Inventory is a term used by American writers to mean the goods bought to resell during the course of business. The same is known as ‘stocks’ in the books from the UK. However, ‘stocks’ in the US mean shares of a company. Likewise, Americanally speaking a person may have an inventory of stocks which would Britishally mean, an investment in shares of a company by that individual. Therefore, in here and most of my blogs I would use the term Inventory to mean (British) stocks, not that it’s a brilliant term; it just saves us a lot of confusion.
Inventory is the most important asset of the business; it is from this where the bigger and the bulkier fixed assets come in to show off. Many business owners fail to understand its significance and treat it no more than a product bought, stored and sold; there is more to it than meets the eye.
Inventory relates to the goods purchased for resale by the business to be sold off within the 3 – 12 months of purchase. Like any other asset, it too has to be managed diligently; for the ease of avoiding fancy terms, we call it Inventory Management.
- Managing the inventory flow
- Warehousing methodologies
- Stock keeping units
- Inventory costing – for financial reporting purposes
- Inventory replenishment
- ERP/MIS support
- Inventory analyses
- Understanding the implications of – over and under storage
- Understanding the implications of – slow moving and obsolete stock
These issues will be discussed in detail in separate blogs, however, at the end of this series on inventory management I will also be offering some tips on inventory management.
We start by talking about managing the inventory flow. Inventory flow is more or less the same as a supply chain within the company; ensuring the materials are available for the production as and when they are required and once out of one phase being moved in to the next phase for further value addition till the final or the finished good/product is ready to be shelved in the warehouse. There on, how the finished products would be dealt with once they are being dispatched for delivery to the customer.
This is a fairly simple illustration of the inventory flow; it is however, worthwhile to notice that the trigger here is the production plan. Where companies have powerful ERPs that can handle complex situations and manage big databases and their integration to customers and suppliers’ ERP is possible then the triggers move out from the production plans in to the customers demand for the product. A common example is, a chain of departmental stores has given restricted access to its suppliers in China; now where one item sold off a shelf in any one of the outlets within the chain in the US the suppliers in China know of it and pack the piece accordingly.
Documentation is the Key
In a company I used to work they had absolutely no documentation at all so much so being a manufacturing company and that too almost all its products were prepared on specifications from the customer. Being a small family business is never an excuse and I didn’t want to take that for an excuse either.
Many such small companies (sole proprietors / small family businesses / small partnerships) have this notion that they and the business are the same, in saying so, what ever the business owns is theirs no real need to complicate things but recording and noting where lies what; my point is, if I were to agree with them that what ever the business owns is theirs then what ever they own belongs to their business too and this can prove to be true if the company were to go insolvent due to poor/inefficient management. Lack of documentation is the first sign of a poor managed company.
A store room was in place, racks full of screws of all sizes, nuts and bolts and drill-bits all over the place, chemicals (hazardous: inflammable) lying around. I have recurring nightmares to date when the brain recollects those images of the ‘first day at work.’
The entire process was defined, all sub-process identified, all activities with counted. All inventories listed, counted and marked. Bin cards prepared, inventory database created in the system, Standard Operating Procedures (SoPs) written to structure all requests from the production floor directed towards the stores and likewise all company purchases were formalized; various forms printed with a strict requirement to approve material requisition by the supervisors. Initial days were very difficult; they were slow and the new systems were being taunted and frowned up on. Stores had a hard time explaining to people that no issues unless the documentation was in place and approved by the supervisor; a couple of weeks down the line and every nut and bolt issued was recorded and the best thing of it all was everyone understood the positive change a different approach brought to their work style bought, they felt the impact.
Here under are generally required documents, they may be and should be lots more to suit the nature of your business and would effectively reflect the efficiency of the internal controls
- Materials requisition note to request stores for materials for production
- Stores issue note record materials issued to production
- Stores requisition note to request for materials for stores
- Purchase order sent to suppliers for materials
- Goods received note GRN prepared once materials are received from suppliers
- Delivery note DN prepared once goods are delivered to the customers
- Invoice – supplier supplier’s invoice to be paid
- Invoice – customer invoice to be sent to customer
Part I of the series on Inventory Management
Next Blog on: Warehousing Methodologies
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