Inventory control affects a range of business outcomes, including profitability, operational efficiency, product quality and customer satisfaction. Despite its importance, inventory control is often neglected, perhaps due to the traditional difficulty of doing it well. With the advent of cloud-based Enterprise Resource Planning (ERP) solutions with dedicated inventory management features, this is starting to change.
Acumatica recently published a paper on the topic, highlighting four strategies for smarter inventory control: 1) Maintain accurate records; 2) Proactively plan to avoid shortages; 3) Focus on improvement; and 4) Reduce lead times and lot sizes by reducing fixed ordering costs. This article offers an overview of these strategies.
Understanding the Financial Impact of Inventory Control
Before getting into smarter inventory controls, it’s worth taking a moment to review three prominent cost impacts of inventory management.
- Cash flow and the cost of capital—Inventory tends to use up cash, unless it’s being sold before the vendor’s bill becomes due. Most companies do not have such a fast cash cycle. Instead, inventory is ordered and paid for weeks or even months before it gets sold or incorporated into other products. In addition to diverting cash from operations or investment, inventory carrying costs show up as interest expense on the income statement.
- Administrative costs of inventory management—Placing an order for products to be held in inventory carries an administrative cost. Someone, or some group of people, must do the work of placing the order, arranging for the purchase order, reconciling vendor invoices with purchase orders, authorizing payments to vendors and so forth. All of this costs money.
- Storage and transportation costs—Inventory storage and logistics come at a cost, too. The warehouse facility has a cost to operate. Freight and logistics suppliers cost money as well.
Quality is an indirect, often intangible issue associated with inventory management. If a vendor ships defective inventory, that creates an administrative burden for returns and refunds. If customers receive defective merchandise, that magnifies the admin problem and adds customer relationship problems to the mix. Generally, the longer inventory sits on the shelf, the harder it becomes to locate the defective goods.
Strategy #1 – Maintain Accurate Records
Record-keeping is essential to effective inventory control. This is a well-known fact, but it’s still surprising how challenging it can be to implement good inventory records at many companies. The culprit is often systemic in nature, with manual processes and re-keying of inventory data from one system into another, e.g. from a warehouse management solution into ERP. Alternatively, record-keeping falls apart due to physical/digital handoffs. For example, if the warehouse receives a shipment of inventory and then places it on multiple shelves, the storage locations may get lost, or at least not tracked, by any central system. Accidental, unnecessary reorders or unawareness of defective goods may result.
Strategy #2 – Proactive Planning
Proactively planning for replenishment is a wise practice in inventory control. But, when is the right time to replenish? This is a simple but highly challenging question to answer. At stake are issues like the business risks of running out of an item, which can affect production and customer satisfaction. Per-unit costs, which may go up in smaller orders, can be a factor, as well as shipping lead times, shipping costs and so forth. Learn more about measuring warehouse productivity.
Material Requirements Planning (MRP) software offers a solution that enables proactive planning. It calculates replenishment quantities and optimal order timing—in alignment with the master production schedule. Distributors can use comparable Distribution Requirement Planning (DRP) tools. Both types of software work from a sales forecast and work backward in time through the distribution network (DRP) and Bill of Materials (BOM).
Strategy #3 – Focus on Improvement
Innovations in inventory management software also make possible an ongoing focus on improvement. Businesses that are successful at inventory control seldom sit still. They are always looking for ways to get better at the process. Plus, the dynamics of the business are always in flux, so the inventory control approach that worked last month may longer be optimal. Software for inventory control enables users to improve their inventory accuracy. Users can also get better at forecasting replenishment quantities and reducing order lead times.
Strategy #4 – Reduce Lead Times and Lot Sizes
The ideal inventory order lead time is zero. The instant the item is needed, it shows up on the shop floor or in the distribution warehouse. Of course, zero lead time doesn’t happen, though software can get a company pretty close. “Just in time” or same-day delivery of needed inventory are now common. The challenge is to predict variability. One day, a company might need 10 units of a particular SKU. The next day, it will need 12. If it orders 12 every day, it will start to accumulate a backlog, with carrying costs and all the other problems that come with inventory.
Control Your Inventory With Cloud ERP Built for Distribution
As these four strategies suggest, software and data analytics capabilities are at the heart effective inventory control. Making fast, smart decisions about inventory—and leveraging technology to automate inventory management processes across multiple systems, is only possible with the right software tools. Acumatica Distribution Edition embodies these capabilities. We have extensive experience working with companies on the implementation of Acumatica for inventory control. To discuss how this technology could benefit your business, or to see a demonstration of Acumatica’s inventory control features, please reach out to arrange a meeting.