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Published:November 17th, 2009 09:23 EST
Good Inventory Management Equals the Most Out of a Company's Profit

Good Inventory Management Equals the Most Out of a Company's Profit

By Ron G Anselm

     Companies now days really need to focus on their Inventory Management operation as much as they should to ensure they are getting the most for their buck. In my past experience with Inventory and consulting for companies, I have seen that most companies do not know how to successfully manage their inventory.

     Inventory Management is not just pulling an item from the warehouse, boxing it for shipping and then shipping the item out the door to the customer, it involves a complete process to ensure good accountability. Whenever I did an inventory audit of a company`s warehouse, I would find variances everywhere. This means that the company inventory is not be accounted for and probably does not have a process in place to ensure inventory accountability.

     One of the first steps to good inventory management is to implement a cycle counting program. When I was a Warehouse/Inventory Manager this was the first step I implemented. I normally trained my warehouse personnel on how to cycle count. It does sound easy but there is more involved in just counting inventory.

     The first step is to develop a process, if you have a large warehouse with many part numbers in it, you really cannot devote one-hundred percent of your operational time to just count inventory. Depending on your operation you may only have three to five warehouse personnel working in your warehouse, so their time needs to be split up with their other warehouse duties.

     You want to have two to three of your warehouse people counting inventory daily. This means to count it first thing in the morning before you start to pull orders and move inventory, or count it after all of the inventory transactions have been done for the day. You print your warehouse inventory reports, take ten-percent of your complete inventory and have your people count that ten percent. Divide up the reports depending on how many pages you have to count.

     Once the inventory is counted, go back behind your people and count fifty-percent of what they counted. This will ensure accuracy in their counting. I have seen many times in the past and don`t be surprised where one of the warehouse people did not count accurately, so you as the warehouse manager going behind them will verify their counts.

     Once all your inventory is counted for that day, then you reconcile any variances. You want to start with making sure the counts for that item is accurate, when you check the count and come up with the same count as your warehouse person did then you know the count is accurate. You then want to check invoicing. Many times the invoicing department may be behind and that particular item may have shipped out the door the day before and has not been invoiced as of yet which would show more in the system that what is physically there so of course the count would have a variance in it until invoicing is done for that item.

     If invoicing is caught-up and that may not be the reason for the variance, you want to go back and check the paperwork trail on that item. When you pull that item from your warehouse shelf, you want to always keep a paperwork trail in your file for your inventory transactions. This is normally just an internal form that may have a part number section to write in the part number for items pulled, the descriptions of the item pulled, and the quantity with a space for the date the item was pulled from the shelf. You may want to have a space for a signature if you are issuing out inventory to other sources other than just pulling and shipping out of your warehouse. The form will give you the trail from when the item left the shelf and the date it was pulled. You can then look in the system to make sure you performed a transaction for that item. Normally, the transaction will be an inventory transfer from the warehouse location to a sub-inventory location (another internal warehouse, a technician van, ") this will depend on your operation as to what types of transactions you will be performing.

     If the item was transferred successfully in your system and that is not the reason for the variance, then you want to go back and pull the original purchase order the items were ordered on from your vendor. In more than one instance in the past, I have pulled many purchase order to find out the quantity that was originally ordered only to find out that when the purchase order was done in the system by the purchasing agent it had a line item quantity of say one-hundred ordered but the vendor only shipped fifty because the rest was put on backorder and the receiving clerk either did not perform a physical count of the items when they came in the door as they should be doing with every order coming in-house and then that clerk went to the system and received in the complete line item of one-hundred instead of what was physically shipped. You can see this would leave a variance of fifty items because those fifty were on backorder and as not been shipped by the vendor as of yet.

     If the original purchase order was received in correctly and that is not the reason for the variance, then one of the last steps you may want to think about is thievery. I have seen many times where the warehouse people or maybe just a very few are five finger discounting the company inventory. I have also taken down more than one thievery ring when I was a Warehouse Manager and stopped it from happening. This does depend on what type of inventory you may have and the types of high-dollar items you have in your warehouse.

     One of the ways to prevent thievery is to make sure the high-dollar items are kept under lock and key and only you and the branch or operations manager has access to those items. The other way is to implement a cycle counting program where the warehouse personnel and everyone else can see that the inventory is being counted daily and watched.

     The company inventory is the company money and when you have to write-off thousands of unnecessary dollars every quarter or yearly when you perform your inventory audit because of poor inventory management and accountability, then that is money the company and you just lost.

     Also, you do not want to have excess inventory just sitting in your warehouse and growing dust. This costs the company unnecessary dollars because the inventory is just sitting there and not selling to make a profit. A good way to ensure you do not have excess inventory is to manage it when you place your orders weekly, bi-weekly, monthly "you want to first count the item you are going to order " do a physical count on it, then look at your build of materials or customer orders in queue in your system that require that item you are ordering to complete the order. Some build of materials require a certain amount to build a system or customer order.

     Take the amount needed to complete an order and the difference you physically have minus any outstanding purchases orders open in your system for that particular item that may not have been received yet from your vendor and then order the difference. This ensures good inventory management and to alleviate any items just sitting on your shelf. Also, when you company reports their monthly, quarterly, or yearly taxes they pay taxes on how much inventory is in your warehouse.  

     This is just very a minimal way to manage inventory it is just the basics for better inventory accountability. Inventory management is a daily operation that needs to be evaluated for what works and evaluated to ensure you have successful inventory audits with no writes-offs.