Managing Inventory can be a complicated endeavor. There are a lot of aspects to consider. In this article, we will cover the basics to help clarify the finer points of inventory management.
There are two definitions of inventory: Financial and Operational.
Financial – The accounting definition of inventory includes all items involved in the creation of a product to measure the cost of production and Cost of Goods Sold (COGS). This includes raw materials, works in progress, and finished goods.
Operational – This definition is narrower. Here the inventory is impermanent and is consumed during manufacturing or repair. It is important to track quantities on hand to ensure a lack of shortage of items such as raw materials.
Operational Inventory is a balancing act. There must be enough stock to meet operational needs such as regular maintenance, as well as backup safety stock to cover potential supplier shortages and unplanned repairs. The cost of running out versus the “carry cost” (the just-in-case materials kept on hand) has to be considered.
Products are what you sell or make, or the components required to make what you sell. Each product has a unique identifier and is typically tracked in an ERP for costing purposes.
Products can also be consumable items that you use in the process of manufacturing or performing maintenance, such as PPE or furnace filters.
Assets are items you need to run your business. This can include equipment and machines, as well as items that are used for making your products or fixing larger assets. Assets are not consumed when used.
An Asset, such as a milling machine, will have a single part number, but if there are multiples of the same type or brand, they will be managed as unique assets with unique identifiers and serial numbers.
Inventory refers to the items that must be tracked so you know how much you have, where it is, and when to order more. Tracking inventory is also an important financial aspect, as you need to have a good overview of how much capital is tied up in inventory.
Consumable products are also considered inventory. Typically, these items are issued for use (such as PPE) and are not returned unless they have not been used.
There are particular areas you will want to focus on to properly manage inventory. A good inventory management system will help with all of these.
Quantity is an important starting point. Knowing where and when inventory is consumed, as well as how much has been used, helps in financial and operational planning.
Verifying quantity is needed for proper inventory management. However, counting every single product is not practical. There are a few industry standards to check inventory quantities as a measure of general inventory accuracy. There are three main types of inventory quantity verification: Cycle counting, Individual and Location counts.
Cycle Counting is usually done at a single location. There are various forms of cycle counting:
· Audit: Here a user would select the number of unique inventory items to count as well as the number of days since the last cycle count. The system would then randomly generate a list of those products based on the number of days since these items were last counted.
· Price: As with audit, the user selects the number of items to count, the number of days since the last cycle count, and the minimum price value of the item. The system will then generate a list based on the stated criteria. People usually select higher value items for this type of count as inventory cycle counting is labor-intensive.
· Range: If a business is using barcoding, the user can select a minimum and maximum barcode range. The system will then generate a cycle count list of all items within that range.
· Custom: A user can choose specific items to add to the cycle count list. If there are certain items that they suspect might have been inaccurately inventoried, they can add these items to the cycle count list.
After the cycle count is complete, systems will generate a “difference report,” which shows the difference between what quantities are thought to be on hand compared to the results of the cycle count.
Individual Item Counts
Rather than cycle counts, a business can choose to do scheduled individual item counts and update inventory accordingly. This can be very labor-intensive and, unlike cycle counting, doesn’t allow the business to track differences and understand general accuracy.
Location counts are typical in Vendor Managed Inventory (VMI) environments where the distributor manages inventory and re-stocking. The distributor can load current inventory values to their mobile device for all locations they are visiting for the day. They would then record the individual site-specific inventory counts and bulk upload the information when they return to the office, which will trigger replenishment orders as required.
Triggering Inventory Replenishment
Depending on whether you are using Kanban or Min/Max to set re-order points, you need to determine the quantities that will trigger re-ordering inventory items when they are running low. Consider the cost of keeping material on hand (back to that “backup safety stock” scenario), shipping costs, and delivery lead times. There are advantages and disadvantages to having large, infrequent orders, as there are with small, more regular orders.
Using inventory reports
Reliable and accurate inventory data reassures MRO operations that they will always have the necessary resources to do their jobs. Without such systems, people tend to take more than they need for fear that the item will not be available at a later date. This causes increased carrying costs for the business. Beyond the day-to-day operational savings, inventory management system data helps to manage cost by:
· Identifying and eliminating duplicate inventory products to reduce carrying costs.
· Noticing when you are sourcing the same product from multiple suppliers. This is an opportunity to consolidate with one vendor and negotiate volume discounts. Also, reducing the number of distributors means fewer invoices to handle which helps your business be more efficient.
· Showing parts that are obsolete and no longer need to be carried using inventory aging.
· Helping you to fine-tune min/max levels to avoid stockouts by monitoring inventory consumption.
Inventory management can be difficult to navigate alone; Tofino can help. Contact us today to learn more.