Standard Operating Procedure for Inventory management
The inventory management process is a complicated system, particularly for more prominent organizations. However, the fundamentals are the same regardless of the size or form of the organization.
Inventory management is the arrangement and control of your entire inventory from the time everything becomes part of your properties until it comes into the hands of your customer. Thus inventory management system involves controlling inventory quantities and naming inventory. Besides, it monitors purchase orders, reorders dates, forecasting, pricing, inventory prices, variations, and arranging all aspects of the company’s most valuable properties.
The reorder level (or reorder point) in management accounting is the inventory level at which an organization places a new order or starts a new production run.
This inventory control process level depends on the lead time of a company’s work order and the demand during that time and whether a safety inventory is maintained. Work-order lead time is when the suppliers of the business take to produce and distribute the ordered units.
It is necessary to define the correct degree of reordering. If a company places a new order too soon, it may receive the ordered units earlier than expected. In the form of warehousing rent, opportunity cost, etc., it will have to bear additional carrying costs. However, if the company places an order too late, this will result in the cost of stock-out, such as loss of revenue, etc.
Maintaining a proper stock management system is an elegant dance that must balance customer demand and supplier reliability. In terms of warehousing costs and available resources, keeping too much inventory eats up your budget, but you still need enough inventory to account for unforeseen demand or supply issues.
Establishing stock replenishment points free up critical resources and ensure that the organization operates through inbound and outbound logistics at full productivity. The most vital and often most challenging aspect of accurately measuring reorder points is that you need reliable data across your supply chain and an accurate customer demand image. The calculation will be incorrect if the data is wrong, and you can end up with too much or too little stock. This is why you will need a business process consultant to help you get the best when it comes to your cycle counting.
Inventory forecasting is the method of determining the inventory required to achieve potential customer orders based on how much merchandise you expect to sell for a given period. These forecasts take into account historical sales data, planned promotions, and external powers to make it reliable.
Inventory forecasting helps the company to assess which goods and in which quantities will be available. In this manner, you can guarantee that you only order products when they are needed. This inventory management control process will help in saving on inventory costs.
Besides, forecasting helps you to tie the purchasing process to your sales. How’s this working out? Orders will be activated when the sales exceed a certain level. This process of inventory management is more effective. Thus the ordering method helps the company to order customers just the right things at the right time.
Some limits must be set to provide the most reliable result:
- Forecast period
A forecast period is a given period that defines the period of forecast.
A trend is an increase or decrease in demand over a certain period. Identifying one such trend makes it easier to project future sales.
- Base demand
Base demand is essentially the starting point (i.e., current demand) for a forecast.
In turn, forecasting is related to the determination of reorder points and order quantity, all of which are crucial for maximizing inventory management. The importance of inventory forecasting covers several business areas. It is, indeed, the secret to effective cost control and continuous development. This is the reason why all businesses need an inventory management consultant to help them manage their inventory.
Tracking Fast Movers/ Slow Movers: Theory of constraints Inventory management
Constraint theory is a commonly applied approach to the management of business processes within an enterprise. It is a strategic principle designed to help companies accomplish their objectives.
The principle is to define the organization’s objectives, define the variables that impede the achievement of those goals, and then enhance business operations by continually working to reduce or remove the restricting variables.
Getting a stable cash flow is inevitable for a company to be competitive in the industry. Only a steady supply of inventory stock makes this possible. This can be through an inventory process improvement consultant. Since inventory stock movement plays a significant role in the success or demise of a retail business, each retailer must closely track and manage their stock movement.
Fast-moving inventory sells within a few days and does not retain stock storage space for long. On the other hand, the slow-moving stock is the merchandise that remains locked up in the shop’s room and has a very low sales rate. Inventories that are more than three months old are usually included.
For every company to run smoothly, cash flow is very critical. To sustain slow-moving stocks, a large amount of money, energy, and human resources are needed. Besides, these stocks, before they are sold out, occupy a large storage area. Thus merchandisers or purchase team are unable to recycle this necessary capital for more development in other areas of the business.
According to the principle of constraints, the best way for a company to accomplish its objectives is to reduce operating costs, decrease inventory, and increase throughput. Therefore, skilled & experienced process consultants like BPX can help you accomplish your objectives professionally.
Inventory management effects on cash-flow management:
One of the variables that you can monitor to maximize the profitability of your small business is inventory. How you source and handle the inventory will affect your income statement’s different profit levels. Ignorance on how to use the inventory to your benefit prevents you from optimizing the productivity. Highlighting factors affecting cash flows below:
Inventory procurement and manufacturing costs play an essential part in calculating gross profit. The reduced cost of products sold results in an overall reduction in inventory costs. Gross profit increases with declines in the cost of goods sold. Thus, inventory directly affects the cashflows.
Generally accepted accounting standards in the U.S. require companies to use one of many accounting methods for inventories.
The three most widely used inventory systems are FIFO (first-in, first-out), LIFO (last-in, first-out), and average cost. If inventory costs are not standardized due to price volatility, the choice of inventory method will lead to an increase or decrease in the cost of goods sold.
Levels of inventory may have a significant impact on cash flow. Tying up much-needed inventory funds to businesses with minimal cash flow that is not required during the current accounting period has substantial spending. Some forms of spending may have a considerable impact on profitability, such as marketing expenses. On the opposite, not having enough inventory to sell will reduce sales and impact profitability. Warehousing costs are another downside to overstocking inventory — more inventory needs more labor and space.
Inventory turnover or the inventory levels over a given period, affects profitability. Holding products that are outdated and have a low turnover slows down sales. Holding stocks that are seeing a strong demand increases sales rate. Stock levels should recognize demand levels to prevent overstocking and under loading.
Inventory optimization is the availability of the required inventory to satisfy the supply and demand of parts and products in the industry, in the necessary quantities, and at the right locations. There are significant advantages for companies that maximize their inventory by reducing inventory products and inventory quantities, thus eliminating related carrying costs and write-downs for obsolescence. Indirectly, by using time previously spent on inventory control to ensure the durability and availability of physical assets, companies can save.
Organizations must correctly define inventory to maintain standards operations procedures for inventory management of stock levels. ABC analysis, a high standard classification method, classifies inventory against other inventory items by the relative priority of an item. The most important, a-classified items usually make up 5 to 10 percent of the inventory. B-classified objects usually constitute the next 15 to 25 percent of the inventory. C-classified items make up the remaining 65 to 80 percent of the inventory, the least important one.
Many organizations depend on corrective maintenance procedures, which lead to unplanned demands for inventory. Organizations should adopt predictive activities such as the following to resolve irregular demand better while taking care to consider what forecasting is — and what it is not:
- Forecasting demand and planning supply
- Communicating, cooperating, and collaborating
- Eliminating islands of analysis
- Using tools wisely
- Emphasizing forecasting
- Measuring everything
Inventory analytics can use the abundance of data that companies produce with such activities as these in place. Companies can focus on an analytical system designed for the management of asset inventory.
An inventory audit is an empirical process that cross-checks whether financial records balance inventory records or the count of physical items. Inventory audits do not have to be conducted by auditors, but to ensure that your stock counts are correct, it helps to have an experienced auditor run through your finances.
An inventory audit can be as straightforward as a spot check (i.e., counting actual stock to see if it suits how much you think you should have), or as involved as getting the process done by a third-party auditor.
An effective inventory management SOP can lower the frequency, duration, and complexity of audits. The inventory of e-commerce is different from physical retail stores since transactions can occur anywhere in the world and are thus more volatile.
Your inventory audit methods must be matched in a digital environment. Instead of using something static like Excel, using technology that keeps inventory counts synchronized in real-time.
To maintain inventory accuracy, recognize shrinkage, and ensure that you still have enough (but not too much) stock at any time, it is necessary to perform inventory audits.
Defining Inventory Management Strategy
For any company, inventory management is a great technique. You are setting yourself up for possible inventory mistakes and problems if you do not keep a watchful eye on your inventory or regularly count stock. Proper inventory management will make the company or break it! When you weigh the expense of not adopting an inventory management plan, bear the following advantages in mind:
A good inventory management strategy improves the accuracy of inventory orders.
Proper control of inventory helps you to find out just how much inventory you need on hand. This will help to avoid product shortages and allow you to store just enough without getting too much in the warehouse.
A good inventory management strategy leads to a more organized warehouse.
A substantial inventory management plan enables an organized warehouse. You’ll have a hard time handling your inventory if your warehouse is not structured. Many businesses want to maximize their warehouses by bringing the best selling goods together and in easily accessible locations in the warehouse. This, in essence, helps accelerate the process of order fulfillment and keeps customers satisfied.
A good inventory management strategy helps save time and money.
The management of inventory can have real-time and monetary benefits. You save yourself the trouble of having to do an inventory recount to ensure your records are correct by keeping track of items you have on-hand or ordered. An effective plan for inventory management also lets you save money that might otherwise be spent on items that move slowly.
A good inventory management strategy increases efficiency and productivity.
Inventory control devices, such as barcode scanners and inventory management applications, will help increase performance and productivity dramatically. These devices can help minimize manual procedures to concentrate on other, more relevant aspects of the organization.
A good inventory management strategy keeps your customers coming back for more.
It’s a fact that successful inventory management contributes to what repeat customers are always striving for. If you want your hard-earned clients to come back for your goods and services, you need to be able to fulfill consumer demand rapidly. Inventory management helps you satisfy this demand by having the right goods on hand as soon as your clients need them.
Why BPX to define your inventory management strategy & SOPs
BPX experts ensure that inventory management SOPS is system dependent and not person-dependent and ensures the SOPs are paperless so that it is implemented within your organization.