Visma.net Whitepaper
How to master the inventory balancing act Solutions to the 4 most common inventory mistakes
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Visma.net Whitepaper
Introduction Inventory: it is what keeps your business going, but at times, it can become quite overwhelming. Making sure that you have the right products in the right place, at the right time, is a real balancing act. More and more small to medium-sized businesses are realising how much of an impact inventory has over their revenue. In this white paper, we aim to inform you on new and improved ways of keeping track of your inventory. We will go through common mistakes that are made when controlling and managing inventory, and offer solutions.
Who should read this? Whether you run your own start-up or are the CEO of a small to medium sized business, you are asking yourself the same questions: How do I manage my workload better and how do I take advantage of new opportunities? Business owners are faced with a constantly growing to-do list, and adapting new tools and trends is usually at the bottom of the list. The goal of this white paper is to help you with both of these challenges—specifically regarding controlling and managing your inventory in an efficient and smart way.
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Visma.net Whitepaper
Inventory Control vs. Inventory Management The table below differentiates inventory management from inventory control. It is important to know the difference between the two because they are often easily confused with one another.
Inventory Control 1
Inventory control is about location, reordering transactions, taking physical inventory, and replenishing. The purpose of inventory control is to reduce slow-moving inventories, avoid overstocking, and balance investment against the consequences of unfulfilled orders.
Inventory Control
Inventory Management
• Controls the inventory that is currently in warehouse
• Ensures the right quantity of products at the right time, in the right place
• Stops purchases of slow-moving products
• Includes all activities of forecasting, replenishing and drop shipment
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Keeps up with the changes in demand to avoid overstock
• Focuses on quick, inexpensive product reordering
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Uses inventory to avoid depreciated products
• Safeguards efficient product receiving and storing
‘Today’s business leaders do best when they can manage for the future not just today. We are at a point in time where rapid rate of change is overwhelming. Business leaders should not retreat from this new, constantly changing technology-driven environment. Rather they need to jump right in and use technology to manage change and anticipate the future.’2 The 4 Most Common Inventory Control Mistakes & Solutions to them
1. Too much inventory •
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Simply put, excess inventory leads to a decreased turnover and profitability. As you know, warehousing is not free, and inventory that is left sitting on the shelf risks damage, expiration and depreciation. Old inventory can be difficult to move and ties up cash that could be used in other areas.
Solutions: If you need to get rid of large amounts of inventory quickly, try selling your excess inventory through third-party sites. Offering your customers discounts on bulk purchases is also a way to get rid of excess inventory. If all else fails and you cannot sell your inventory, you can donate it to organisations and turn it into a public relations event to raise your visibility. Examples include donations to local community events, schools or libraries.
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A. van Bodegraven and K. Ackerman, ‘Inventory management vs. Inventory control’ http://www.dcvelocity.com/articles/20120416-‐inventory-‐management-‐vs-‐ inventory-‐control, April 2012, (accessed April 2015). 2 G. Drenik, ‘Are you Building A Business For Where The Market Was?’ www.forbes.com/sites/prospernow/2014/10/13/are-‐you-‐building-‐a-‐business-‐for-‐where-‐ the-‐market-‐was, December 2014, (accessed April 2015).
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Visma.net Whitepaper
‘Managers must decide on an inventory level that balances the risk of running out of products with storage costs and the other negative aspects of holding too much inventory.’3 2. Inaccurate Tracking • • •
Knowing how much you need is one thing, but making sure you actually have it on hand is just as important. Opportunities for miscounts are everywhere: during receiving, during ordering and counting. Typically, companies aim to lower carrying costs by decreasing inventory to the minimum level necessary to meet customer orders. However, that approach maximises ordering costs and might 4 cause the company to miss increased sales due to increased inventory.
Solutions: Every situation is different, and there is no simple recipe to finding the right inventory level. Every company should track their inventory vigilantly to find the perfect balance between maximizing sales and minimising expenses. By carefully comparing the various inventory-related costs to sales, a company can find a workable balance. Finding that workable balance can take hours upon hours—however, by finding a solution that does most of the tracking work for you, you will find yourself with more time to focus on growing your business.
3. Lack of Control • •
The less control you have, the more likely your customers will walk away either empty-handed and unhappy, or waiting too long for a product they ordered. Keeping track of all the details for each inventory item can take an absurd amount of time and resources.
Solutions: Put the control back in your hands by using an inventory solution that allows you to see realtime information on what is in stock, what needs to be ordered, how much should be ordered and when the best time to order is. After you review your inventory, look at some of the key issues such as excess or aging stock, product expiration. The key to having the information you need to properly manage your 5 inventory is having the appropriate inventory and order history data available in your solution. It is important to start with a basic projection of how much inventory you will need, and when you will need it. One of the best ways of gauging this is to look back at what you have sold in the past. Easily view your inventory by adapting a new inventory solution that seamlessly oragnises all past and present information for you. TIP: Products that are ordered more frequently should be placed closer to the entry, allowing for easy counting and access.
4. Manual entry of data •
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If you are currently using a spreadsheet to keep track of your inventory, then you are lacking realtime inventory data. One of the biggest drawbacks of manually entering in inventory is that at any time, your workbook could be out-of-sync with what is actually in your warehouse. Spreadsheets limit your ability to quickly analyse historical data. You need to know how much of a certain item you need. The ability to forecast inventory needs is essential for meeting your customer’s demands. Using Excel to track inventory increases the likelihood of data entry errors. This means that either you or your staff are spending large amounts of time validating the numbers in your spreadsheet.
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G. Hamel, ‘The Disadvantages of Holding Too Much Inventory on Hand’, smallbusiness.chron.com/disadvantages-‐holding-‐much-‐inventory-‐hand, 2015, (accessed April 2015). 4 S. Mack, ‘What Effect Will Inventory Increase Have on a Company?’ http://yourbusiness.azcentral.com/effect-‐inventory-‐increase-‐company-‐25510.html, (accessed April 2015). 5 A. Lozano, ‘Supply Chain –Inventory Management’, https://www.linkedin.com/pulse/supply-‐chain-‐inventory-‐management-‐albert-‐lozano, February 2015, (accessed April 2015).
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Visma.net Whitepaper
Having a single area where your entire inventory is stored is not only risky, but it also limits user access. This becomes a problem when multiple individuals are in charge of your inventory, but only one can edit the workbook at a time.
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Solutions: Say farewell to Excel. Gone are the days of guessing inventory usage and spending hours updating spreadsheets. With the right tool, you can instantly look at the database, see what is in stock, where it is, or what you need to order and how much—thus subtracting the hours it takes to locate it and communicate to your customers what is in stock. Sales Warehouse E-mail
Phone
Web
System sends Automatic
Order received
Order. Confirm. E-mail
Check inventory
E-mail
System checks automatic
Sold out
Click a button
Order sent to distributors
Goods sent
In stock
Pick goods
Ship goods
Invoice sent
Post
To warehouse
or directly to customer
Inventory Management When working with inventory, it is important to have your processes in order before moving forward with management. Inventory management is about keeping track of the placement and amount of stocked goods. Efficient inventory management provides a clear, always up-to-date overview of what you have in stock, what needs to be ordered, and your sales history. Purchasing, shipping, receiving, tracking, warehousing, turnover, and reordering: all aspects of managing and controlling inventory. In order to have an updated and correct inventory, it is important that these functions be performed in sequence. Computerised inventory solutions make it possible to integrate subsystems into a single cohesive solution.
What is the purpose of inventory management?
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Stocking the right product
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Locating the right products
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Maintaining the right products
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Visma.net Whitepaper
Stocking—locating—maintaining. These three points sum up the most important parts of inventory management. Stocking is important because if you do not have a system that supports your operations, you risk losing sales. Over time lost sales add up and can lead to a severe decrease in revenue. Not being able to locate items within the warehouse is another problem that many companies run into. Maintaining the right amount of products is tricky— you need to have the right amount of products at the right time, otherwise you risk depreciation, expiration, etc. These losses can easily be avoided by adapting an inventory solution that supports your operations—one that tells you when to deliver, at what time and at what cost. Having an accurate inventory will: • • • •
Stabilise production Meet the demands during the replenishment period Prevent loss of sales orders Allow you to keep pace with changing market conditions
By balancing the ability to offer the right inventory to the right consumer at the right time, you can concentrate more on meeting consumer demands and minimising inventory costs. This in turn leads to improved customer service and loyalty, which can help improve profits.
Tips & Tricks Before sitting down and getting busy with different inventory activities, it is important to get to know your customers and plan. To have an inventory that drives your business, you need to stay up-to-date on what products matter most to your industry. Stay in the loop by looking at your inventory history. When were products selling the most? Was it around a certain holiday? What was the weather like when profits were low? What could you do to stay ahead of the game and make sure that your inventory is always on par? Once you have these questions sorted out, the answers can be used to drive your marketing campaigns.
Conclusion When you first began your business, inventory may have not been a top priority. However, as your business has grown, and will continue to grow, you need a solution that will not limit you, and will assist in growing your business. As you may know, systems and technology are big enablers, but using outdated tools means that processes must make up what they lack. Keep in mind that you must have a long-term perspective on the success of your inventory. Achieving the perfect inventory flow takes time, and you must have accuracy and discipline as your foundation. By now, you may be asking yourself, “Should I change the way I keep track of my inventory?” It is natural to be undecided. We understand that change is difficult. It may take analysing how much money you are losing because of inventory issues, and comparing that to the cost of investing in an inventory solution. However, you will find that for those who make the transition from traditional inventory solutions to an updated, accessible, does-most-of-the-work-for-you solution, will see a quick return on their investments. Do not miss out— the time to consider using a new inventory solution is now.
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Visma.net Whitepaper
Reference List Drenik, G. ‘Are you Building A Business For Where The Market Was?’, forbes.com/sites/prospernow/2014/10/13/are-you-building-a-business-for-where-the-market-was, December 2014, (accessed April 2015).
Hamel, G., ‘The Disadvantages of Holding Too Much Inventory on Hand’, smallbusiness.chron.com/disadvantagesholding-much-inventory-hand, 2015, (accessed April 2015). Lozano, A., ‘Supply Chain –Inventory Management’, linkedin.com/pulse/supply-chain-inventory-management-albertlozano, 2015, (accessed April 2015). Mack, S., ‘What Effect Will Inventory Increase Have on a Company?’, yourbusiness.azcentral.com/effect-inventoryincrease-company, (accessed April 2015). Van Bodegraven, A. and K. Ackerman, K., ‘Inventory management vs. Inventory control’, dcvelocity.com/articles/20120416-inventory-management-vs-inventory-control, 2012, (accessed April 2015).
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