The Basics Of Inventory Tracking

Correct management of inventory can be the difference between a business that hums along efficiently and one that sputters out prematurely.

If you're a small retailer or wholesaler, your inventory is the heart of your business. Not only is it probably the largest single investment you'll carry as a business owner, but correct management of inventory can be the difference between a business that hums along efficiently and one that sputters out prematurely. Many businesses with good business plans and good products have failed because poor inventory management has choked out both cash flow and profits.

The purpose of inventory tracking is to ensure that while some of your capital must be tied up in inventory, it does not hinder your company's cash flow or waste employee's time. Your business will run best if you have an accurate count of that inventory, procedures for changing it, and an organization scheme that allows fast and efficient access to it. Conquer those challenges, and the business of tracking your inventory will be no problem at all.

So how can you ensure that your inventory is managed in a way that helps your cash flow rather than hinders it? Here are a few tips and pointers that can help:

I. Set aside sufficient space for your inventory. A sizable and well-lighted area will allow you to organize and manage your inventory in the way that fits your company best. Sufficient space between rows to allow movement without bumping items will reduce breakage and unintentional damage to inventory. Having plenty of room to work and store stock will reduce the propensity to "stick things where they'll fit", which ends up with items being lost or broken.

Sufficient space is probably the single most important factor of efficient inventory management, because a lack of space forces your company to take shortcuts and undermines the procedures you set in place to keep track of what you have in stock. A lack of space can be the largest factor in inventory disarray, and an inventory in disarray is an inventory that is poorly managed.

II. Organize your inventory in a manner that fits the type of business you run. How you buy and sell products should be a determining factor in how your inventory is organized. Do you have 10,000 paperback books in a warehouse? Or is it 3000 types of auto parts on shelves for browsing customers? Do some items move quickly? Are there some items worth carrying but which seldom leave the shelves? Do you care about individual items or do you buy and sell in volume? All of these factors can have an impact on how quickly and efficiently you can get your inventory into the hands of your customers.

For example, our warehouse stocks books of various sizes, movies, computer software, and miscellaneous items, like mouse pads and cassette tapes. Because different-sized shelves are necessary for different types of books, the books are organized by size with hardcovers and trade-sized paperbacks together, separate from the mass market paperbacks. Within each type of book, books are sorted by author, within each author, books are sorted by title. Items which turn over quickly (like paperbacks) are stored at the front of the warehouse for ease of access. Items which sit longer in inventory (like movies or multi-volume sets of books) go in the back. Duplicate titles are stored in well-marked boxes on top of the shelves, which allows for quick re-stocking at the time items run low.

The objective of this organization is to ensure that when our warehouseman receives an order, he will immediately know where to find the item. However, if customers shopped directly from my warehouse, the items would need to be stored differently, because they are most interested in other factors (like genre). Only you know your business, and your inventory should be sorted and organized in the fashion that makes your business as efficient as possible.

Remember, the objectives are to know where everything is and to be able to move it quickly to where it needs to be.

III. Develop a database of your inventory, including re-order targets. If you have only a few items, a notebook may be sufficient to list every item by type, brand, color, and quantity. If you have thousands, you'll need to develop or purchase a computerized database (even if it's only an Excel spreadsheet). But large or small, your inventory needs to be reflected as accurately as possible on paper or on the computer, so you can avoid leaving the phone to rummage the warehouse every time a customer inquires about an item and to allow you to quickly and efficiently gauge how much of your money is tied up in inventory, what inventory is turning over, and what is simply collecting dust on your shelves.

Every item in your database should have a target level at which a re-order should be made, along with a measurement of the time it sat in inventory. At reorder time, check to see that you sold the items in the time you expected or if you're selling them faster than you expected. Writing down your expectations up front can help you identify trends that will tell you whether to double your re-order quantity or discontinue carrying an item altogether.

Keep in mind that the quantities you order can affect the cost per item, lowering your costs and increasing your profits. Take advantage of quantity discounts where your inventory allows. By tracking your turnover and comparing trends, you'll be prepared to get the most for your money without tying up most of your money in inventory that does not move.

IV. Develop procedures for "check-in" and "check-out". Every item that enters or leaves your inventory needs to be recorded somehow, either directly into the database or onto a receipt that is compared against the database. Inventory tracking means knowing how much of what you have available, and that can only be accomplished by having procedures for adding and subtracting items from inventory.

Keep in mind that for procedures to be followed, they must be simple, consistent, and accurate. A 20-step process for removing an item from a shelf and dropping it in a bag will be ignored as soon as your employees get in a hurry. 20 different processes for 20 different items will be forgotten or (more likely) run together. The result of either is that your inventory management will suffer.

The check-out and check-in procedures of our book warehouse are simple: When an order arrives, the person who receives it prints it and circles the author, quantity, and shipping method (step 1). If the shipping method is other than "standard" or the quantity other than "1", such is highlighted on the order so it is not missed in the warehouse (Step 2). The database is adjusted accordingly (Step 3) and the orders are sent to the warehouse (Step 4). The warehouseman checks the book and quantity and packs it for shipping (Step 5).

To check inventory in, incoming books are organized by type and author (Step 1). Each is then checked against the database to see if it is currently in stock (Step 2). If it is, the quantity for sale is adjusted (Step 3), if it's not, the item is added (Step 4). The books are then physically moved to the warehouse to be put on the correct shelves (Step 5).

No books enter or exit the warehouse without going through these procedures.

Having simple, effective inventory-control procedures in place will ensure that everything in your warehouse is ready to be moved to your shelves and everything on your shelves is ready to be replaced from your warehouse.

V. Strive for accuracy and manually double-check at least annually. No matter the procedures you have put in place to ensure the accuracy of your inventory, mistakes and errors will creep in. Whether it's through items not being properly recorded or through pilfering employees, the more items that move through your database, the larger the gap between what it reflected in your electronic database and what sits in your physical warehouse will grow.

That means that monthly, quarterly, or annually, a physical inventory should be taken of everything in the warehouse and compared to the inventory database. It doesn't mean shutting down your business while everyone goes through the warehouse and counts, but it does mean that an occasional physical survey must be taken (maybe during slow periods) to ensure that everything in your inventory is accounted for. Such checks will also help you identify items that are susceptible to pilferage, breakage, or simply being put back in the wrong place. Once patterns are recognized, adjustments can be made to avoid similar problems in the future, like keeping small, high-value items under lock and key or keeping glass items well back from busy aisles.

The challenges of inventory tracking can be managed with planning, organization, and consistency; and your cash flow will improve if your largest cost is handled efficiently. That means not only will your bottom line benefit, but your customers will as well.

© High Speed Ventures 2011