventory (Stock) Control

What is Inventory?

Stock (Inventory) Control

Wednesday, 10 October 2018
Omni Accounts
Inventory (Stock) Control

Inventory (also referred to as stock) can be defined as the products or items which are sold by a business or used to manufacture products which are then sold.  

In a manufacturing business, inventory falls into three main categories: raw materials, finished goods and work in progress (WIP). Raw Materials are the items which will be used to manufacture finished goods. Finished goods are items which are the result of the manufacturing process. Work in Progress refers to the raw materials which are currently being used in the manufacturing process.

In a retail or wholesale business there is normally simply just inventory or stock which is purchased and then resold.

What is Inventory Control?

There are two main aspects of Inventory Management. The first aspect is to ensure that there is enough stock to fulfil customer orders as well as any manufacturing processes which might be needed to fulfil these orders. The second aspect is to ensure that the stock holding is not excessive, too expensive or unnecessary. A key stock holding level to aim for is an optimum level.

In summary, inventory control is the processes utilised to maximize a business’s use of inventory. The goal of inventory control is to generate the maximum profit from the least amount of inventory investment without intruding upon customer satisfaction levels.

Importance of Inventory Control

Inventory is classified as an asset in a business and as such, needs to be carefully managed. A major part of a business’s cash resources can be tied up in its stock holding.

Ensuring that the products that a business sells are available without being over stocked is critical. Being unable to fulfil a customer’s order results in lost revenue and often in a lost customer. On the other hand, having too much stock ties up cash resources, can result in issues with warehouse space and, depending on the product, may risk stock write offs due to expiry dates being reached.

Inventory purchases should be carefully managed. Buying in bulk or from a single supplier can reduce delivery costs and attract volume discounts. However the cost of the purchases as well as delivery lead times need to be taken into account as suppliers have different prices and lead times.

Stock shrinkage or wastage should also be carefully monitored as this is effectively an asset write off and impacts the profitably of a business.

In a business which has a large stock holding, it is important that stock is easily located and obtained to ensure that customers’ orders are quickly and efficiently picked. Warehouse space is expensive and efficient storage is essential to maximise space usage.

Knowing exactly what the cost is of the inventory a business sells is critical to determine what the selling price should be in order for the business to be profitable. It is rarely as simple as just putting a mark-up on a cost price.

How can Inventory Control software help?

Unless a business is able to track inventory at every stage: procurement, storage, work in progress and sales, it is impossible to effectively manage all the different aspects of Inventory Control. All of these areas are interdependent and inefficiencies in any area will cause problems in all the other areas.

Most of the problems listed below will be solved by having an Inventory Management software system which is part of an ERP solution.

  • Is stock ordered mostly only when there is a shortage?
  • Do you know how much stock to order and when it will be delivered?
  • Are orders time consuming to make up because of searching for stock?
  • Is data being captured more than once, perhaps into multiple systems, in order to manage inventory?
  • Are spreadsheets or whiteboards used to manage activities such as picking orders, working out what needs to be manufactured etc.
  • Are there stoppages in the manufacturing process due to raw material shortages?
  • How easily can bottlenecks in the manufacturing process be identified?
  • Are stock take counts inaccurate and time consuming?
  • Are customers able to obtain accurate delivery dates?
  • Is there a lot of obsolete inventory?
  • Do you know which your slow-moving items are? 
  • Do you know which your best selling items are?
  • Do your sales reps sell products you don’t have or at the wrong price?
  • How efficiently are products that have serial or batch numbers handled?

Inventory Control software helps to ensure data is entered once into the system and then all aspects of controlling inventory are updated. For example, capturing customer sales orders results in stock levels being checked and shortages highlighted. Once supplier purchase orders are captured, this information is reflected as being stock that is on order. With all of this information and having minimum and optimum stock levels per product, suggested purchase orders can be extracted and production schedules can be worked out. In a manufacturing environment Material Planning Requirement (MRP) reports and information can be extracted. Using costs on supplier invoices, costs prices are kept up to date, ensuring that Gross profit (GP) margins are correct. Using historical information, slow moving and bestselling products are identified. This is a basic example of some of the advantages of an Inventory Control system.

Multiple Sales Channels

In today’s world, many businesses have multiple sales channels. Orders may be received from the business web site (Ecommerce), telephonically, EDI (Electronic data Interchange), email and Point of Sale (POS) just to mention the common channels. Trying to manage all of these different channels without an Inventory Control system is extremely difficult if not impossible. It becomes vitally important to handle these different sales channels in an integrated manner.  

Serial & Batch Tracking Numbers

High value products and products carrying warranties will be tracked with a unique serial number. Most of these serial numbers are barcoded. Trying to manage these types of inventory products without an Inventory Control system would be extremely difficult. Many products have batch or lot numbers, often with expiry dates. Furthermore raw materials are tracked with these batch or lot numbers. In many sectors, such as retail, food and beverage, manufacturing, health care and more, it is a requirement to track the batch numbers of raw materials which were used in the manufacture of a product. An Inventory Control system will manage serial and batch number tracking, giving full control and the ability to track all raw materials and finished goods.

"The goal is not to improve one measurement in isolation. The goal is to reduce operational expenses AND reduce inventories and increase throughput simultaneously" - Eliyahu M. Goldratt

Omni Accounts offers inventory control functionality which is fully integrated. Omni Accounts offers a flexible and scalable inventory control solution which is suitable for businesses of all types and sizes.


Resources
https://www.accountingtools.com/articles/what-is-inventory-control.html
https://accountlearning.blogspot.com/2012/05/introduction-and-importance-of.html



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