Inventory Should Result in Clarity

By Diane M. Calabrese / Published December 2022

Take stock. The concept is as old as the exchange of goods—so old, in fact, that stock and inventory get caught in a round robin of meaning. When doing an inventory of the amount of stock on hand, one is taking stock. 

     Inventory gets drawn into legal usage. In legal terms it’s an instrument for itemizing and evaluating property.

     Backing up to fundamentals and whether it’s taking stock or completing an inventory, the effort begins with some sort of list. The act of listing provides structure and a mechanism for communicating about items. Actual numbers substitute for a good memory. Instead of thinking there are six more of a particular part, it’s immediately known there are only five.

     The sophistication of contemporary inventory goals and systems go way beyond knowing how many of each, yet the goals and systems are all part of the same legacy.

     Arabic numerals, double-entry books (ledgers), and formalized creditors (banks) all converged in 15th-century Florence and quickly spread throughout the Italian peninsula and beyond. The Medici family played a significant role.

     The root word of “stock” may go back to Old English for “stick.” And it’s possible to see the utility of bundling sticks or lining them up as tallies. Today, “stock” has meanings that extend beyond 20, many of which align with tracking property (e.g., stock as in livestock, stock as in certificate of stock).

     Any detailed list is an inventory. It could be the list of spoons, forks, and knives in the kitchen. Inventory derives from the Latin word for invent, so the goods and property of a business are built into the meaning.

     Today, the word inventory is used in conjunction with any listing activity. People talk about taking an inventory of their skills or taking an inventory of their positive characteristics.

     In the realm of business, inventory has taken on a high profile. Disruptions to supply chains caused distributors and manufacturers to realize that they might have too little. And conversely, they might have too much if they tried to out-maneuver disruptions by holding more in stock than they would ordinarily have done.

     While inventory methods that provide fine-grain analysis of who is buying what, how much, and when have long been available, there’s increasing interest in them. Developers will customize inventory programs to the wants of a business. First, though, a business owner must know what information he or she wants to have readily available. 

Organization

     Whichever method of inventory is used, the end result should be to bring clarity to the holdings of a business. Guessing, estimating, and hoping are not required when a good system is in place.

     Drew Harbour, the general manager at Chappell Supply and Equipment in Oklahoma City, OK, says, “Organization is the key to maintaining successful inventory control.”

     It’s all too easy for things to go missing or processes to go awry if there’s insufficient rigor. “Without an adequate organization plan, inventory either gets lost or duplicated,” remarks Harbour.

     Things have changed very rapidly in recent time. “Five years ago inventory flow was simple,” notes Harbour. “You kept a small amount of inventory on hand and reordered as needed.”

     It’s all different now. “In this post-pandemic economy, many manufacturers are struggling to obtain minimal inventory, much less create a stock level that we as an industry were accustomed to five years ago,” explains Harbour. “This has led companies to increase inventory on hand, thus increasing the cost of business.”

     Items in stock—whatever they are—must be stored somewhere. That takes space. The environment of the space must be controlled. If a satellite facility becomes the space, there’s an additional expense of moving goods between sites. 

     Costs of holding items in stock add up quickly. Until spring 2020, most businesses tried to operate on lean models, an approach that worked because resupply was very fast.

     Options for businesses when implementing a method of inventory are many. Systems can be fully integrated with orders and receivables, for instance. Should business strive for integration?

     “I believe that they should,” says Harbour. “The primary benefit is that inventory being integrated with ordering/receivables allows you, as a salesperson, to keep up with changes in product costs, thus ensuring you are making smart business decisions.”

     The organization puts a business on solid footing not just in the day-to-day managing of activity but also long term. If an owner decides to sell, any prospective buyer will want a clear picture of the activity of the company, a picture that includes inventory.

     Moreover, should an owner want to buy another company, a firm understanding of what’s already an integral part of the business—and that includes machinery, shelves, and computers—will prevent duplication. The same applies to making any major purchase.

     Just as homeowners make the mistake of going out and buying a particular paintbrush when they already own one identical to it (that got stashed and forgotten), business owners can make a similar (and costly) mistake. Inventory of property is as important as inventory of marketable goods. In such demanding economic cycles, duplication is a serious waste of money.

     And organization puts a business in good stead should the worst happen, such as a natural disaster that destroys part of the business or impedes doing business. 

     In order to apply for assistance following a disaster, a business must be able to give a good accounting of its assets and functions. In that context, copies of all crucial records, including inventory, should be kept off site. 

     Cloud storage is one possibility for enduring retrieval. But many owners may also want to keep records on distant or portable drives that they can get to if the cloud storage mechanism is disrupted by a significant event (e.g., earthquake, typhoon). 

Balance

     Cash flow remains the lifeblood of a business, even if currency is all moving in a digital form. A product lying in wait for a buyer or a component being stored for future use in a manufacturing line can be converted to cash value, but they cannot be used to pay employees or vendors.

     If the buyer never comes, or the component is never used, a loss begins to look real. When the product and the items sit for too long, they become like perishable food. Fresh fruit and vegetables fade with age (and time). So do nonorganic items.

     Companies want to return to the point where it was possible to know how much to order, when to order, and what to order. That was the point in time when a sophisticated inventory system was not thrown off-balance by the vagaries of the last (almost) three years.

     What to do? Assume things are returning to the point where predictability is possible. Implement an inventory system that meets the specific needs of a business. To do so, begin with some overarching goals.

     Determine the scope of the inventory. But in reality, inventory should be inclusive. Although property and durable equipment might only be tallied annually, both should be in the mix.

     For all items except property and durable equipment, determine how much information it would be ideal to extract from a tally. And have the inventory system designed accordingly.

     Custom designers can provide retrieval at any level of granularity a company might want. Many businesses will design their own systems or use prepackaged programs. 

     In either case, consider some of the methodology of an organizational unit of the United States Army, the Army Materiel Systems Analysis Activity (AMSAA) unit. AMSAA embeds cost differential in its determination of whether an item is economical to stock (https://armypubs.army.mil/epubs/DR_pubs/DR_a/pdf/web/r710-1_Web_Final.pdf). 

     For example, the variable cost to procure for an item sums up all costs associated with determining the requirements for an item, processing requests to purchase the item, and completing contract actions to obtain the item. That may be more refinement than a manufacturer or distributor requires in the cost to procure, but it does highlight the many costs that are not given a full accounting by businesses. 

     Alongside the variable cost to procure is the variable cost to hold. To be accurate it must include costs associated with inventory losses, storage, obsolescence, and one more. That one more is the loss of investment in the private sector when the army is holding items it does not need. (This is directly analogous to a business tying up its cash in stored items that it could use to innovate or expand.)

     Finally, demand frequency is figured into the cost differential. Twelve requests for the item in a year keep
it in stock. Fewer requests and it’s relegated to purchase-as-needed. (A business would naturally choose its own demand-threshold number.)

     Irrespective of the inventory management system a company deploys, there must be periodic checks on accuracy. Systems can be thrown off when returned items do not get entered properly, refunds are given on sales, and so on.

     An inventory is first and foremost a list. But in 2022 it is also so much more than a list—make it so.