The Beginner s Guide to Inventory Management

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1 The Beginner s Guide to Inventory Management Brought to you by Cin7 What is inventory? Inventory is a broad term that encompasses every physical thing that a business owns - from the desks and computers in the office to the stock in the warehouse or store front. In most cases, when people refer to inventory, they often mean all the products a business keeps in stock in order to sell. This type of inventory is crucial to the operations of most businesses. Turning inventory into revenue by selling it at a profit is the key reason for their existence. A good business will spend a substantial amount of time analysing its inventory: too little inventory and a business can t make enough sales; too much and the cost of ownership and storage can be overwhelming.

2 What is inventory management? When we refer to inventory management we mean the theories, processes and techniques involved in controlling and valuing inventory. The basic function of inventory management is to make sure that you have the right amount of stock on hand, at all times, at the right cost. Why is this important? Having good inventory management is critical to a business s cash flow and bottom line. Inventory managers need to carefully balance the need to have enough inventory to sell to meet market demand in a timely fashion with the dangers of storing too much stock. Storing inventory costs money (for instance in rent) and ties up cash that could be used elsewhere in the business. The availability of accurate stock figures and a good estimation of the value of this stock are critical factors to good inventory management.

3 Basic Types of Inventory For retailers, warehouse distributors and wholesalers it s important to understand the types of inventory used in the supply chain. Below are four primary inventory types you should know, plus other inventory types that are important to business. RAW MATERIALS FINISHED GOODS This is inventory that can be made into Inventory that is ready for people products. These are usually unprocessed (consumers) to purchase. with the intention they will be made into finished products. MRO (MAINTENANCE, REPAIR AND OVERHAUL) Inventory that is not part of the production WORK IN PROGRESS (WIP) line, but contributes toward the finished This is inventory that is in the process of good such as consumables or computers. being made into a product. Other Type of Inventory TRANSIT INVENTORY ANTICIPATED INVENTORY BUFFER INVENTORY This is inventory that is in the This is inventory that is kept This is extra inventory that is process of being delivered in excess of current demand. stored for uncertainties in from one place to another. This inventory is kept in demand and supply. Having anticipation that it will be too much safety or buffer needed in the future, when inventory may mean times are busy i.e. Christmas increased costs for storage or holding this stock.

4 The importance of the Inventory Value Calculation Although it s important to know how much inventory you own, it is equally important to know how much that stock is worth. Typically, businesses will record the cost to purchase their stock, plus any additional costs such as freight and manufacturing costs. The sum of the costs to acquire your inventory make up what we call your inventory value. There are two traditional ways you can go about tracking how much your inventory value is at any one time. You can either use a perpetual inventory system or a periodic inventory system. A perpetual inventory system continuously updates your inventory records when stock is added or subtracted. This will include when goods are purchased or sold, but also if stock is manufactured, lost, broken or expired. In a perpetual inventory system such as Cin7, you would usually keep a ledger of stock and all your corresponding stock values. This ledger monitors stock that goes in and out of your inventory and provides a real time valuation of stock. On the other hand a periodic inventory system only updates your inventory on a periodic basis. Inventory determinations for this usually take place on a monthly or quarterly basis or in some cases at the end of each financial year. Calculating your inventory value is a crucial factor in making business decisions, such as working out if you can afford to purchase more stock. It is also a legal requirement for accounting, so it will form an element of your end of year financial reports.

5 Important Inventory Methods FIRST-IN FIRST-OUT (FIFO) LAST-IN FIRST-OUT (LIFO) This means the oldest inventory This means the newest inventory brought into stock is the first to be brought into stock is the first to be sold. sold. From an accounts perspective it From an accounts perspective it means means the following when it comes to the following when it comes to calculating cost of goods: calculating cost of goods using the I.e. if you sell 100 t-shirts and I bring the same example above: first 80 in at a cost of $10 and the next 80 If you sell 100 t-shirts and I bring the first at $15, then the cost of goods would be: 80 in at a cost of $10 and the next 80 at $15, then the cost of goods would be: First 80 at $10 = $800 Remaining 20 at $15 = $300 First 80 at $15 = $1200 Remaining 20 at $10 = $200 Meaning a $300 difference in cost of goods in this example between FIFO and LIFO. FIFO and LIFO are quite different. FIFIO is better suited towards industries that have a steady price and usually sell its oldest products first. LIFO works well in industries where prices fluctuate and the newest units are sold first. FIFO is Cin7 s preferred method of managing inventory. In some regions, LIFO is restricted from being used as a method for calculating cost of goods. FIFO is the more popular and recommended method of calculating your stock value. AVERAGE COST This means that all inventory is calculated by an average unit cost for goods that are available for sale, during a specific period of time. It s sometime called the Weighted Average Method. The average cost method is usually used is the accounting system chosen can t handle FIFO or LIFO or if it s hard to assign a specific cost to an individual inventory item.

6 Setting up an Inventory Management System If your business is growing but you don t have stock visibility, or you re running out of stock, then you probably have an inventory related issue. Having an Inventory Management System allows you to manage all your stock from a central place and will help you make better business decisions. Businesses that experience growth, but don t have sufficient Inventory Management processes in place often suffer from: Inefficient operations Theft Low Customer Satisfaction Lost data A disjointed customer experience Misguided business decisions caused by a lack of data Stock issues (Oversupply or Undersupply caused by incorrect forecasting) Things to consider before selecting an Inventory Management system Understand your sale and supply workflow. Work at where you need stock visibility and understand what processes currently communicate to each other, and who is involved. Put aside time to work on your inventory management system. Despite what people say, it s not going to work overnight. You need to have resource that can work on the system, as with any system implementation Get all your product data together. Vendors should be able to supply guidance on how to import your data and best practices. It s important you understand where all your stock and cost data is, and you have easy access to this Get cost information on all your products. At some stage, you re going to need to input costs into your chosen system. Start preparing early, by getting all your costing information together Training: Having the right people and training in place is one of the most important things to consider. You can have the greatest inventory system in the world, but if you don t have good processes and training systems to support it, the system won t yield the results you want. This is particularly important for organisations operating both and inventory system and point of sale, because not all point-of-sale staff are as trained as managers Make sure you re performing scheduled stock takes and have a set process around this

7 An Inventory Management System should allow you to: 1 Track important business metrics 4 Increase your ability to save floor space 2 Help you better understand your 5 Save you time and money that is spent 3 customers and your ability to convert finding stock, resolving issues or sales handling logistic administration Analyse your stock, how quickly it gets sold and how long it sits there costing 6 Most importantly, it should help you make better business decisions you money How do you know if you ve chosen the right inventory management system? You should be able to: Manage your costs and have clear Improve your balance sheet by and accurate visibility over these. effectively managing supply issues Manage your business on the go Understand your margins and and give you access to critical accurately calculate your landed business data costs Have the ability to manage things Integrate and communicate across like multi-currency, multiple your other important business locations, consignment of stock systems. and all the logistical processes needed to better serve your customers and fulfil orders.

8 Why opt for cloud inventory management? Cloud inventory management offers unique advantages that traditional ERP s and locally installed solutions struggle with. With a cloud inventory management system you re better equipped. Gain Real-Time Visibility Get Mobile Having real time data helps support better Because cloud inventory management systems business decisions. Cloud inventory gives you are usually designed for mobile and tablet, it the ability to see exactly how much stock you means you have the ability to run your have at a given time. This helps businesses business on the go. It also gives you the ability become more operationally efficient and to take the checkout to the customer. With a reduces the amount of time spent trying to find good Inventory Management and POS system, stock. It also allows businesses to take orders, you re free to create a mobile checkout, which transact or process stock all on the go. is great for pop up stores, adding registers or performing stock quotes on the go. Get Integrated Keep your data safe Disruptions in mobile technology and the Because all information is stored in a central, internet has meant integrating software is now secure location, cloud systems have changed seen as competitive advantage. It improves the way consumers and businesses operate. operational efficiently and enables process Being able to access and export data from a automation. Being able to leave the integration cloud inventory system, that s backed up up to the experts mean s more time the regularly means less chance of losing critical business has to spend on the things that business data. matter, rather than trying to make systems work.

9 General steps to take when setting up an Inventory Management System: 1 2 Learn the system till you get comfortable enough to perform basic tasks. Try to customise your system to your requirements. These include things like customising documents, logos, branding and any integrations. If you re integrating into cloud accounting and finance software, then you should have an accounting specialist, to advise you on the best setup for your business. 3 Import all your contacts and utilise any vendor templates provided. 4 Create all your products manually or import all your products. 5 Configure your invoices 6 Test the system and identify any bugs or areas where more learning is required. 7 Test the system again 8 Give all your staff access to the system and ensure they are effectively trained. 9 Have a dry run with a few products and staff to ensure everything is working as 10 Perform an entire stock take before going live 11 intended. Go live start using the system and iron out any things you need to improve on.

10 Important inventory metrics you should be tracking Stock on Hand and Availability Being able to see what stock you have based on the current stock on hand, incoming stock and open sales to be dispatched is essential to understand what you will need to purchase. It also gives you insight into what stock you have on hand and will need to have. Current Inventory Valuation The current inventory valuation looks at your total value of stock on hand, based on the landed cost value inventory that is received. Your inventory value is important to because it ensures accurate financial statements. A good inventory management system should sync with your chosen accounting package to update any COGS (cost of goods sold) figures. Stock Aging Being able to see how long inventory has been in stock, without being fully sold is important to keeping inventory carrying costs down, because slow moving stock simply means too much working capital is being held carrying stock. It also means there s not enough available for other areas of the business. Sales Forecasting Calculating the average monthly sales of a product gives a projection of how much stock will be available over time, based on stock on hand, incoming stock, open sales and forecasted sales. Sales forecasting gives businesses an idea when they are likely to run out of stock and when to reorder stock. contact us J join a webinar

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