Inventory Management

Just Good Business

By Diane M. Calabrese / Published May 2018

Salt licks and ice blocks were perhaps easy products to track. A quick glance around the storage place for the licks or blocks would give a vendor a good picture of availability.

       A simple look-and-see discovery process becomes a liability, however, when products are not uniform in shape and in type. To satisfy everyone from customers to the Internal Revenue Service (IRS), only a bona fide inventory—one that takes a methodical approach to discovery—will do.

       Inventory management is just good business. “It is very important,” says Dan McMahon, purchasing agent at Barens Inc. in Seneca, PA. “We want products in stock for our customers. We do not want to create backorders.” McMahon’s company not only has a full-time programmer on site to keep its inventory management program running smoothly, but also sells and supports the program it uses.

      The sophistication of an inventory program can never compensate fully for the unpredictable. There will be times when a particular item is ordered in excess of what an algorithm derived from experience predicted. The item then moves to the temporarily out-of-stock category, and filling backordered items as quickly as possible becomes the remedy.

       “Allocating quantities on backorder” is now built into the inventory management system at his company, McMahon explains. “We were not able to do that until December 2017.”

       By perfecting inventory management, firms can improve the experience for customers. Being able to say with certainty the product is available and when it will ship streamlines decisions a customer waiting for the product must make. Similarly, being able to give customers solid information about any impending price increases on products they order frequently also allows them to plan better.

       McMahon notes that having a refined inventory management system enables a company to easily assess its performance. “Sales were very good last year and are off to a good start in 2018,” he says, citing an example of the sort of information that can be retrieved from a good inventory management program. Knowing such information on an immediate basis allows a company to revise plans as well as adjust inventory.

Way Beyond a Count

       The manual component of the inventory process has largely become one of spot checks and verification. The days of moving aisle by aisle and shelf by shelf to count are gone. Barcoded items can be tracked by electronic devices.

       Customer expectations have been elevated by the high-tech approach to inventory. “Customer demands to ship with short lead times are becoming the norm,” says Vik Takacs, director of operations at R.W. Beckett Corp. Inc. in Elyria, OH. “Driving operational efficiencies throughout the supply chain allows companies to be more responsive to demand.”

       In recent years, the entire scope of inventory management—from the tracking of inventory to the process of inventory—has leapt to a new level thanks to the speed and accuracy of communication. “The continued refinement of internet sourcing has provided clarity to businesses regarding potential disruptions and global inventory levels,” explains Takacs.

       Those seeking an example of change for the better find a great one in inventory management. After all, selling a product or service is just one facet of doing business.

       “It is one of the key financial drivers of every organization to provide products or services in the most cost-effective manner possible while meeting the needs of customers,” explains Takacs. Consequently, inventory management is inextricably tied to overall operational efficiency.

       “Inventory management is a value stream proposition, meaning that it includes a business’s supply base through to its customers,” says Takacs. “In order to determine the success of an inventory management system, key metrics should be incorporated and balanced appropriately.”

       The metrics to be included range well beyond a count. “Metrics such as on-time shipments and customer satisfaction have the same amount of importance as the inventory metric itself does,” says Takacs.

Value Extracted

       As much information as possible should be extracted from the metrics of inventory. A clear-eyed assessment of what inventory reveals can reduce costs and produce savings for changes in an operation.

       Products on storage shelves do not belong to a zero-cost center. The space itself could be used for products that move. And the cost of cleaning, lighting, and heating the shelf space is more than zero.

       Serious cost containment measures at a business use inventory as an indicator of what to cut and what to add. In some cases, simply taking the loss on products that have not been sold in a long time makes more sense than continuing to store them. Space can be used for products that do sell.

       If items being stored have an expiration date, such as chemicals do, they will become less desirable to customers as the date grows closer. One option is to get control over such products by storing the minimum necessary to fill customer orders immediately. Another option for manufacturers of such products is to do compounding on an as-ordered basis.

       Refined inventory management might point to a combination of the two options, depending on time of year. If spring brings a surge of orders, compound ahead of the orders. If orders are rare in December, wait to mix, but be ready.

       There is also value to be had in using inventory metrics as a way to evaluate pricing. If products began to stay put after a price increase, that’s a clue that something needs to change because customers are meeting their needs elsewhere.

       As reliable as inventory management software programs are, they can never substitute completely for physical checks on products. Routine monitoring of storage areas ensures that heating, cooling, lights, and water are all functioning properly. Physical checks also catch errors, and they reduce fraud.

       Distributors who receive products from a manufacturer should reconcile invoices and products immediately. Sometimes there is a mismatch. The time to correct it is right away. Even though it’s possible to just scan barcodes and take orders on faith, it should not be done. That does not mean anyone in the supply chain intends to short or send the wrong product. It’s just that mistakes happen.

       Sometimes, albeit rarely, there is intent in play. As a contractor in-stalling two new doors to a home once told this writer, if someone wants to get in, they will. No lock is burglar proof. So it is with inventory systems. Irrespective of how state-of-the-art they are, theft remains a possibility. Computerized systems may give thieves more opportunities to cover their tracks. For that reason, physical checks on products and periodic audits of inventory systems are as important as ever.

       The value in the metrics that can be fed to an inventory management system cannot be overstated. There is a caution, though. The more links there are, the more possibilities for a weak one to emerge and cause a problem. Various point of sale systems (POS) can be linked directly to a company’s inventory management program. As long as the communication goes in one direction, all is well. Yet if a hacker uses the link as an entryway to the inventory program, havoc can ensue. Good computer protocols (including firewalls, installation of updates as they come, password security, etc.) are a must to realize the benefit—and not the risk—of such a tie-in.

IRS Notes

       Rules for valuing inventory vary with the type of business. Whichever way inventory is valued, it figures in taxable income.

       A discussion of whether a company uses cost or the lower of cost or market method to value inventory is outside our scope here, except to note that a good inventory management program simplifies valuing the inventory. Manufacturers, for example, must include merchandise, raw materials, all work in process, finished products, and supplies (e.g., cases) that become part of an item intended for sale in their inventory.

       If a manufacturer or a distributor still owns a product, even one in the process of being made, it is part of inventory for IRS purposes. There’s no allowance for subtracting products on which there is a contract for sale. They must be sold. On the flip side, goods that have been ordered for a future delivery but are not yet in the titled possession of a distributor are not part of inventory.

       Obviously, tracking the products (components and supplies) that figure in the value of inventory reported to the IRS is made easier if all the elements are tracked regularly and separately as part of inventory management.

       Strong inventory management procedures benefit everyone. By itemizing and valuing the products on hand, a business can assess trends in product movement and also make better decisions about which products to add. Deciding which products to add without careful attention to what’s on hand wastes money and resources. (It’s akin to going grocery shopping without a list of needs, particularly when whims and impulsive decisions lead to purchases.)

       In short, inventory management is just good business.