Month: August 2022

Managing every aspect of a company’s inventory – from purchasing and receiving to storage and turnover, and even reorder – in a system, together makes up an inventory control system.

Of course, the various inventory activities may differ from company to company and may be included in different categories.

However, they need to be executed in a logical sequence so that you have a smooth inventory control system.

ALSO READ: Common Inventory Management Problems and Solutions

What Is an Inventory Control System?

Whether you run a brick-and-mortar store or an E-Commerce business, inventory is extremely important – in fact, it’s the biggest asset any business can have.

However, it is essential that you implement appropriate inventory management to ensure you have the required stock at the required time.

Only an accurate stock control system will help you to keep only the requisite amounts of inventory items so that you can enjoy reduced expenses and increased profitability.

It helps in automation and streamlining the process of managing inventory.

How Do you Define Inventory Control System?

A software solution that tracks and manages the inventory of a company across the entire supply chain is called an inventory control system.

It integrates various inventory functions like purchase, shipping, receipt, warehousing, and returns in one single system.

It facilitates automation of manual processes, providing precise details of the inventory in stock, and its location, enabling you to maintain and organize your warehouse inventory properly.

ALSO READ:  What is Zero Inventory?

Inventory Control vs. Inventory Management

Both inventory management and inventory control handle inventory functions, yet there is a difference.

Inventory control focuses on the stock already in your warehouse, and necessitates the knowledge of what inventory you have and where it is located in the warehouse.

It concerns itself with the maintenance of inventory in good condition and its proper organization so that the expenses are minimized.

On the other hand, inventory management additionally deals with reordering of inventory, and forecasting.

Management includes defining reorder levels of inventory along with the reorder quantity so that you don’t face situations of being stocked out, or carrying excessive stock.

Inventory management makes sure that you have the right quantity of inventory at the right time and place.

Inventory control can be taken to mean a subset of inventory management.

ALSO READ: Common Inventory Management Mistakes to Avoid

Types of Inventory Control Systems

As in everything else, evolution and refinement has taken place in inventory control too.

The first systems were nothing more than mere spreadsheets, while now machine learning and AI are making inventory control smarter and more efficient.

There are mainly two types of inventory control systems:

1. Perpetual Inventory System

This is a system that keeps tracking inventory in real-time; the moment a product is sold and its barcode scanned, it is deleted from the database, and the new quantity is shown.

The opposite happens when a company takes delivery of products; they are scanned and added to the database.

The database will now reflect the purchase and the count of the inventory will include these goods as well.

The database is centralized, which means that all modules can access it.

This type of system reflects in-depth views of changes in inventory and provides a precise account of stock level without manually counting the inventory.

It can be used by any business regardless of size or industry and is especially useful for stores with several outlets or high sales figures.

This is the more efficient of the inventory control techniques.

ALSO READ: What is Batch Tracking?

2. Periodic Inventory System

In this system, the inventory is physically counted at predetermined intervals; hence, there is no clarity regarding the inventory level till the manual counting is finished.

Now, this can be an impediment to fulfilling customer demands; you may have to physically check your inventory to see if the product is available for sale.

This is because you had last counted the stock a few weeks or months ago, and it is likely that between then and now, whatever you had was all sold, and you are now stocked out.

Apart from that, manual counting of stock is cumbersome, time-consuming, and prone to errors.

Counting dozens of SKUs may work for smaller stores, but for large business, it is not a feasible system.

ALSO READ: What is Inventory Cycle Counting and What are its Benefits?

What is the Importance of Inventory Control?

When a customer comes to you for specific products and you are not able to meet their need, they will be disappointed – annoyed even.

You end up losing a sale and some profit.

You must have products on your shelves or in the warehouse, whenever you receive an order or customer demand.

While this sounds simple, behind it there are a lot of complex activities like purchasing, receiving, shipping, storage, and selling.

These complexities are simplified by inventory control systems, allowing you to focus on your core business.

ALSO READ: What is UOM in Inventory?

Let us examine the main advantages of inventory control:

1. Real-time Inventory Levels

With perpetual inventory systems, you get updated inventory levels immediately as products get sold, bought, returned, or produced.

Accurate inventory figure received in real time allow you to analyse the flow of inventory to determine effective reorder levels for each item.

This way you can avoid situations of excess inventory and stock-outs.

Thanks to real-time and accurate inventory, you can improve relationships with your customers and employees, avoid backorders and dead stock, and so on.

2. Optimize your Logistics Workflow

The supply chain is a complicated mechanism that involves numerous steps – from the time you purchase or manufacture a product till the time that it reaches your customer’s doorstep.

Not only will you be able to meticulously track a product throughout its journey, but you will also be able to identify the hurdles in your logistics workflows with a robust inventory control system.

It will also give you more time to fix problems and inefficiencies.

ALSO READ: Complete Guide on Make to Order vs Make to Stock 

3. Quality Control

When you implement an inventory control solution, you can exercise better quality control by tracking and managing every aspect of your stock.

The longer inventory stays in your warehouse, the greater its chances of getting spoilt.

By ensuring its rotation throughout your warehouse, you can avoid this problem.

You can track the quality of stock received from vendors, as it will help you determine the following:

• The frequency with which specific products are returned
• The reasons for returning the products – defects, breakage, or anything else
• How do the products move through your inventory?

Knowing these aspects can help identify problems and avoid write-offs.

ALSO READ: What is Negative Inventory and How Can you Prevent it?

4. Save Expenses

When your inventory is not accurate, you can incur expenses in multiple ways.

Not having a product in stock demanded by your customers means cancelled orders and lost sales; moreover, they are likely to buy that or a similar product from your competitors.

If you think of the other side – having too much stock of a product, can cause you to incur carrying costs, taxes, and insurance, along with the risk of shrinkage.

By helping you maintain optimal inventory, an inventory control system can help you save money.

ALSO READ: What is Pipeline Inventory and Decoupling Inventory? 

5. Reduce Inaccuracies of Manual Labour

With manual counting and tracking of inventory, you are open to the risk of fraud and mistakes.

However, when the tracking and managing from purchasing to delivery to the customer is done through an inventory control system, you eliminate the possibility of fraud and error.

6. Enhance Customer Satisfaction

Today’s customer is in a hurry to get their products, and they are not willing to wait.

With accurate inventory, you can quickly confirm the order and ship it out immediately; however, when you don’t have a proper system in place, you may end up accepting orders for products you don’t have.

You face the risk of backorders or cancelled orders, and eventually, unhappy customers.

They may never return, and spread negative feedback in their circles – this has a cascading effect and can hamper your business.

ALSO READ: What is Storage Cost of Inventory?

Challenges of Inventory Control

There is no doubt that inventory control is critical to ensure efficiency in business operations.

As with everything else, it has its own set of challenges – and the more complex your business, the more the challenges.

Fortunately, the challenges are not insurmountable; you can smoothen them and control your inventory effectively.

Let us take a peek at the most common inventory control challenges that businesses face:

Having the Time and Resources

Manual counting, tracking, and managing of inventory necessitate allocation of significant resources.

Employee hours and finances are required substantially; by not prioritizing inventory control, you could end up spending even more time and money later.

In the initial stages itself, you should spend some time to implement a proper schedule of inventory control; this way, things will go smoothly and you will not have to waste much time or money on rectifying problems.

It is also a good idea to include the financial layout for inventory control in your budget.

ALSO READ: Important ERP Modules and Functions 

Visibility

Large businesses with thousands of SKUs, selling via numerous channels, complex warehousing, and fulfilment centres, often find it difficult to have a proper visibility into their inventory.

However, it is imperative that companies have an overarching view of their inventory so that they can perform activities like accounting, sales, and reorders smoothly and flawlessly.

The quality of your inventory can get degraded, and you can even end up with dead stock if you don’t have proper visibility into your inventory.

Inventory control software generates reports that give you enhanced visibility into your inventory; you can get alerts when inventory falls below a certain level.

You can avoid obsolete or dead stock and excess inventory as well. Meet customer demands, and keep holding costs low.

ALSO READ: What is Cross Docking?

Human Error

With inventory coming in and going out continuously, making errors becomes unavoidable.

Suppliers have to send proper invoices which are verified against purchase orders and actual stock.

If there are any errors or inaccuracies at this stage, it can hamper your inventory control.

Human error can be reduced by optimizing your inventory control software and integrating your solutions into one.

This way, the system will notify you in case any discrepancies between actual inventory counts and the accounts payables are discovered.

ALSO READ: What is ABC Analysis in Inventory Management?

Conclusion

Inventory control software like Tranquil enables the integration of numerous functions of inventory management into one centralized and unified system.

We have already read about the immense benefits provided by the right inventory control software. Now you can see it for yourself – all you need to do is schedule a demo at a time and date of your choosing. We will walk you through our software and show you how everything works.

 

Any business that has to handle product inventory, like consumer goods, E-commerce, food, etc. is faced with the constant challenge of maintaining the right stock levels – neither too less nor in excess.

If a high-selling item gets stocked out frequently, consumers will get annoyed and take their business elsewhere.

Managers are aware that carrying too much excess inventory means incurring heavy expenses.

You need to strike a balance between being able to fulfil consumer demand and incurring minimal carrying costs.

Efficient inventory management is a critical requirement for any business that wants to be successful.

Maintaining safety stock is one method of inventory management that helps you have optimal stock with you.

ALSO READ: Why is Cycle Stock Important for Your Business? 

What is Safety Stock?

Safety stock is the excess or buffer stock of an inventory item stored in the warehouse to avoid the situation of getting stocked out.

It helps to brace against demand fluctuation and guard against delays in receiving fresh supplies.

When you maintain a safety stock level, you won’t be caught short because of erratic supply or demand.

Importance of Safety Stock

Safety stock inventory ensures that you don’t get stocked out; even if your vendors delay deliveries or you have unprecedented demand, you will have sufficient quantity in hand to meet the demands of production or sales.

ALSO READ: What is Inventory Reorder Point (ROP)?

In fact, it offers a host of advantages, like:

1. Protects Against Irregular Surges in Demand

Market forecasts may go wrong, or due to any of several reasons, the demand for specific products may skyrocket.

When you have a safety stock of those items, you can keep producing or selling those items and meet customer demand.

Without the safety stock, you may have to turn customers away, or pause production.

2. Buffer Stock to Protect Against Delayed Deliveries

You may have good suppliers who deliver your orders consistently every time within the promised time, so you may not have faced delays in delivery.

But several external factors may impact delivery, like the weather, machinery breakdown at the manufacturer’s, strikes, breakdown of vehicles, or anything else, which can cause your delivery to get delayed.

In such times, safety stock is your shield against possible stocked-out situations, helping you to fulfil demands till fresh stocks arrive.

ALSO READ: What is Storage Cost of Inventory? 

3. Guards Against Supply Chain Disruption

It’s not only your business, but even your vendors who can get impacted by a disruption in the supply chain – unavailability of raw materials, disruption in transportation, natural disasters, failure in procurement, and other factors.

What all of this means for your business is that your lead time for getting delivery of the required products increases beyond the time you had factored in.

However, having adequate safety stock can help prevent disruption in your production or sales.

4. Preventing Loss of Sales

If products that are sold regularly keep getting stocked out, you are likely to face several annoyed customers; they may come back a couple of times, but if it happens too many times, they will most likely buy similar products from your competitors.

Additionally, they may also speak negatively about your brand.

ALSO READ: What is Pipeline Inventory and Decoupling Inventory?

5. Protection from Price Fluctuations

Sudden fluctuations in market price can lead to the cost of your products to rise sharply.

Raw material scarcity, increase in price, regulations and government policies, market demand fluctuations, or other factors may lead to this situation.

Having adequate safety stock can help you overcome unpredictable and challenging situations.

6. Save Expenses

In case you face a sudden shortage of products or raw materials, you may have to resort to urgent purchases from new vendors.

Urgent purchases tend to be more expensive; with safety stock, you will not need to shell out extra cash for your materials or goods.

That brings us to an important question: How much safety stock should you keep?

Every business is unique, with its own requirements and goals; it goes without saying that there is no one single rule for
the one-size-fits-all approach doesn’t apply to safety stock.

Based on various demand and supply factors, different products have different safety stock levels.

ALSO READ: Advantages of ABC Analysis in Inventory Management

Safety Stock Calculation

It is imperative to know safety stock calculation so that you know how much stock to keep in hand; too much safety stock means increased carrying costs, and too little leads to lost sales.

With a proper formula, you can calculate the ideal safety stock for your company.

There are several different formulae for calculating safety stock, and they use different details and parameters.

However, knowing lead time – the time between placing the order and its receipt in your warehouse – is essential for almost all of them.

ALSO READ:  What is Dead Stock – How Can You Avoid It?

Let us look at the different methods:

Fixed Safety Stock

Production planners prefer the method of fixed safety stock.

They don’t use a specific formula, and the quantity remains fixed, till the production manager decides to alter it.

Now this fixed number could be anything – even 0 if the lead time is very short and the frequency of sales or rate of consumption of that item is not high.

However, you do run the risk of getting stocked out in unforeseen circumstances.

Time-based Calculation

Depending on the forecast for a particular product, the safety stock is calculated over a specific time period.

Here, the predicted demand (calculated per statistics) and the actual demand as seen from sales or orders, are combined.

However, it is unable to predict uncertainties in business, so you run the risk of holding excess stock in case your sales are happening slower than your expectations.

ALSO READ: Common Inventory Management Problems and Solutions

The General Formula

This is the simplest and most commonly used method of safety stock calculation.

It calculates the average safety stock a business needs to carry to avoid stockouts.

However, this method also does not take seasonal demand fluctuations into consideration.

The safety stock is arrived at when you multiply the maximum daily usage of an item, or the maximum number of units sold in one day, by the maximum lead time; in other words, the longest time the vendor has taken to deliver your product, and then subtract the average daily usage of that product – which is the average number of units sold per day, and the mean lead time – or the average time the vendor needs to deliver your goods.

In other words, safety stock = (max units sold/used per day x maximum number of days needed by vendor) – (average number of units sold/used per day + average number of days taken by the vendor)

ALSO READ: Tips For Efficient Stocktaking

Heizer & Render’s Formula

When the vendor’s lead time fluctuates significantly, this formula is the apt one.

It provides a precise picture about your lead time, and how often you have to handle late shipments, as it makes use of the standard deviation of lead time distribution.

This method also does not consider the fluctuations in demand for calculating safety stock.

Here, Safety stock = Desired service factor (Z score) x standard deviation in lead time.

Here, the standard deviation in lead time refers to the intensity and frequency by which the average lead time and actual differ from each other.

The desired service factor or Z score allows you to determine how sure you want to be about stocking sufficient inventory.

It is a value that you need to choose to avoid stockout.

The lower your Z score, the lower your chances of having a stocked-out situation.

ALSO READ: Physical Stock Verification and Its Advantages

Greasley’s Formula

This formula takes into consideration fluctuations in demand as well as lead time; therefore, it is considered a more precise method of safety stock calculation.

But this too has its drawbacks, as it does not consider work in progress – that is stock which is in production and not ready to be sold yet.

Here, Safety stock = average demand x desired service factor (Z score) x standard lead time deviation.

Safety stock is a company’s protection against unforeseen situations.

Accurate calculation of safety stock is critical if you want to ensure that you don’t get stocked out and lose sales.

You need to weigh all these methods and determine which one will best suit your business.

ALSO READ: What is Stock Adjustment and Stock Transfer?

Key Reasons for Carrying Safety Stock

Safety stock is not optional or decorative, but essential.

Here are the chief arguments in favour of businesses of all sizes keeping safety stock inventory.

• Unforeseen disruptions and variations in the supply chain can cause you to lose sales and customers. Safety stock will allow you to continue to fulfil customer orders. Long and global supply chains mean greater disruptions than previously seen.
• Compensate for erroneous forecasts and demand is higher; safety stock will tide you over and help you maintain your service levels till your stock is replenished.
• Ensures uninterrupted production or shipping, and smooth supply chain.
• Achieve greater customer satisfaction by keeping enough safety stocks to fulfil consumer demand. When customers get the products that they want when they want, they will be happy, and keep coming back. They will also become brand ambassadors and tell others about your products.

ALSO READ: What is Zero Inventory?

In all of this it would do well to remember that safety stock does not have a one size fits all formula or approach.

The formula or method to calculate safety stock need to be dynamic and must be linked to the accuracy of forecast, variation in lead times, service levels, and so on.

In fact, within a company, you are likely to have hundreds or thousands of SKUs, each with unique demand and usage rates.

Therefore, you will need to have different safety stock levels for each item.

Mere rule-based approaches are not very reliable for calculating optimal inventory levels; you need a sound mathematical approach.

Only then will you be able to balance the opposite goals of reducing expenses and increasing quality of customer service.

Final Thoughts

Calculating safety stock levels for hundreds, or even dozens of products can be cumbersome and monotonous.

However, you can implement a robust ERP like Tranquil which will automate this and other inventory management processes. This will help save a lot of time, effort, and money for your business.

If you are not sure how our software can benefit your business, do schedule a demo at a data and time of your choosing, and we will be happy to walk you through it. Our executives will be on hand to answer any queries you may have regarding the ERP solution.

 

Most businesses have hundreds of inventory items that have been purchased from a few dozen vendors at least; these are shipped or sold to thousands of customers.

The larger the business, the more complex this equation.

Managing inventory of this complexity in an efficient way necessitates the use of smart strategies which help assign priorities.

The ABC analysis in inventory management is one such strategy or model, and it is also referred to as ABC Inventory Classification.

ALSO READ: Common Inventory Management Mistakes to Avoid

What is ABC Inventory Analysis?

ABC inventory analysis is a method of inventory management whereby the Inventory team classifies inventory items into three categories: A, B, and C.

The items are categorized according to their value or importance to the business.

It is a simple and easy method and helps managers to concentrate their efforts on controlling important inventory items more efficiently.

They can implement different inventory control strategies for the three categories so that they hold optimal levels of each inventory item.

ABC Analysis to Control Inventory

The different Stock Keeping Units or SKUs in any business have different values.

While some items may be highly profitable, others may not be, but they may be necessary as an accessory or complementary to another, and so on. Some items may necessitate meticulous management, replenishment, and forecasting.

Therefore, by segmenting all inventory items into A, B, or C, it becomes easy to discover which items need to be managed more efficiently.

Inventory is usually prioritized as per sales or consumption in production (usage value).

The formula to calculate usage value is: usage rate x individual value OR sales volume x unit cost.

Therefore, if 50 units each costing 70 are sold, the usage value will be 50 x 70 = 3500.

The most important and critical items which require the strictest control are classified as A.

Items less important than A, are classified as B.

The least important items are classified as C; they require much lesser attention than A and B category items.

ALSO READ: What is Inventory Cycle Counting?

ABC Analysis Of Inventory Control and the 80/20 Rule

The 80/20 rule is also called the Pareto Principle; it simply means that a small number of inventory items make up the major usage value.

‘A’ classified inventory items are 20% of the items in the inventory but they have the highest usage value – around 80% of the total usage value of the business.

‘B’ classified items that make up about 30% of the inventory items and have usage of about, 10% of the total usage value.

‘C’ classified items make up the rest of the inventory and account for only 10% of the usage value.

Other Types of ABC Analysis Criteria

Apart from usage value, there are types of ABC analysis; of course, usage value is the most popular method.

Inventory items can also be classified according to various operational criteria, like:

• Uncertain supply – items with sudden spikes and dips in demand
• Obsolescence risk – the risk of the item deteriorating or going out of vogue
• Stockout risk – the possibility of the item getting stocked out
• Stockout consequences – the impact on production or customer service due to the item being stocked out

ALSO READ: What is Zero Inventory? Advantages, Drawbacks

The Importance and Advantages of ABC Analysis

After performing the ABC analysis and categorizing all the items into A, B, or C, you have to use this information to make your inventory control and management more efficient.

Let’s look at the advantages offered by this method:

1. Accurate Demand Forecast

Inventory planners can leverage the ABC analysis to forecast the sales of various products, and accordingly manage those inventories.

This can help reduce the holding cost for dead stock or obsolete stock, enhancing your supply chain management.

2. Improves Time Management

The inventory team can focus mainly on Category A items to ensure optimal availability of those items.

This may include a more frequent review of stock levels, updating of sales forecasts, or increased interaction with suppliers to reduce lead times.

3. Develop Custom Inventory Rules

Once you categorize all your inventory into different categories, you can implement tailored strategies to manage each category.

You can establish separate reorder levels and parameters, safety stock levels, and service levels for each category.

Let us say, that by altering the safety stock or reorder quantities of category A items, you can save significantly on the cost; and an improvement in its fulfilment rates may help increase overall availability greatly.

ALSO READ: What is Pipeline Inventory and Decoupling Inventory? 

4. Strategic Pricing

For products that deliver maximum value to your company, you can leverage ABC analysis to optimize the pricing strategy.

By knowing the in-demand products, you can increase the selling price for those, and boost your profitability immensely.

5. Informed Supplier Negotiations

We have seen that businesses earn nearly 80% of their revenue from Category A inventory items.

It makes good business sense to negotiate with vendors for better prices for those items as you purchase a good quantity of those items.

You can also negotiate for reduced down payments, lower or free shipping, or reduced cost of other post-purchase services.

ALSO READ: How Can you Track UOM?

6. Strategic Resource Allocation

Through continuous evaluation of the resources allocated, you can ensure that you always have those items in Category A, that align with customer demand.

When demand reduces, you can reassign them to either B or C, and bring the in-demand items into A.

7. Improved Customer Service

Service levels are dependent on several factors including profit margins, cost of the item, and the quantity sold.

When you know the most profitable items, you can offer the best service levels for them.

8. Better Product Life Cycle Management

You get crucial insights about the stage of a given product in its life cycle, like launch, maturity, waning etc.; this can help you to forecast demand and frame your inventory stocking policies accordingly.

ALSO READ: Debit notes Vs Credit Notes

9. Improved Control of High-Value Inventory

Category A inventory significantly contributes to the success of a business.

With ABC analysis you can identify the A category inventory items in real time and keep track of the demand for those items to make sure you always carry adequate stock.

By focusing your energies on inventory that is a high priority, you increase the chances of succeeding in business.

10. Good Stock Turnover Rate

ABC analysis can help you maintain a good stock turnover rate with the help of data capture and proper inventory control.

11. Lower Storage Expenses

By holding the appropriate level of stocks in each of the three categories, you can decrease the carrying costs that are related to stocking inventory in excess.

ALSO READ: Why ERP User Interfaces are Important?

Disadvantages of ABC analysis

While ABC analysis is an easy and popular way to set priorities for managing the different items in your inventory, as with everything else, there are certain arguments against this method:

Overly Simplified

Some experts opine that ABC analysis makes inventory classification overly simple – and they would not be wrong.

This is especially so when inventory teams perform the classification based not on actual data but on their instincts.

ABC classification is a one-dimensional method, because it does not consider any other factor other than sales value of an inventory item.

Frequency of picking or sales, variation in demand and other factors could be just as important to categorize your inventory items and define the most important items. But these tend to get overlooked when implementing ABC analysis.

Dividing inventory into just three categories robs this method of granularity.

Companies can have thousands of items in a single category; to think that all of those SKUs have the exactly similar characteristics is making too much of a generalization.

ALSO READ: What Every Business Should Know About CPQ?

Static Method

The ABC analysis is not dynamic at all.

Trends emerge and fade frequently in any marketplace, and sales of products can fluctuate wildly.

This means that items could move from one category to another fairly quickly.

Without continuous monitoring and re-classification, your original categorization can become irrelevant and outdated.

For example, your category A products may become category C products, but you may continue to treat them as Category A because you have not monitored inventory and reclassified them.

You could face stockouts of some items and excess inventory of others.

This can harm your business significantly; it can throw your inventory management into disarray and negatively impact your bottom line.

ALSO READ: Guide on Stock Adjustment and Stock Transfer

Time-consuming

As there is the risk of ABC classification becoming outdated in a short time, you need to frequently re-evaluate your categories; and this can take up a lot of time.

Your inventory department may spend too much time in classification rather than taking informed decisions about inventory based on the results of the categorization.

Considering Demand in ABC Analysis

You can take ABC analysis to the next level by cross analyzing the usage value of inventory items with their variability in demand.

This means you will be able to categorize products depending on their value as well as the extent of variance from the demand forecast.

This will give you an idea of how accurately you are able to forecast a specific product or item.

Let us suppose, that some products have regular demand, with others having erratic demand.

These types of insights can help you take informed actions regarding the inventory items to stock, set safety levels, and so on.

ALSO READ: What is Demand Forecasting? 

You can also decide to perform the cross analysis of usage value with the frequency of the item’s sale, or picking.

This will help you to prevent stocking items in excess, that are relatively high in value but move only slowly.

You can make sure that items which are relatively low in value but have regular sales are monitored more closely.

Often these supposedly low-value items have high profit margins, and are hence very important – so you need to focus on such items as well.

Automating ABC Inventory Analysis

One of the most effective ways to overcome the gaps in the ABC analysis method, and to use it more efficiently, is by using the right software.

Effective software can analyze and categorize your inventory efficiently and track it round the clock.

ERP solutions like Tranquil allow not just the basics like ABC analysis and XYZ analysis (for demand) but also offer advanced tools – especially customization to optimize your inventory.

You can perform multi-dimensional item classification that takes into account multiple variables, like:

• Annual usage value = volume of sales * per unit cost
• Number of times an item is picked in the course of 12 months
• The number of units sold or the demand volume
• The frequency of sales of an item

ALSO READ: Understanding the Importance of Distribution Management

This allows a sophisticated inventory classification structure that can be used to frame inventory policies.

This includes setting levels of safety stocks and service level targets for every category and filtering down to the level of the SKUs.

These classifications are constantly monitored and updated, and reclassified as and when necessary.

This ensures that the segmentation is always aligned with market dynamics.

A robust ERP solution like Tranquil can help you manage your inventory efficiently, with its robust inventory management module. You can enjoy increased profitability and reduced costs, and prevent lost sales, or excess inventory. Do schedule a demo to see how our software works, and we will be happy to explain how it can benefit your business.

 

Inventory is one of the most important assets for any business; after all, it is when a business sells goods that it earns revenue.

There are dozens of aspects involved in inventory management; to ensure efficiency, the relevant persons in charge need to be diligent and ensure that, stock can be easily identified, there is no dead stock, under or over-stocking, and so on.

An SKU number is one element that helps in effective inventory management.

What is an SKU?

An SKU or stock keeping unit is a unique alphanumeric code or number that is given to a specific product to make it easy to track and manage.

It is an identifier allocated to individual products that simplifies the task of maintaining records.

You could say that SKUs are the fundamental building blocks of inventory management, as they help to identify products, check stock levels, and determine inventory turnover, and profitability, among other things.

ALSO READ: Why is Cycle Stock Important for Your Business? 

SKU and UPC or Barcodes

An SKU can consist of any series of numbers or alphanumeric codes that you prefer, and they are unique, with every retailer assigning SKUs according to their in-house system.

This means that you could buy the same brand of toothpaste of the same size (say 120 grams) from two stores, and each one will have different SKUs.

An SKU can be any series of numbers or a combination of alphabets and numbers as decided internally, hence there could be several variants of SKUs for the same product.

Barcodes are nothing but versions of the UPC that can be scanned and read by machines.

This means the 120-gram toothpaste of Brand X will have only 1 UPC or barcode, but multiple SKUs.

There is no specific rule for creating an SKU; you just have to ensure that your employees are familiar with the system.

SKUs are simple and do not necessitate machines to understand or break them down.

ALSO READ: Common Inventory Management Problems and Solutions

How Are SKUs Created?

We have already seen that an SKU code is normally made up of numbers, alphabets, or a combination of both.

These alphabets and numbers provide product details like brand, model, colour, size, and so on.

While there is no set rule for creating an SKU, certain best practices have to be remembered:

• Every stock keeping unit code must be unique, and not reused
• Long SKUs may become confusing; it is good to keep it as short as possible
• Special characters like *, #, & and so on, as well as spaces, should not be used as they are vague and can cause confusion.
• Avoid using letters like O and I by themselves as they can be mistaken for numbers 0 and 1.

Example of an SKU Code Generator

So how is an SKU code created?

Let’s suppose a retailer sells Tag Heuer watches in the Carrera style; for this watch with leather strap and blue dial, the SKU may look something like this: TH-CRA-LTR-BLU.

The dashes are used to separate the different items.

Here, TH stands for the brand Tag Heuer, CRA for the model name Carrera, LTR for leather, and last BLU for blue.

This is a simple, easily understood code for store employees.

For products sold in different sizes, the size number is usually appended at the end.

For example, let us say we have to create an SKU for a pair of Levi’s Jeans, 501 models, light blue, in size 34.

It could be something like this:
LEV-501-LBL-34.

ALSO READ: Common Inventory Management Mistakes to Avoid

The Importance of SKUs

Stock keeping units are essential for proper inventory management, and are used by e-commerce sites, brick-and-mortar stores, warehouses, and product fulfilment centres.

Regardless of whether you are an established business or are just starting one, SKU numbers are helpful in managing inventory.

They help in creating a streamlined checkout system, deliver essential data that enables informed purchase of goods, and help minimize human errors, thereby boosting profitability.

Many key business areas can be planned and managed better if you implement a well-thought-out SKU system.

SKUs serve certain key purposes, like:

• Product identification
• Inventory tracking
• Identifying product availability and its quantity
• Reconciliation of product inventory levels
• Detecting inventory shrinkage
• Establishing the most profitable products
• Setting product reorder points
• Saves time with instant product identification

ALSO READ: What is Negative Inventory and How Can you Prevent it?

Let us look at the most important points in detail:

1. Enhanced Shopping Experience

Thanks to SKU numbers, you can organize your store better, helping both staff and customers to find products easily.

You can track products according to brand, type, collection, etc – this helps to organize and find products easily not only on the sales floor but in warehouses too.

You can also offer a user-friendly and attractive shopping experience to your customers with enhanced merchandising – and this means more sales.

You could easily get confused about where your products are displayed without SKU codes; this means annoyed shoppers, hassled employees, and a loss of sales.

2. Points out Small Differences

Going by the example of the watch, let us suppose that the same watch model is also sold with a steel strap, and white, grey, and cream dials.

In that case, the SKUs are likely to look like these:

• TH-CRA-LTR-BLU
• TH-CRA-LTR-WHT
• TH-CRA-STL-CRM
• TH-CRA-LTR-CRM
• TH-CRA-STL-BLU

ALSO READ: What is Pipeline Inventory and Decoupling Inventory?

3. Improved Customer Service

With a streamlined SKU system, you can ensure a smooth and hassle-free checkout system.

When you are able to use SKUs to track products in a POS system, it renders error-free inventory and pricing.

As you check out customers, the till rings up the correct pricing, and decreases the quantity on hand to reflect the quantity sold.

Also, with an SKU search in your point-of-sale system, you can easily check the stock status if a customer is unable to find a specific item.

4. Helps in Cross-Selling

For online retailers, having proper SKUs can help in cross-selling.

For example, when a customer adds a product to their cart, the site can recommend complementary products, based on its SKU.

Let’s say a customer adds a mobile phone to their cart.

The online site will immediately suggest items like screen guard, adapter, earphones, phone covers, and even protection plans.

ALSO READ: What is Backordering? 

5. Inventory Management and Profitability

Retailers lose a lot of inventory to theft, damage, and errors in inventory management, causing them to incur huge losses every year.

Theft can be controlled or detected by installing security systems.

But the main loss usually occurs through administrative and data entry mistakes; these tend to pile up, impacting your bottom line negatively.

A properly implemented SKU system can help prevent loss of profit in the following ways

• Organizing the warehouse and tracking excess stock for order in the future
• Checking and managing inventory shipments to eliminate shortages in shipment
• Using supplier codes to extract inventory quantity for a single vendor to check inventory on the spot
• Draw a sales report for one item type code over a specific period
• Pulling up a report of restock orders for a specific department in a store.

ALSO READ: What is Inventory Cycle Counting and What are its Benefits?

Application of SKUs

Let’s consider this real-life scenario.

A small grocery store sells 10 brands of jam.

A customer walks in and asks the owner for brand Z jam, which the owner recognizes, and says that they do sell the brand.

The owner takes the customer to the area where jam bottles are displayed, only to realize that the particular brand is sold out.

Now the owner is embarrassed and has to apologize to the customer, who in turn gets annoyed, and leaves without buying.

The owner then thinks of assigning unique codes for each product so that a cursory search in the system can reveal whether the product is available, and if yes, how many units are available, rather than do a manual search every time.

Now that SKUs are there, all the owner has to do is check the computer to see the availability, handling the situation much more efficiently.

ALSO READ: Physical Stock Verification and Its Advantages

How are SKUs Used in Ecommerce?

Stock keeping units help in tracking both inbound and outbound inventory.

It is also immensely helpful when you have to work with a third-party fulfilment service provider.

The logistics provider is likely to want to know how many different SKUs are there in your inventory, as it will help them in determining your warehousing and storage requirements, and also the level of complexity of your orders.

Usually, third-party logistics providers store unique SKUs in separate bins or shelves so that the picking process can be optimized.

This also helps to make the packing process more efficient.

The third-party logistics provider is likely to offer an all-inclusive inventory management solution that includes the below-mentioned SKU-based services:

• Inventory syncing with automatic extraction of SKUs from your E-commerce site
• Display of inventory as per SKUs in real time
• Configuring reorder levels for every SKU depending on the stock level at which you want to place new orders
• Bundling varied SKUs for special offers
• Combining the same product across E-commerce platforms
• Special assembly and packaging of SKUs prior to shipping

This means that third-party logistics providers keep track of inventory and offer tailored and detailed analytics and services for your E-commerce business utilizing your SKUs.

ALSO READ: Ways to Improve the Procurement Process

Calculating the Number of SKUs in Inventory

You can calculate how many SKUs you have in your inventory by taking into account all the product variations in your inventory.

This means differences in price, size, colours, models, and so on. How many product variations do you have, and how many SKUs will be there in your online store?

Continuing with the example of the watch, let us say you have two models of the same brand, Carrera and Formula 1.

They come in steel straps, leather straps, rose-gold metal straps, and combined steel and yellow metal straps.

Leather straps come in black, blue, red, green, brown, and maroon. Dials are white, grey, cream, blue, black, and green.

That means 2 models, 4 types of straps, 6 colours in leather, and 6 colours in dials.

So, the number of product variations is 2 x 4 x 6 x 6. That means 288 variations.

This translates to 288 SKUs in your online store.

ALSO READ: Benefits of E-commerce and ERP Integration

Conclusion

SKUs may seem overwhelming and confusing at first, but they are not; in fact, they are a critical part of inventory management and the successful customer order fulfilment process.

Generating each SKU however can be a laborious and time-consuming task.

With a robust ERP system like Tranquil, which has a feature-packed inventory management module, all of this can be automated and streamlined, increasing efficiency, and reducing effort, time, and cost in the long run. To understand how Tranquil ERP can help your business, schedule a demo at your convenient time, and we will be happy to show you.

 

As a manufacturer, some of the questions constantly going through your head are most probably about when you should order your raw materials next, and how much to order.

As important as they are, these questions are also difficult to answer.

They are also extremely important for efficient inventory management.

What is Reorder Point?

Reorder Point in inventory management refers to the inventory point or level at which your stock has to be refilled.

To put it differently, ROP tells you when exactly to order materials so that you don’t get stocked out.

Usually, it is set at a level slightly higher than the minimum so that in case you face an unforeseen delay in getting delivery of the order, or have a sudden spike in demand and your present materials get used up, you are still safe.

ALSO READ: Benefits of Stock Status

Difference Between Reorder Quantity and Reorder Point

You need to remember that inventory reorder point is not the same as reorder quantity.

Reorder level and reorder point are the same – the inventory level at which stock has to be ordered again.

Reorder quantity, on the other hand, is the quantity of stock to be ordered when the stock reaches the reorder point.

In other words, a reorder point is an indication of when to send a purchase order for additional stock, and reorder quantity specified the quantity of goods to be ordered.

Reorder level is more important here as you first need to establish when to place the order after considering the following factors:

• Quantity of goods that get used during the lead time
• Security or safety stock
• Renewal period

Once it has been decided that the order has to be placed, then the relevant manager will decide on the quantity to be ordered after considering these factors:

• Per unit holding cost of the stock
• Cost of placing the order (including the cost of goods and shipping)

Avoiding stockouts is the key risk that has to be mitigated when calculating the ROP inventory, while the per unit cost of holding inventory is the biggest concern while determining order quantity.

ALSO READ: What is Dead Stock – How Can You Avoid It?

Understanding the Importance of Reorder Points

As the owner or inventory manager, your priority should know when to order new stock.

Purchasing additional stock when you already have a lot of stock in hand will only lead to excess inventory, increasing your carrying costs.

But if you wait till your stock reaches zero to place the order, you are likely to miss potential sales, which means unhappy customers.

If your lead time – the time taken for the stock to reach you after placing the order – is long, you will end up losing even more sales.

However, if you establish a reorder point for inventory, you can ensure restock at the correct time and fulfil customer demands without being stocked out; in short, you can achieve inventory optimization.

ALSO READ: What is Storage Cost of Inventory?

Calculation of Reorder Points

You need to set reorder points for every item in your inventory, as the consumption rate of each is likely to be different.

The inventory reorder point formula depends on the following factors:

• Lead time or the number of days taken for the goods to reach you once ordered
• Safety stock, or the buffer stock of extra goods you maintain to ensure adequate supply and order fulfilment
• Daily average usage, or the number of units sold or consumed for production on an average day for that item

Inventory Reorder Point Formula

There are two ways to calculate the reorder point – with safety stock, and without safety stock.

ROP will also differ for different vendors as the lead time is likely to be different for each.

Safety stock is maintained by businesses to tide through unexpected surges in demand or delayed shipping.

ALSO READ: What is UOM in Inventory?

The Formula for ROP with safety stock

If you are a retailer of branded electronics, and you sell 50 laptops every day.

Your supplier requires 10 days to deliver the number of laptops you order.

Your buffer stock should last you 5 days.

Now let’s calculate your reorder point.

Lead time: 10 days.

Safety stock: 5 days x 50 laptops = 250 laptops

ROP Formula = (daily sales x lead time) + safety/buffer stock

This translates to (50 x 10) + 250 laptops

500 + 250 = 750 laptops

Here, the reorder point is 750 laptops; this means that when there are 750 laptops remaining in inventory, you need to place an order for additional laptops.

This will help you fulfil customer orders until the fresh stock of laptops arrives.

ALSO READ: Why Physical Stock Verification is Necessary?

Calculating ROP without Safety Stock

Not all businesses maintain safety stocks.

Some businesses have a lean or zero inventory policy whereby they maintain bare minimum stock to reduce carrying costs, in such instances, you can calculate the ROP thus: multiply average daily sales x lead time.

Without safety stocks, your ROP, as well as order frequency, are typically higher.

Calculating Reorder Levels without Safety Stock:

Let us continue with the same example of the laptop retailer.

Average daily sales = 50. Lead time = 10 days. 50 x 10 = 500.

This means that you need to place an order for new laptops when there are 500 laptops remaining in inventory

Calculating ROP for Different Vendors

Most businesses purchase materials or goods from multiple vendors, each with their own lead times.

It makes sense, therefore, to have separate reorder points for each inventory item.

Apart from laptops, let’s say you sell Bluetooth speakers and monitors.

Both are sold by different vendors and have separate lead times.

Let’s say the speakers have a lead time of 4 days and the monitors have a lead time of 12 days.

On an average day, you sell 60 speakers and 10 monitors.

Let us assume that you don’t maintain safety stock.

In that case, your reorder point for the Bluetooth speakers will be:

Average daily sales x lead time = 60 x 4 = 240 Bluetooth speakers.

You should reorder when 240 Bluetooth speakers remain in inventory so that you have enough stock to meet customer demands for 4 days.

Your reorder point for the monitors will be:

Average daily sales x lead time = 10 x 12 = 120 monitors.

This means when 120 monitors are left in stock, you should place orders for fresh stock; and you have enough monitors to fulfil customer demands for 12 days.

Reorder levels are critical for efficient inventory management.

Not only does it help you reduce carrying costs, but it also helps prevent both overstocking and understocking, and ensures you have adequate stock to meet customer demand so that you don’t lose sales.

ALSO READ: Why Distribution Management is Important?

Replenishment Models

Various models of stock replenishment are followed by different businesses, depending on their overarching inventory policy.

The policy comprises when and how much to order, among other things.

The objective of these models is hence, to establish the optimal reorder levels and reorder quantities of the different inventory items in stock.

When to order is usually fixed, or depends on when the level of an item in stock reaches a certain point, as determined by the formula we saw above.

There are ways in which both of those can be combined so that you can have a fixed schedule as well as quantity.

There are a few things to keep in mind while choosing your ideal replenishment model.

There are different aspects that will impact demand for specific products:

• Consider if the consumption of an item in your business is constant or variable
• You either know the demand or it is random and stochastic
• Is your demand steady, continuing through the cycle, or does it concentrate in certain periods

ALSO READ: Why ERP User Interfaces are Important?

Each type of demand will have a range of lead times, which will also affect your decision.

Your lead times could be very short or very long – and even those times may vary by vendor, season, and market condition.

You also may need to order multiple items; for example, a garment manufacturer will need to order the fabric, threads, buttons, lace, elastic, and so on.

It is quite possible that each item is supplied by a different vendor, and that even if you place the order at the same time, they may have different lead times, and arrive at different times.

Ergo, you may need to have different reorder points so that you get each item in time to produce the next batch.

The Importance of Calculating Inventory Reorder Points

Establishing reorder points ensures that you don’t get caught short for your next stock.

When there is a precise reorder point for every item, you can ensure that there is adequate stock in hand to meet customer demands.

ALSO READ: Difference Between Procurement And Purchasing

Additionally, you can also enjoy these benefits:

1. Reduction in Inventory Cost

When a business stocks raw materials or finished products in excess of what is required to meet consumer demand, it is not a prudent usage of capital.

With reorder levels, businesses are better able to understand finances and allow them to maintain minimal inventory based on consumer demand.

2. Avoid Stockouts

While it’s true that carrying excess inventory can increase the holding costs, having too little stock puts you at risk of losing sales, and consequently, customers.

After all, customers are not likely to wait too long to receive their orders.

However, all of this can be avoided by setting reorder levels and maintaining optimal inventory levels.

You have a clear picture of when exactly to order additional goods or raw materials.

ALSO READ: Understanding Sales Management in ERP

3. Improved Forecasting

Calculating reorder levels is inextricably linked with knowing the market trends that are prevalent in a certain period.

When you closely follow and examine the reorder level for an item, you will be able to assess the demand for that product more accurately in the future.

It also provides reassurance that you have used the available resources effectively.

ALSO READ: Inventory Management Mistakes and Tips to Avoid Them

Final Thoughts

If you are a small establishment dealing in only a couple of items of raw material or finished products, you may be able to calculate the reorder points manually and keep track of every detail.

Still, it entails a great deal of effort and time.

For an enterprise with hundreds of items, it is almost impossible.

Tranquil Cloud ERP offers an easy and convenient way of doing it. The inventory management module automates all of these functions and does much more to help you manage your inventory efficiently. Schedule a demo at your convenience so that we can tell you how it works and how your business can benefit.

 

Inventory is one of the most critical assets of a business, and it needs to be managed efficiently.

Sufficient inventory is required on hand to meet production needs and fulfil customer orders.

Too little, and you may need to pause production or delay shipping; too much, and you run the risk of high storage cost of inventory as well as other potential risks like spoilage, theft, and so on.

All these factors need to be thoroughly thought about before deciding the quantity to store.

Before delving into what constitutes inventory storage costs, let us first understand why a company stores inventory.

Reasons for Holding Inventory

Striking the perfect balance between reducing expenses and carrying sufficient stock is easier said than done.

Most businesses fear that with inadequate stocks, they may miss out on sales and annoy customers.

ALSO READ: What is Landed Cost and How to Calculate It?

Here are the most common reasons that businesses hold inventory:

Safety Stock

Having just enough stock to fulfil the projected demand can be risky in the event of sudden demand spikes.

This encourages companies to keep some safety stock in hand, especially for popular items.

Seasonal Demand

Most retailers and some manufacturers have seasonal demand, earning most of their revenue in a few months of the year.

Air conditioners will sell more in the summer, while jackets and woollens will see a spike in demand close to winter.

To meet these seasonal demands, companies often stock up on inventory just before the start of the busy season.

Cycle Inventory

After forecasting sales, businesses often buy cycle inventory, which is simply inventory needed to meet the projected demand for different products.

Unlike safety stock, it is not purchased as a buffer to cover the unexpected but to cover the expected and forecasted sales.

ALSO READ: What is Zero Inventory? 

In-transit Inventory

This is stock bought by the company but not received at their warehouse yet.

Depending on the distance between the vendor and the company, the lead time can be a few months too, meaning that inventory could take a long time in transit.

But this stock needs to be accounted while they plan purchases for the near future.

Else, they may end up ordering too much.

Dead Inventory

Stock that can’t be sold is usually a write-off but continues to languish in some warehouses.

Unfortunately, it increases carrying costs without the management realizing it.

The storage cost of inventory can be so prohibitive that your inventory can become a liability for you – in spite of it being the most essential thing for a business.

Some experts stress on the need for minimal inventory to keep the inventory cost as low as possible.

Let us understand all about inventory carrying costs first.

ALSO READ: What is Dead Stock – How Can You Avoid It?

What is Inventory Carrying Cost?

This is an important KPI that allows you to establish if your operations are efficient or not.

If your carrying costs are very high, it could indicate that your business has excess inventory than what it needs.

You will need to rethink the quantities or the frequency of orders so that you don’t hold stock for too long.

There are four main categories of inventory holding costs – capital, service, risk, and storage expenses.

Risk includes theft, shrinkage, spoilage, obsolescence, and depreciation.

Capital costs refer to the amount you spend on purchasing inventory, interests, fees, etc; storage cost is lease, mortgage or rent for warehouses, utilities, labour, admin expenses.

Service costs refer to software, taxes, insurance, and so on.

We will now take a detailed look at what constitutes storage cost of inventory.

ALSO READ: Common Inventory Management Mistakes to Avoid

Inventory Storage Cost Components

Facility Cost

This expense is more or less fixed, and refers to the cost of the warehousing facility, depreciation on it and storage racks, insurance, wages of staff, electricity and other utility bills, etc.

It can be assigned only to the inventory that is inside the warehouse, and not to the individual inventory units.

Material Handling

Labour expenditure is a huge component of the amount spent on handling materials; labour is required for unloading, unpacking, storing in racks, labelling, picking, packing, loading, and so on.

Employee cost can be reduced by arranging the warehouses and storage of inventory items in such a way as to increase the productivity of employees and reduce the time they spend walking all over the warehouse to pick or put away items.

One way is to store the highest selling items closer to the packing station, or introducing some automation to supplement your human employees.

You can also try out different methods of picking, and implement software to map the best picking paths for your workers.

This will help increase efficiency and picking, and make it faster, as well as reduce your labour costs.

Material handling also includes the machinery and equipment used for handling the stock like forklifts, cranes, bins, and the like.

By storing fewer items in warehouses, a business can reduce its material handling cost considerably.

ALSO READ: What is Cross Docking?

Shrinkage

Some perishable items are liable to shrinkage in storage; this can be due to natural causes like evaporation, theft, transit damage, fraud, errors in records, and so on.

The higher the inventory that you hold, the more you are likely to lose to shrinkage.

To lower this cost, you could install CCTVs to find out if employees are stealing and dismiss them, ask vendors to be more careful with packing, and carry out physical counting.

ALSO READ: Why is Cycle Stock Important for Your Business?

Cost of Capital Funds

If a business borrows money to purchase stock, they are liable to pay interest on it.

This cost can be directly assigned to the inventory it is used to purchase.

Also, even a single unit of that inventory can free up funds to repay the debt as it gets sold.

This is a variable cost as the market interest rate often fluctuates.

However, tying up too much money in inventory can hamper your cash flow and probably even make it more urgent and expensive to raise more capital.

By investing smartly in forecasting software, you can purchase the right amount of inventory and probably bargain for more favourable prices and payment terms with vendors.

ALSO READ: How Can you Track UOM?

Insurance/Taxes

Most organizations purchase insurance policies to protect their inventory as it is subject to several risks as we saw above.

Once insured, even a devastating flood or fire will not cause you great loss; however, you must remember that your insurance premiums are linked to the quantity of inventory you store in the warehouse.

Therefore, the more the inventory, the higher your premiums.

The same goes for your taxes as well.

By storing a lesser quantity of inventory, you can reduce both your insurance premiums as well as taxes.

You could also plan things such that you sell the inventory you hold prior to the date when your inventory has to be checked to calculate your tax liability.

Administrative Costs

Several heads of expenditure can be categorized as administrative costs.

These include but are not limited to:

• Warehouse cleaning and maintenance
• Property tax
• Depreciation of equipment and building
• Transportation.

Companies with large warehouses and more inventory are likely to have higher admin costs.

ALSO READ: What is Backordering?

Risk Mitigation

Risk mitigation expenses include the cost of insurance, installing CCTVs, employing security guards, sprinkler systems, alarms, waterproofing, and other measures taken to protect the inventory.

This is also mostly a fixed cost, similar to the facility expenses, and relates to the inventory value.

Obsolescence

Certain types of inventories become unsaleable over time due to several reasons: they could be perishable as in the case of produce or food products, go out of fashion like clothing and footwear, or be made obsolete by newer, advanced models, as in the case of appliances and electronics.

This is generally an incremental expense and is usually linked to goods with low turnover, and to the inventory value.

Delayed Innovation

It could happen that a business is almost all the time concentrating on moving out the additional inventory it has.

This leaves very little time for the company to innovate and come out with new and more efficient product offerings for their customers. This can create a pretty negative image about the company in the minds of the customers.

As you can see, most of the inventory holding costs are of a fixed nature.

Therefore, a company with an empty or near-empty warehouse will have very little incremental expense if they have a couple of extra inventory units.

A business that has a full warehouse, however, is likely to have to deal with heavy expenses to store the excess inventory units.

The only way that this fixed expense can be reduced by a business is to ensure that they do not store huge quantities of inventory in their warehouses for long periods of time.

ALSO READ: What is Batch Tracking?

The Formula for Inventory Storage Cost

We have already seen that regularly measuring inventory storage costs can help you determine if you’re spending too much on storage and whether you need to change your production and purchase schedules.

To get the inventory storage cost, you first have to add all the expenses discussed above, for a whole year.

Next, you divide that cost by the total value of the inventory.

To get this as a percentage, you multiply the answer by 100.

Inventory storage cost = total storage cost / total value of inventory x 100

ALSO READ: Demand Forecasting and Its Importance

Why Is it Important to Calculate the Cost of Inventory Storage?

The storage cost of inventory can take up to 25% of the amount spent on inventory, which means it can impact the financial health of a company.

They can face serious cash flow issues if they are unable to measure the cost of carrying inventory; this can be resolved by implementing a robust inventory management system.

Another reason that you must calculate inventory holding costs is that you may have so much money invested in your inventory that you may have to forgo certain growth opportunities or lucrative investment opportunities.

And this may well happen without the management realizing that the storage cost of inventory is causing the problem!

ALSO READ: Tips For Efficient Stocktaking

Other reasons why knowing the inventory storage cost is important are:

Production Planning

When a business realizes the cost of storing inventory, the leaders can reconsider their production schedules.

Let’s suppose that the manufacturing time for product X is very short; the management can decide to stock a smaller quantity of this product.

If product Y is a hugely popular selling item, it makes more business sense to allocate more space in the warehouse for this product.

Profitability of Existing Inventory

When you calculate the cost of storing inventory and track the value of individual products, you can have a clearer understanding of how much profit you can make from the inventory in hand.

As holding cost is a huge part of inventory expense, you can easily measure item-wise profitability after deducting it.

ALSO READ: A Complete Guide to Cash Flow Analysis

Inventory Accounting

As inventory is a major expense for most companies, you must ensure that you calculate the storage cost of that inventory correctly, and also the value of the inventory items.

This information is necessary for the accounts department to generate financial statements accurately.

Decrease Inventory Cost with the Right Software

Investing in a robust inventory management software like Tranquil will provide you with innumerable options to optimize your inventory and reduce inventory carrying costs.

This smart investment will help you save a lot of money in the long run.

ALSO READ: Differences between Debit notes and Credit Notes

Book a demo with us to know more! See how Tranquil ERP and our Inventory Management Module can bring more efficiency into your business. Happy to answer any queries you may have.

 

 

Inventory is the most critical asset for a business, and managing it efficiently is essential for business success.

Today we will examine what a UOM is and how you can track it.

What is UOM in Inventory?

An inventory UOM or unit of measure is the standardized measurement unit used to count stock items and to express them as specific quantities.

Pieces, litres, kilograms, meters, etc. are some examples of UOM.

Units of measure help in quantifying and tracking items in your inventory.

The physical units help in measuring and managing the different items and help in planning their purchase to ensure fulfilling of customer orders.

Depending on the transactions, different units of measures are used for the same inventory item.

For example, you may purchase cotton fabric in kilos but may use them in production in meters.

ALSO READ: Important ERP Modules and Features

Types of UOM

Let’s take a look at the different types of inventory units of measure:

Stocking UOM

This is the unit of measure used in warehouses for quantifying inventory items.

Inventory transfers, picking, orders, container management, etc. are some of the warehousing transactions where stocking units of measure are used.

These UOMs help make warehouse operations simpler.

ALSO READ: Guide on How Do ERP Systems Work 

Ordering UOM

As the name suggests, it is the unit used when placing orders for purchasing inventory items, and for sales orders as well.

Shipping UOM

This is the UOM used for shipping operations like unloading, loading, and packaging.

Standard UOM

Standard UOM means the measurement unit stays the same for ordering, stocking, and shipping.

ALSO READ: Understanding Different ERP Systems

Importance of Unit of Measure

UOM helps in quantifying inventory items easily understood by all relevant parties, and hence is critically important in inventory management.

UOM makes it easy to understand how much a business is buying or selling, what price they have to pay, and so on.

Prices are always expressed in terms of UOMs; for example – SAR 500 per kilo, or USD 200 per box, and so on.

Without a well-defined unit of measure in the order and quotes, communicating the exact quantity becomes difficult, leading to confusion.

Units of measure must also be standardized so that all relevant parties have a clear understanding with regard to quantity and total price.

This is especially important in international transactions.

For example, some countries may use kilograms while others use pounds.

ALSO READ: Common Inventory Management Mistakes to Avoid

UOM Example

Let us suppose that a retailer has to order rice to stock in his supermarket, for sale to the end-users.

Here it is critical that the retailer defines the unit clearly.

Merely mentioning a number – let’s say 350, can cause misunderstanding.

The retailer may have kilos in mind, while the wholesaler could assume sacks – with each sack weighing 50 kilos!

Therefore, it is important that the retailer clearly mention the unit as kilograms while placing the order so that there is no ambiguity.

Factors to Remember When Creating Units of Measure Labels

Here are some tips that will help you to develop your UOMs.

• It is a good practice to keep all your abbreviations in lowercase; kg instead of KG for kilograms, pc rather than PC for ‘piece’.
• Make sure that whether its singular or plural you use the same UOM. For example, 1 kg and 100 kg (not kgs) or 1 kgs and 100 kgs. This way there will be no confusion.
• If individual pieces are counted, use only one from ‘each’ or ‘piece’ (ea or pc); using one UOM sometimes and another some other times will lead to chaos.
• The units in which you normally buy an inventory item should be designated as the default unit of measure.
• Make sure there is consistency in your UOM

ALSO READ: ERP in Accounting and Financial Management

The Importance of Tracking Multiple Units of Measurement

Certain items are easier to track than others; let’s take the example of shoes; you buy them as x number of pairs, stock them in pairs, and sell them in pairs.

However, not all products are like that; this is especially so if you buy raw materials in bulk, process them and sell them as finished products.

This would entail breaking down the product into different units of measurement.

Steel rods for example your company buys them say by weight.

But at your factory, they are cut into small pieces for sale.

So how do you account for them – by length or weight?

You may purchase an item like a soft drink in crates, but store and sell them as individual bottles.

Here it is important to know how many cola bottles are packed in a crate.

ALSO READ: What is Cross-Docking and How Does it Work?

Hence, we can see that we need to remember three categories of measurement units to track them:

• The unit in which you purchase or receive the inventory or Purchasing UOM
• The unit you use to track the item or Standard UOM
• The unit in which you sell the item or Sales UOM

It may not be necessary to have all these measurement units for each product; however, it’s a good idea to have a UOM that shows the way you track that item – the standard unit.

This will allow your employees to relate to the products in the manner they are familiar with, without any mix-up as the product is moved from purchase to sales.

You can also create your own units to be used internally for convenience.

For example, if you find it difficult to track an item in pieces, you could use dimensions.

For example – instead of just packing bags, you could refer to them as 12×16 bags and 14×18 bags (dimensions)

ALSO READ: Ways to Improve the Procurement Process

Tracking Inventory Items in More Than One UOM

It is possible to use the two UOM features; the primary unit is often used for purchasing, pricing, producing, receiving, packing, and shipping but the secondary is used for determining the pricing.

Say you need to purchase, order, or transfer an item in a UOM different from the pricing and invoicing UOM.
Here are a few examples:

• You receive rice by the sack but price them by the kilo
• You receive mangoes by the kilo but you price and sell in numbers
• You receive steel in sheets but price it per ton

The weight of each mango is different as they are of different sizes.

You may sell 10 different mangoes at a different prices as the weight for each is distinct.

Here you will use the primary unit piece while stocking the mangoes, and the secondary unit of grams when you price it.

An average crate of mangoes may weigh 10 kilograms; so, you use that unit for stocking.

The actual weight of each mango will determine the price of each mango – what you bill your customer.

You can use the dual UOM feature to track items in both the primary and secondary units of measurement at the same time.

This can be done throughout the procure to pay and order to cash processes, in various modules like Procurement, Inventory Management, Manufacturing, etc.

ALSO READ: How Does Landed Cost Affect the Cost of Inventory?

It is essential to record the correct weight of the item you buy or sell so that you can do accurate costing, pricing, and invoicing of that item.

Give an estimate of the price during purchase or sale, and ensure maximum value as per the precise weight that you have received or shipped.

In the case of perishables, the weight may reduce between the time of purchase and sale – evaporation causes weight loss while in storage.

Therefore, it is important to weigh the item just before it is shipped and price it as per this weight.

The Order Management feature allows the creation of a sales order in the primary UOM of the item, and uses the item or standard conversion to calculate the quantity in grams or any other secondary unit.

You can track an item in a unit different from the unit you’re using for stocking.

Say you stock and track the customer’s order in cases, but use kilos to track the quantity for pricing and shipping.

This means you can use both case and kilos to track that item.

Automated flows can be used for updating order lines, and invoicing them as per the primary or secondary quantity used for shipping.

In case you have to transfer goods internally, you can generate the transfer order and fulfil it in the primary unit, and calculate the pricing as per the secondary unit.

ALSO READ: What are Backorders and How to Manage or Avoid Them?

Benefits

These are the benefits of properly tracking items in different units of measurements:

• You can charge customers accurately, and as per the quantity you actually ship, that is, in the secondary unit of measurement.
• With accurate billing, you can boost your profits
• You can have more accurate reports by using the secondary UOM and quantity in them.
• Proper tracking of item UOMs will not only help you enhance revenues but to also deliver greater customer satisfaction.

Link your UOMs to Prices and Cost

By linking your UOMs to your prices and expenses, accounting becomes automatically easier, and your business also becomes more flexible, as you can sell products with different UOM.

The best practice would be to link your price and cost to the product’s smallest UOM, the one you use as the standard unit of measurement.

Therefore, in case you receive sunglasses in cartons, you must cost and price them per pair, and not cartons, if you’re selling them in pairs.

ALSO READ: Challenges in Procurement and Supply Chain

Using Software to Automatically Track UOMs

While spreadsheets are very useful to track inventory, they cannot be scaled; so, when you reach the point where there are numerous items to update, you are likely to make mistakes.

It makes good business sense to shift to robust inventory software like Tranquil Cloud ERP before you reach that stage.

Tranquil inventory management module allows you to tie a specific unit of measure to every item and use the appropriate unit for specific items.

This means that you are saved from the worry of remembering which unit to use at different stages like purchasing, shipping, and so on.

With Tranquil, you get the appropriate UOM in the correct context, with the right cost and price assigned.

Still, confused about how it works? Schedule a demo of our product when it’s convenient for you, and we’ll take it from there. Our executives will be happy to walk you through the software and answer any query you may have about its working.

 

Cash flow refers to how much cash and other liquid assets like shares a business spends and earns over a specific period of time.

The amount of cash on hand establishes how much flexibility a business has; the less cash you spend, the more space you have, and higher the valuation.

It’s different from profit in the sense that, unlike profit, it does not refer to the money that is remaining after subtracting your business expenditure from your total income.

ALSO READ: Benefits of ERP in Accounting and Financial Management

Understanding Cash Flow Analysis

In order to ascertain how liquid and solvent your business is, you need to track and study three types of cash flow:

• Cash flow from business operations
• Cash flow from financing activities
• Cash flow from investments

All of the above are included in the cash flow statement of an organization.

During a cash flow analysis, companies compare transactions in these three categories to check the revenue and expense sources.

This helps them to establish the status of the company currently.

Remember, however, that spending money is not always bad, and bringing revenues in may not always be good – it depends on the type of cash flow.

ALSO READ: What is Demand Forecasting? 

Remember:

• Analyzing cash flow aids in understanding the amount of cash earned or spent in a specific financial period by a business
• To maintain a viable business, it is critical to understand your sources of income and expenses
• Profitability does not mean you have positive cash flow, and negative cash flow does not mean the business is at the loss.
• Corollary measurements like unlevered or free cash flow can offer deeper and distinctive insights into the financial health of the business.

Explaining Cash Flow Analysis

We have already seen what cash flow is and how it’s measured from various activities in one cash flow statement.

Apart from measuring the profitability of your business via the P&L statement, this analysis provides vital information about its financial status.

This statement sets out the source of the money: sales, investors, loans, or anything else.

Similarly, it tells you about the cash outflows too.

A temporary negative cash flow is usually not a big problem but if it continues for a long time, most businesses would not be able to sustain it.

A newly established business is likely to spend more on marketing and growth-oriented activities and hence is likely to have negative cash flow.

As long as creditors and investors are ready to provide continued support, it won’t be a problem.

However, it is essential that the cash flow becomes positive to ensure the business stays viable.

It’s only when you review your cash flow statements properly that you can discover if there any problems or if there is a healthy cash flow.

ALSO READ: Top Benefits of E-commerce and ERP Integration

Additionally, you need to look into different cash flow versions like free cash flow which looks at expenses, not of a cash nature, interest payments, working capital changes, etc. which give you a better picture of your operational cash flows.

Your cash flow before considering your financial obligations is unlevered free cash flow, and levered free cash flow is about cash flow post those obligations.

Assessing and following the different cash flows could be very valuable when it comes to financial planning for future financial periods, and even in preparing for possible economic slumps or low sales.

Cash Flow Analysis Basics

First off you need to generate a cash flow statement about the three types of cash flows.

• Operating activities cash flow show cash received from sales, after deducting operating expenses including salaries, utilities, rent, and supplies.
• Investment activities cash flow shows funds spent in acquiring long-term investments like property and other fixed assets, and shares and other financial instruments.
• Financing activities cash flow shows your borrowings, lending, the money you put in, and so on.

ALSO READ: What is Inventory Cycle Counting?

Importance of Cash Flow Analysis

Now that we have understood what cash flow analysis is in detail, let us look at the importance of cash flow analysis.

A cash flow analysis establishes the working capital of a business.

This is the money that the business has for running everyday operations and completing transactions.

Working capital = current assets – current liabilities. Current assets are liquid assets like cash. Current liabilities are those that are due in the upcoming accounting period.

Analyzing cash flows enable you to see whether your business can pay its dues and earn enough revenue to continue operating for the long term.

When negative cash flows continue for too long, it could potentially mean bankruptcy; positive cash flows indicate good times in the near future.

ALSO READ: Benefits of Retail ERP in Business

Cash flow analysis is one of the best measures of the performance of a business due to these reasons:

It is Measurable and Comparable

Cash can be quantified, and it’s tangible and measurable in standardized units that are universally accepted.

Cash flow is very useful to compare two companies, even if they are in different industries and geo-locations.

It’s Tough to Falsify

Unscrupulous businesses often resort to profit inflation, to make it seem as if the business is doing better than it actually is; this is mainly done by artificial boosting of asset values.

The same is not possible with cash.

ALSO READ: Debit Note vs Credit Note

It is a Universally Accepted Tangible Store of Value

You may have to convince people about the value of goodwill, intellectual property, and so on, but not about the value of say SAR 2 million cash.

That everyone knows, and values.

The Benefits of Cash Flow Analysis

Short Term Planning

A cash flow statement is an important tool that can be used for planning in the short term, and to control cash.

Every business must have sufficient liquid assets that will allow them to meet the different financial obligations as and when they become due.

Cash flow statements enable the finance department to project the cash flow for the upcoming period, basing it on past cash inflows and outflows.

ALSO READ: Guide on Make to Order vs Make to Stock

Provides the Details of Expense Heads

Certain payments made by the company don’t show up in the profit and loss statement, but they reflect in cash flow statements.

The cash flow statement shows in detail where exactly the business spends its money.

We can understand this better with an example.

Let’s suppose a company has taken a loan and is paying the principal amount off; this will not turn up in the P&L statement, but it will be reflected in the cash flow statement.

Again, a situation where the company is profitable but lacks the liquidity to pay off its dues.

All such issues can be easily detected with the cash flow analysis.

ALSO READ: How to Calculate Job Cost?

Creates Additional Cash

The primary aim of any business is to be profitable, and it’s the profit that helps in creating cash.

However, there are other ways in which cash can be created in a business, and these can be identified by analyzing cash flows.

If you depend solely on profit and loss statements, creating additional cash can be very difficult.

For example, more efficient use of your inventory, collecting receivables quicker from your customers, and so on, can help you bring in excess cash – and this information is available in your cash flow statement.

Revealing the Cash Planning Results

Cash flow statements help companies evaluate the success of their cash planning by comparing the actual results with the projections laid out in the cash budget or statement.

These insights will help businesses take better decisions for the future.

Let us suppose that the company predicted an expense of SAR 5000 for acquiring a particular capital asset but the actual amount came to SAR 7500.

The difference between the projected and actual expenditure can be recognized and factored into the projection for the next financial period.

ALSO READ: Physical Stock Verification and Its Advantages

Long Term Planning

Cash flow analysis and prepared cash flow statements help businesses plan long-term cash requirements.

Business growth depends on the savvy long-term financial planning the company does.

The cash flow statement uncovers the crucial changes a company must make in its financial planning and allows the management to prioritize important activities.

For example, the cash flow projection can help management to determine the ability of the business to repay long-term debts as it depends on cash availability.

Knowing the Optimal Cash Balance

Cash flow statements also help businesses to determine the optimal cash balance level, which helps management to see if there is an excess or shortage of cash and if funds are lying idle.

These factors help businesses to take smart decisions around cash planning.

Let’s say the statement shows a cash surplus, and there are funds lying idle; this money can be invested.

On the other hand, if there’s a deficit, money can be borrowed in time to overcome the deficit.

ALSO READ: What are the Key Stages of Fixed Asset Life Cycle?

Helps in Working Capital Analysis

Working capital refers to the liquid assets like cash that the business has in hand to run its daily operations.

It is important for investors to be aware of the movement of the working capital of a business.

Cash flow can be increased by collecting receivables faster, settling payables later, and so on.

Performing The Cash Flow Analysis

The first step in performing a cash flow analysis is to get the three different cash flow statements ready.

ALSO READ: Ultimate Guide to Dropshipping

Generating the Cash Flow Statement

The most commonly included line items in the cash flow statement are:

• Proceeds of sales of goods and services
• Payments to employees
• Payments to vendors for supplies and inventory
• Rents, lease payments
• Payments of utility bills
• Interest on loans or any long-term debt
• Interest earned on deposits or loans provided
• Any fines or penalties paid
• Cash settlement received from lawsuits
• Payments made for repairs, maintenance, etc.

Two methods are commonly used in the calculation and preparation of the operational activities part of the statements: direct and indirect methods.

In the direct method, all the cash payments from operational activities are deducted from the total cash inflows from operations.

In the indirect method, the non-cash inflow and expenses are deducted from the net income.

Next comes the investment cash flow statement.

Here the end result is arrived at by deducting the amount spent on acquiring stocks and assets, and outstanding loans, from the amount earned through the selling of stock and assets, and loans repaid.

Lastly, financing cash flow refers to the cash that moves between a business and its creditors, investors, and owners.

ALSO READ: Why Distribution Management is Important?

The Five Steps Involved in Cash Flow Analysis

When performing the analysis, these are the trends to watch out for:

• Is the operating cash flow positive? This indicates that the company will be able to stay solvent and attain business growth in a sustainable manner.
• Negative operational cash flow with positive investment cash flow may mean that the business is selling assets to meet its operational costs – unsustainable in the long run.
• Negative cash flow is not always an indicator of trouble in investment cash flow as it usually indicates investment in equipment and property for expanding business. Combined with positive operational cash flows, it signifies that the business is in growth mode.
• Free cash flow is what the business has with it after paying operational and capital expenses, and can be used to pay principal and interest on loans, buy stock, and so on.
• Cash on hand from operations expressed as a percentage of income from sales in a specific period is the operational cash flow margin. Positive margins indicate profitability and efficiency and build trust among investors.

ALSO READ: What is Cloud Data Protection?

Analyze Cash Flow With Software

Calculating free cash flow and analyzing it can be complicated and daunting, especially for large organizations.

But with robust financial accounting software from Tranquil, you can rest easy.

All you need to do is configure your reports and, in a few minutes and with minimal effort, you can get details of cash flows, free cash flows, and more.

With an efficient ERP solution like Tranquil, you can automate all of these activities, and get AI-driven insights, enabling you to work with fewer employees. Do schedule a demo at your convenient time, and we’ll show you how Tranquil Cloud ERP can help your business meet its cash flow requirements efficiently.

 

Inventory is the most critical asset for a business; it is also vulnerable to theft, wastage, spoilage, and expiry.

A stock audit is conducted to ascertain the ownership, accuracy, rights and realizable value of the inventory of a business.

To maintain compliance with MIS reporting and to ensure an efficient book-keeping system, it is essential that your inventory is accounted for properly.

Inventory is not a static asset; it keeps moving.

Stock comes in, and moves out when customers place orders.

For this reason, the process of physical stock verification must be planned well, with the proper resources and expertise.

ALSO READ:  What is Stock Adjustment and Stock Transfer?

In fact, this is among the most critical audits a business must conduct in order to establish the assets it owns.

Assets indicate the financial health of a company, along with their market position.

They can be used by an organization if a business fails, or if for any reason, they decide to dissolve the company; the company can sell these assets to pay off debts and clear all outstanding accounts payables.

Stock audit or physical stock verification means you need to count, calculate, weigh, and measure every item you have in stock.

This is about a stock audit or stock verification in a nutshell.

Let us now understand the objectives of physically verifying stock and other assets, its advantages, and methodologies in some detail.

ALSO READ: What is Inventory Cycle Counting?

What Are the Goals of Physically Verifying an Organization’s Assets?

• Organizations have to physically verify stock to adhere to compliance of a legal requirement
• It helps to establish that an organization has assets
• Physical verification of stock allows the organization to evaluate the stock and rectify any inconsistencies in books of account
• Enables the organization to maintain and supervise internal compliance requirements

Steps Involved in the Physical Verification of Stock

As physically verifying stock necessitates an objective evaluation of the contents of the ledger and all internal systems and processes that aid in asset management, the process of physical stock verification involves the following steps:

• A comparison and documentation of the tags of assets along with their product codes or numbers
• Manually verifying the model numbers of the products as given by the manufacturer, where applicable
• Physical counting of items in stock; some items may need to be weighed or measured as they may not be countable.
• Comparison of any additional information that is available, like department, location, and description by the auditors
• A robust attempt to deal with the possible matches per manufacturer, model, serial number, description, and so on, that could be recorded in other places.

ALSO READ: Inventory Management Problems and Solutions

• Distribution of grouped assets and bulk entries to individual assets, like manufacturing equipment, fixtures, IT equipment, and so on.
• Auditors may visit the organizations again if necessary, for collecting more information and checking for residual assets.
• It also involves the setting up of an audit path to link the inventory file that is reconciled with the fixed assets as in the accounting books.

ALSO READ: What are the Key Stages of Fixed Asset Life Cycle?

Let us look at the most important steps in some detail:

Examining the Records

During the course of the physical verification, every record can be collected and noted on the basis of the basic commercial instruments available with the company with regard to the good.

This includes bin cards, investigation reports, goods received notes, material issued notes, and so on.

These facts shape the circumstances of individual cases.

It could so happen that those conducting the physical verification may find cases where organizations only have basic sales and purchase records, and don’t have any in-depth records of stocks.

In such cases, the verifying personnel may need to extend the scope of applying the audit procedures.

Attendance at Stock Taking

The whole process of stock verification is based upon the method of physical verification the organization follows – periodic or perpetual.

Whether an auditor has to be physically present for the process is up to their discretion.

If they are convinced of the efficiency and transparency of the internal controls and procedures of the business, they may not be actually present; they will, however, ensure that their instructions are followed by those conducting the stock verification.

ALSO READ: Tips For Efficient Stocktaking

Confirmation from Third Parties

This step is necessary if third parties hold a good portion of the company’s stocks.

The physical verification needs to ensure that these third parties are trustworthy, and the auditor must get it in writing that these parties hold the stock as per the quantities and description in the company’s books.

Benefits of Physical Stock Verification & Reconciliation Services

Let us see some of the advantages of stock verification:

• Physical stock verification supports the stock valuation as seen in the balance sheet through actual counting
• Helps to verify the correctness of stock records of a business
• It aids in detecting possible fraudulent activity, depreciation, loss, or pilferage
• It identifies and offers a way to remedy the vulnerabilities if any in the system

Every business must conduct a thorough physical verification of stock at least once in a financial year, usually at the end.

It is usually a reconciliation of stock assets line-by-line as in the books of account, with the assets that are physically counted during the inventory-taking process.

ALSO READ:  What is Batch Tracking?

Methods of Stock Verification

Let us now take a look at the different physical stock verification methods.

There are three methods that are commonly followed by businesses across industries all over the world:

1. Continuous or Perpetual Verification

In this method, stock verification is carried out in the course of the year, rather than confine it to a specific time.

Businesses that follow this method usually have a proper system and program in place to ensure that it is performed smoothly.

Here, the physical evaluation of every inventory item happens at a minimum, once in the course of a year.

The continuous or perpetual verification method offers a few specific advantages over the other two methods:

• It causes minimal business disruption or hinderance, and daily transactions and postings can be continued as usual.
• Neither employees nor the particular store in question have to pause their routine activities
• Shortage or excess inventory that arises now and then can be properly evaluated during this verification and written off.
• Continuous verification ensures that all physical stock verification happens in a timely fashion.

ALSO READ: What is Negative Inventory and How Can you Prevent it?

2. Periodic Verification

This is the method that is the most commonly used, especially by small or new businesses.

Under this method, all the stock is verified and processed altogether in one period – the end of the financial year.

This makes sense for small organizations or those not yet established as they have fewer assets in comparison to large companies.

They can pause operations for a day or two and do physical stock verification.

This method is not suitable for large organizations as it could mean having to pause business operations for several days.

3. Blind Verification

This is not a very commonly followed procedure.

Here those verifying the stock give only the location, without details of stock record balance, description, quantity, etc.

The individual conducting the verification only mentions the same figures as recorded in the account books, without actually conducting physical verification of the stock and giving their opinion on it.

As you can see, it really does not serve the purpose of physical verification of stock.

ALSO READ: What is Product Bundling? 

Understanding a Few Basic Facts About Physical Stock Verification

A Stock-Taking Sheet And A Stock Valuation Sheet

As the name suggests, a stock-taking sheet records all the items that are in the inventory which have been purchased for a particular time period, and includes details like the quantity, supplier name, per unit price, and so on.

On the other hand, a stock valuation sheet is a summary of the results from the various stock-taking sheets and calculates the grand total of every item in stock.

ALSO READ: What is Dead Stock – How Can You Avoid It?

The Need for Materials Verification

It is important for companies to formulate a system to check and validate stock regularly, as per the regulatory requirements and local conditions.

Let us take an example of a company that receives materials as a monthly consignment.

The company will need to physically count and ascertain that all the items have been delivered to the company at least by the last day of each month.

In case this is not verified in a timely manner, goods that get delivered after that date won’t be counted in the physical count of materials in hand.

ALSO READ: Why is Cycle Stock Important for Your Business?

It is not only mandatory compliance but good accounting sense to take a physical count of the stock in your organization regularly.

This can be done quarterly or even monthly.

The physical count of goods must be verified against the quantity that is recorded in the ledger and other books of accounts.

You should also conduct an intensive review to check the currently held stock against the valuation performed in the previous year to ascertain if there are any discrepancies.

Who Should Ideally Carry Out Stock Verification?

Physical verification of stock should be conducted by an employee of the Audit or Accounting team.

They can review all the books of account and make a comparison with the number as revealed by the physical count.

In the absence of an audit department, the company can assign an employee from the Purchase or Operations department to carry out physical verification of inventory.

ALSO READ: Benefits of Stock Status 

Things you Need To Check While Carrying Out Physical Verification

Ideally, the whole end-to-end process of counting inventory must happen in a clean and bright environment, without any contaminants like dust, insects, toxins, as well as elements.

Every item must be checked individually.

The physical count (or measurement) needs to match the data from instruments like delivery dockets, invoices, packing slips, and so on.

Final Thoughts

While physical verification is a manual process, it has to be verified against the quantities, descriptions, and values as recorded in your books of account.

There could be errors in the accounts books if maintained manually, and the process could also take a long time.

Tranquil cloud ERP’s robust Finance module has rich accounting features that make it super easy to maintain your ledger and other books of accounts. You can have precise accounts of everything including your inventory. This makes it easier and simpler to reconcile the physical stock counts and is more accurate to boot. Schedule a demo with us to know how our software can help you manage your inventory better and maintain compliance with accounting and other regulatory requirements.