How do you manage inventory? It seems like such a simple question, but there’s actually a lot of complexity in its answer. We are going to walk through what inventory is and the steps that are necessary to take in order to properly manage it.
WHAT ARE THE 3 TYPES OF INVENTORY?
What is inventory? Inventory is everything you possess in all of your warehouses, stores, and other locations. It includes not only the finished products you intend to sell, but also a few other key types of items that are necessary to keep your business running.
Here are the three types of inventory.
Parts can be anything from nuts and bolts to flour and sugar. They are any items that can be used to create a finished good, but they will not be sold in their current form. Basically, parts are the raw materials you need in order to make products, so it’s important to keep track of them. But they must be changed or used in some manner to make them more valuable to customers. After all, a computer company wouldn’t ship a motherboard, hard drive, and other equipment to customers and expect them to assemble a computer themselves.
Products are the end result of putting together a number of parts. Products can be customizable, so you can add different parts depending on customers’ preferences. They come in all shapes and sizes, from baked goods and frozen ice cream to expensive electronics and vehicles. Obviously, different products have different shelf lives and require varying amounts of storage space. These are all factors that need to be taken into account when deciding how many products to have on hand at any given time.
Assets are different than parts and products, both of which are intended to be sold at some point. Assets are items (such as heavy-duty manufacturing equipment, brooms, paper towels, work uniforms, shelves, and vehicles) that are meant to be used in the day-to-day operations of a business, but not to be sold. Sure, they can wear out and be sold or scrapped at some point in the future, but that’s not their primary purpose. Assets make it possible to produce, hold, move, and eventually sell parts and products.
WHAT IS INVENTORY MANAGEMENT?
What is inventory management? Basically, inventory management is the process of keeping your parts, products, and assets organized across all of your warehouses. It involves numerous tasks, such as keeping track of the number of items in stock, reordering them from time to time, monitoring their movement from one location to another, and more.
Also encapsulating warehouse management, inventory management is extremely useful at maximizing your warehouse space and speeding up the receiving, picking, packing, and shipping processes. It keeps your inventory quantities balanced so you will have enough on hand to meet demand without going overboard and winding up with an unnecessary overstock.
Here are some ways that you can use inventory management in your business:
- Stay on top of seasonal sales trends via detailed reports.
- Restructure your warehouse.
- Put parts that are often used in conjunction with each other close together.
- Use auto reorder points to keep inventory flowing in and out at the optimal rate.
- Form mutually beneficial relationships with vendors to maintain supply chains.
WHAT IS SUPPLY CHAIN MANAGEMENT?
Supply chain management is the process of obtaining parts and products from vendors and then getting them into the hands of customers. It takes a lot of work to handle all of the vehicles, workers, inventory, and finances involved in maintaining a supply chain, but it is absolutely necessary to keep your business running smoothly.
Barcode scanners come in handy (no pun intended) when managing supply chains. Of course, the barcode scanners need to be connected to your computerized inventory management system, such as Fishbowl. When you scan a part or product’s barcode, you can instantly see detailed information about it, such as its quantity in stock, location in the warehouse, default vendor, and more. This information helps you reorder, receive, and conduct cycle counts faster and with greater accuracy than you could by hand.
Fishbowl’s supply chain management features allow you to:
- Track shipments.
- Monitor vendor performance over time.
- Stay up to date with payment terms.
- Instantly update inventory records when products are ordered, received, sold, and shipped.
- Monitor inventory levels at multiple locations.
CALCULATING INVENTORY COSTS
There are a number of costs that an advanced inventory management solution will help you calculate. Here are some of the big ones, along with all of the costs that they are made up of.
Carrying costs (also known as holding costs and inventory costs) are the sum of all of the money that companies must spend to store their parts and products. All of the things that make up carrying costs include:
- How much the inventory depreciates during a certain period of time.
- Warehouse employees’ salaries.
- Essential insurance premiums.
- Security systems and personnel.
- Upkeep, such as storage space, heating, leases, and other bits of maintenance.
- Applicable taxes.
Also known as the true cost, the landed cost of parts and products is made up of everything that goes into obtaining products and getting them to their final destination inside a warehouse. Landed costs are made up of:
- Taxes, including customs, tariffs, duties, harbor fees, and currency conversion.
- Shipping costs, including crating, packing, freight, and handling.
- Operating expenses, including employee compensation, due diligence, and brokerage and logistical fees.
- Risk management, including insurance, regulation compliance, quality checks, and buffer stock.
Robert Lockard is a copywriter with Fishbowl. He writes for several blogs about inventory management, manufacturing, QuickBooks, and small business. Fishbowl is the #1-requested manufacturing and warehouse management software for QuickBooks users. Robert enjoys running, reading, writing, spending time with his wife and children, and watching movies.