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Inventory Management 101

inventory-management-101-banner Almost every business carries inventory, regardless of the organization’s size. Inventory includes raw materials, work-in-progress, and finished goods. No matter which category a business’ current stock falls within, those items need to be counted and tracked. Accuracy determines whether a company has correct levels of stock – a good inventory management system ensures that accuracy.

Independent vs. Dependent Inventory

Items in a warehouse are often classified as independent or dependent inventory. Independent items are finished products, and dependent items are components of finished products. For example, a car is a finished product and is considered a dependent inventory item. The parts of the car, such as the engine, tires and windows, are components of the car and considered dependent inventory items. Customer orders for some products often have no bearing on the demand for finished products, so these items are also seen as independent. The opposite is true for dependent products. The number of dependent products you need depends on the number of orders you receive for finished products.

Types of Inventory Systems

Inventory systems are of two general types -- continuous review and periodic review systems.
  • Continuous Review Systems
Continuous review systems generally order the same quantity of items in each order. The order frequency varies in continuous systems because the inventory is monitored and orders are placed when items reach a particular level.
  • Periodic Review
With periodic review systems, products are ordered at the same time each period.  The number of items ordered is determined based on quantity levels at the end of each period. There is no set reorder level for periodic review systems.

WarehouseInventory Management and Control Options

The goal of inventory management is to make sure customers can be served. A business shouldn’t run out of an item and it shouldn’t carry excess inventory of an item.  Products must be moved efficiently without overstocking. There are several options for managing inventory.
  • Manual Systems
Manual control systems may work for some small businesses. These systems are simple and easy to put in place. Workers simply walk through the storage area to determine available products and then order more items based on manual counts. The trouble with manual inventory control systems is that they’re a lot of work and prone to mistakes, which might cause over or under stocking of products. For example, if a worker forgets to update the inventory records for a particular product, an order might not be placed for that product. That product’s inventory level may be dangerously low or even depleted.
  • Barcode Systems
To efficiently manage inventory, several pieces of information need to be tracked; for example, the vendor, price of each item, and exactly where in the warehouse the product is stored. A barcode inventory system enables the tracking of every detail, and it eliminates manual data entry. Because an automated inventory management system reduces human error, it adds accuracy.

Inventory Management Maintains Control

A business must know where its inventory is at all times. If inventory isn’t tracked or controlled, then its chosen inventory management system is failing. Signs a business is losing control of its inventory management includes the following:
  • Inventory management tasks aren’t assigned to specific employees.
  • Inventory procedures are inconsistent from person to person – some departments track one way while others track a different way.
  • The current system doesn't account for time lapses.
  • Staff members pick items already tagged for previous orders.
  • Non-warehouse staff members are allowed to freely pick and restock items.
  • Inventory documentation isn’t consistent.
A thorough understanding of inventory management is a company’s first step in controlling its inventory. The next step is to gain control of inventory by setting up an effective inventory management system. It’s impossible to control inventory without an effective inventory management system. The lack of control will cost a business money because more stock is purchased than needed or items are out-of-stock when requested by customers. Keep in mind there are storage cost associated with every item in the warehouse. Also, if understocked, customers will be lost because what they need isn’t available. Get in control of your inventory.  Read how Wasp’s customers use Inventory Control to successfully manage their inventory.