Inventory Management: The Nuts and Bolts
Our objective in managing inventory is to produce maximum return on investment. This means having just the right amount of stock, in each item we sell, so that we never lose sales because of stock-outs and, at the moment the last item is sold, replacement stock arrives on the shelves. It’s a simple, clear mandate. The devil, as the saying goes, is in the details; thousands and thousands of details.
Every item we stock must have its own inventory record. If the item comes in different sizes, colors or flavours, each must have its own record and unique identification code. If a pair of running shoes is offered in ladies’ half-sizes 5 through 10, in two colors, that one pair of sneakers becomes 22 Stock Keeping Units (SKUs). When we receive our first order of this item, we’ll record the quantity of each size and color placed in stock. Every time this item is sold, our system will adjust the corresponding inventory record, calculating the new balance on hand. At a glance, we will be able to determine the quantity on hand in any size or color. Technology is our friend.
Obviously, we want to take advantage of computing power and electronic devices. Luckily for us small business operators, electronic equipment and software prices have plummeted in recent years. Even the smallest business can afford some form of inventory management system.
One of the cornerstones of inventory management is the Universal Product Code (UPC). That’s the bar code that appears on so many of the products we handle every day. Many products come from the manufacturer with the bar code label already in place. The re-seller simply uses the supplier’s bar code as an identifier in their own inventory system. Some retailers print their own bar code labels with the name of their business, a short description of the item, their inventory code and the bar code equivalent and the price. In a retail setting, the customer likes to see the price on the article, then confirm it when checking out.
We’ve taken a lot of the labour out of handling goods. Receiving a shipment of merchandise from a supplier, we need only scan the bar code with a reader to find our corresponding inventory record in a computer system. We can print our own bar code labels, on demand, from our computer system using a label printer. When the item is sold, the bar code scanner quickly identifies the unique SKU Number, sourcing the retail price and adjusting the inventory.
An efficient, informative, secure inventory system begins at the design stage. We will need user-friendly software that gives us all of the information we need for our specific business without a lot of “generic” information that gets in the way. We must be able to tailor or customize the software to our specific business and, as we grow and our demands for more complex information increase, the system must be able to respond.
Before we even begin to look at the bewildering array of small business inventory management and point-of-sale software out there, we must define our own needs. We must think through what is essential now and what we might need in future. Without a clear systems definition and statement of requirements, we have no criteria against which to rank the many software products available. Chances are, the cost of the software component will be far greater than the equipment. When we factor in the man-hours required to set up the system, it’s not difficult to see where the real investment lies. Before shopping for software, we need to spend time, perhaps with the help of an experienced advisor, in defining our needs.
Finally, we need to manage our expectations. Frequently when we make a purchase, we have a set of expectations around the utility, efficiency or function of the item. This is particularly true of computer systems and software. It is not uncommon for us to expect one result while the product actually delivers something quite different. We need to be clear about our expectations, then make sure that the system we choose actually delivers, before we sign up.
In a future series of articles, we’ll discuss system requirements and solutions:
- Store Front, Warehouse Distribution or E-Business. What kind of a system do you need?
- Inventory System: Database Orders, Receipts and Reports
- Point of Sale System: Managing the Front End
- Warehouse Distribution System: Managing Sales, Receivables and Payments
- Back Office Accounting: The frequently-missing link