7 mortal sins of inventory management

The importance of inventory management

Inventory management is indispensable for all companies who engage to item sales. As business grows, so does the volumes of sales and purchases. And in the end of the day the profit margin is by large determined on how efficient the operations are.

Especially inventory management is the area where company profitability is determined. There are several factors that have an impact. These include forming processes, establishing automation and general efficiency.

It is possible to manage inventory either very well, poorly, or very poorly. We wrote this eBook to take a closer look at seven mortal sins of the inventory management so you can avoid them in the first place.

Before we dive deeper into the inventory management, it is essential to understand how very important inventory management is for a business. Inventory management is a key process for all companies who engage in sales of goods, be they either consumer sales organizations or wholesale distributors.

A wise manager will understand the importance of success inventory management and its impact on company sales, work organization and in the end of the day – profitability.

A warehouse should function like a well-oiled machine

Inventory management in a warehouse – be the warehouse a large one or a small couple of shells in the back of a shore consists essentially of two main functions.

1.   When goods arrive to the inventory, they must be maintained. Maintenance must continue until the goods can be delivered to the client, it is used as a raw material for another product or the product is delivered to another location.

2.   Goods in the inventory must be accounted for. A good tracking and accounting is not just a good idea. It is absolutely essential.

Inventory tracking and accounting is often overlooked. It is a job that is assigned to someone without proper training or know-how. Unfortunately, this will lead to losses in the long run.

A good inventory management is easy to establish if the company has established ways of working. And if the inventory has a large number of products, that calls for specific processes to avoid mix-ups. These specific processes include for example:

·      Physical investigation of goods

·      Inventory calculations

·      Management of goods in transit

·      Procurement

·      Returns of goods

·      Removal of broken goods from the inventory

·      Valuation of capital

·      Normative valuation of inventory

If one does not manage the inventory well, there will be strange batches of remaining goods, waste, goods that you will not know about, lost products, duplicates and ghost products.

Inventory management must be a daily routine and it has to be easy. Inventory management IT systems should not be too complicated and must be designed in the manner that help manage the operations.

That’s it about the introductions. Let’s move to the mortal sins.

The impact on procurement

One may ask if the inventory management indeed has an impact on the procurement and purchases. The answer is a solid “yes”. When inventory is well managed, the organization knows how much goods there are in the inventory and how is the customer demand. This in turn has a direct impact on the purchases.

With a solid inventory management that is linked to procurement the company can optimize the amounts of goods that it needs. Goods are then delivered to the clients in right time, there will not be surprise delays and customer will not experience lack of products in the inventory. In the business consulting jargon, the term is Just-In-Time. But that is not something that only big businesses can enjoy. Also, small, and medium sized companies can benefit from JIT principles once they start to work with them in mind.

A good inventory management reduces several business pain-points, saves time, money and nagging.

·      The capital of the company is not attached for a prolonged time

·      Materials in the warehouse come in fast and leave quickly

·      Manual calculations of inventory levels are something that get done only as an exceptional activity. Not a routine.

·      It is easy to see the amount of incoming goods, items being sent out and how much capital is attached to those

·      Inventory management system should automatically create draft purchase orders for goods that are about to run out

·      Good inventory management does not waste the time of staff

·      Customers tend to purchase goods from vendors who have them immediately available in the stock

·      Proactive inventory management system eliminates running out of stock

·      Fast circulation of goods provides a competitive advance

Sin 1: Almost decent product catalogue

One of the worst nightmares of the merchant is when inventory management personnel reports that there is a gap between what is inventory and what is in the accounting system. And the nightmare turns to a boss level of Ghost ‘n Goblins when there are errors with product codes, barcodes and Stock Keeping Units (SKUs).

An inventory with a lot of ghost products can easily lead to a major mess and a complete stop of normal day to day activities. In a severe case all products have to be accounted for manually and to seek out which are the codes that provoke problems.

It is not uncommon to detect products that should have never been in the company’s inventory registry. Common source of these problems is to mix up between product package barcode and product barcode. (In case of for example a six-pack).

Nobody really wants to participate to this kind of engagement, so it is well worth one’s time to pay attention to the creation of product catalogue. One should think carefully how to establish product codes. They should be self-explaining, show what is the product for those familiar with the product and have room for expansion. Special products should not differ from the main product coding rules.

Sin 2: Always creating variants

To establish the lexicon of the product coding is essential part of the original inventory management. And one aspect of that job is to decide how to manage product variants. In almost all industries there are customer-specific versions of the product, but is it worth the while to create those as separate variants?

A variant is essentially a (slightly) separate version of a product. Let’s take an example of a company that sells T-shirts. It is natural that all sizes vacant a variant and the same apply to the colours as well. Therefore, the attributes that change the product are called variants; a T-shiert can be of medium size and blue or XL and red. But is it a good idea to add more variants?

Let us assume that we have also a separate cut for men and women and the clients can select their own image for the T-shirt.

In this example there are six T-shirt sizes (XS, S, M, L, XL, XXL) and five colours (white, red, blue, black and grey). And separate cuts for men and women. This in turn causes immediately already 6 x 5 x 2 = 60 variants! Thus, if one generates a separate variant every time that a client orders his own print that causes a large number of product codes to be generated. Most of those are clearly for products that will never be used for.

Therefore, one should really carefully consider if it is worth to really create variants for every single time one might be needed. A good rule of thumb is to create a variant only in the case when product attributes will remain static. Therefore, it is not a good idea to create variants for customer specific versions or attributes that are not core for the product.

Attributes that are not core are for example accessories and software version that is bundled with the product.

Hint: these kind of products in the inventory are recommended to be managed as separate products that will be added to the product line. In the inventory management system physical accessories as physical products and non-physical products as service products.

Sin 3: Buying more than you are selling

Without a good inventory management system, it is difficult to estimate how much of the product is actually needed. Therefore, a lot of companies are making a simple mistake: they would buy more stock than what they would need. Purchases made with gut feeling are good if you can actually sell them, but all too often the numbers tell otherwise.

If a company has a habit of purchasing too many products, there will be excess of inventory. And surplus means bad for capital and inventory. Finally, the company must get rid of excess stock by massive discounts and lower margins. This is something that the consumers love, but if sale is forced upon the vendor, it is not good business.

A good IT system will show reliable data on how well the products are being used and give guidance when it should be restocked. Restocking is a very relevant point for products that have multiple day delivery lead time. When it should be ordered again? Instead of spending nights with Excel sheets, why not let the inventory management system do predictions.

In many cases companies have policies that certain products must always have available stock. In the end of the day, customers have a tendency of purchasing products that are readily available. And the IT system must support this.

Sin 4: Expired product data and inadequate follow-up

If the eCommerce site has products that are used for human consumption, it is essential to follow production batches or production lots. In this case the merchant is obligated to implement measures to track them. This applies to food products and products that share similar characteristics. For example, food supplements, vitamins, and protein bars.

Product information in this regard refers also to list of item ingredients, artificial sweeteners, and similar components. Production batches in this regard, refers to the ability of a vendor to identify which group the individual item belongs to. This is important for example when the item is consumed and has a risk of expiring. This applies equally to food supplements and foods, but also to certain products that have a best-before date which is not obvious. For example, make-up products.

Sometimes also the authorities demand a withdrawal of certain product batch because there have been irregularities during the manufacturing process. A wise merchant would in this case co-operate fully with the authorities and provide access to the customer registry and help with a call-back of this production lot. Experience suggests that customers appreciate a merchant who gets back to them to advice about a potential danger of the product. Customers will return to a vendor who takes care of them.

Not all Inventory management products support production batches or tracking them in multiple ways. The expiry dates and production batches differ between product types. For food products the batch is typically a week of the year but for cosmetics the production cycles can be month-long. It is essential that the IT system supports flexible lots numbering and identifying.

And while we are in the topic of production batch tracking, it would be a good idea to make sure that the IT system supports also serial numbers. Serial numbers are essential when the product comes with a warranty and vendor wants to mark down the exact identifier.

Sin 5: Trusting on provider SKU codes

When the volume of the product grows in the eCommerce site, the merchant will soon run to challenges with item providers. Especially when the same product is available from multiple vendors. In this case it is fairly common that the product is known with different product code. Make sure that the IT system supports different product names with different vendors.

To make things more complicated, the vendors can also packet the product differently. And this can change during the time. So, in the first month the product can come individually, then be available only in six-packs or dozens. And most probably the product code will also change.

If the IT system does not offer a support for vendor-specific product names, codes and packages, there will most certainly be trouble.

Sin 6: Ignore product checks

The sixths sin is related to the fifth sin. Especially when the volume of sales increases, it becomes more and more important to implement procedures to check the product quality.

In practise then inbound product quality check refers to a practise that all incoming products must undergone a quality check. The quality check can be carried out for each individual item or by spot checks.

There are surprisingly large number of IT systems who do not allow checking of incoming goods and rejecting faulty products. It is essential to make sure that the system does support this.

Also, some inventory management organizations prefer to first move the product to an intermediate inventory before accepting them to the main inventory. Adopting this practise increases the bureaucracy a bit. But on the other hand, this way it is certain that the products can be well maintained and tracked once they are accepted to the inventory. From IT system point of view this requires support for multiple warehouses, virtual warehouses, and internal transfers. These procedures should not be too complicated.

Sin 7: Dreadful onboarding

We get it, the core business of item sales merchant is to sell and purchase goods. Not implement IT systems. Therefore, it is certainly better to leave the development of the IT system for a professional implementer and concentrate on the core competence.

A drawback of this approach, however, is that the organization will lack its own IT staff. And when this competency is not within the own organization, completion of processes is fully up to the staff carrying out management’s orders. Sometimes, this is easier said than done.

If the onboarding is not done well and processes enforced on the ground level, it is very easy to ignore the orders and not execute the process well. There can also be friction between different departments. These aspects all contribute to the bad adaptation of new rules and procedures. And if the IT system is unfriendly to be used, it will cause natural resistance. Nobody wants to waste his or her time doing something that will not show value.

Inventory management onboarding problems cause frequently problems with overstocking of products, lost products, duplicates, and ghost item codes. All of these will cause loss of money in the long run.

To avoid dreadful onboarding, make sure that the inventory is well planned, the codification makes sense and you have thought a strategy for managing variants.

Odoo as an integral solution

Fortunately, the marketplace has solutions that offer aid for all before-mentioned sins. Key part of a good IT solution is that it is an integrated, all-encompassing solution. And Odoo is exactly that.

Odoo ERP suit is a market leading solution that provides all components that a good inventory management solution need. And Odoo does not stop at the inventory. The suite offers modules for managing almost all possible business cases for any type of business. And if Odoo can’t do it, there are over 10,000 extensions by third party.

Go-Live in less than a week

Business benefits:

·      Real-time sales tracking

·      Real-time accounting

·      Cash flow management

·      Automatic connections to banks

·      Send reminders of bills automatically

·      Fixed monthly price

Odoo ERP benefits:

·      Easy to learn

·      Easy to use

·      Aggressively priced

·      Extensible

In one packet:

·      Customer relationship management

·      Website and eCommerce site

·      Email marketing

·      Accounting

* Supply chain management