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What is Delivery Performance and How Can it be Improved?

Simply put, delivery performance is nothing other than a measure of how well an organization is able to deliver products and services compared to customer expectancy.

It is an important element in supply chain management as it displays the capability of the organization to meet customer demands.

Delivery performance measures how well a business can deliver goods within deadlines, with the use of planned resources, and not incurring additional costs.

There are two types of Delivery Performance:

  • Operational – which measures the effectiveness of the company in producing and supplying products and services as per expectations
  • Strategic – which examines long-term plans and checks if they are aligned with organizational objectives.

ALSO READ: Ways to Improve the Procurement Process

Delivery Performance KPIs

The delivery performance KPIs are more concerned with operational factors like stock-outs, lead time, fulfilment rates, and more.

But it is also necessary to measure strategic factors like market share, customer satisfaction, and brand equity.

Factors that Impact Delivery Performance

Factors that Impact Delivery Performance

Supplier Delivery Performance

Vendors must deliver the ordered items in the expected quantity and quality; only then can the company have a hassle-free production process or ship customer orders in time (for retailers).

Manufacturers must plan and monitor better and improve efficiency across departments to ensure they deliver on time.

Manufacturing Schedules

How well the organization schedules and segments its production activities determines if they can carry on uninterrupted production.

ALSO READ: Key Steps for Successful Demand Planning 

Inventory Management

Inventory has to be managed efficiently without which production, and subsequently, deliveries can get delayed.

Transportation Requirements

This helps in determining how often the logistics were accurate and what remedial actions can be taken to avoid mistakes in the future.

Why Is It Important to Measure Delivery Performance?

It is important that delivery performance improves, to gain a competitive advantage.

As with everything else, to improve, you first need to measure current performance.

Here, the main factors are delivery logistics metrics.

Measuring these KPIs will tell you how you stand.

ALSO READ: Guide on ROI on ERP Implementation

Regular tracking gives you insights into what you’re doing right and what is wrong.

This helps you to discover flaws in performance and process inefficiencies, along with improvement opportunities – and this can help you become more efficient and productive.

When you optimize your supply chains, you can lower your delivery costs by up to 20%.

It can also help in:

  • Continuous delivery of operational excellence
  • Enhancing customer satisfaction
  • Business growth

Delivery Performance Metrics

Delivery performance metrics

If you are looking at improving delivery performance, you need to set and measure KPIs.

There are numerous metrics that organizations use, but you need to choose the ones that are apt for you.

We present here the most commonly measured metrics.

ALSO READ: Common Inventory problems and Solutions

1. Number of Completed Deliveries

This is the total product deliveries made annually, quarterly, or monthly.

This is among the important KPIs that are used to calculate other metrics as it is the basic value that helps to evaluate how effective your delivery performance was in general.

By categorizing this number into various categories like locations, product types, and so on, it can help in optimizing other metrics; it can also be used to determine the growth potential by calculating the average number of deliveries.

2. Order Accuracy

The percentage of accurate orders vis-à-vis the total number of orders is represented in this metric.

It helps id identifying errors in the delivery process, like returns, failed deliveries, damaged products, etc.

It’s a bit tricky to calculate as errors can happen anywhere in the fulfilment cycle.

Asking for report submissions at every step via advanced delivery solutions, which makes it easier.

ALSO READ: ERP software in Warehouse & Fixed Asset Management

3. On-Time Delivery

This metric tracks the number of deliveries made within the promised date.

This is a critical metric as it can improve customer experience, retention, and subsequently, your relationship with them.

Delays can happen due to supplier delays, inventory problems, mistakes in orders, wrong forecasting, delivery schedule problems, and so on.

Identifying late deliveries and the causes can help in devising solutions.

4. Average Service Time

Average Service Time

How long does it take on average to complete a delivery?

This could be by day, month, quarter, or year.

It helps you see how efficient your planned delivery routes are, and how effective your supply chain is.

When you know the average delivery time, you can inform the customers likewise, and it will impact their experience positively.

You can also decrease the number of returns while improving the accuracy of order pickups.

You can also identify areas for improvement and optimization by comparing average delivery time per day against average delivery time per month and so on.

ALSO READ: What is P2P (Procure to Pay) Process?

5. Average Cost of Delivery

Specific parameters like distance, product type, and vehicle are used to calculate the average delivery cost.

Total up the cost of the fuel, driver’s wages the vehicle, and other costs, and divide it by the total distance, and you have the average delivery cost based on distance.

If you divide the total cost by number of deliveries, you get the average delivery cost based on the product.

This metric can help in making operational changes that decrease the cost without impacting performance.

Examples of changes – route optimization systems, fuel-efficient vehicles, etc.

ALSO READ: Route and Van Sales – Challenges and Opportunities

6. Transit Time to Distance

Transit Time to Distance

This metric calculates the time spent by drivers and couriers in transporting the products from pickup to delivery.

It compares the distance travelled by the package with the time taken for it to travel the distance.

This KPI helps you see how quick and efficient your delivery routes are, and to take the actions to improve your accuracy rate while reducing returns.

Knowing the average transit time allows you to mention accurate ETAs to customers.

ALSO READ: Inventory Reduction Strategies 

7. Vehicle Capacity Utilization

Dividing the available capacity of the vehicle used for deliveries by the total capacity gives you the amount of unused space in the vehicle.

This will help you to route and schedule vehicles more effectively, increasing the profitability of your delivery operations.

If the utilization is high, it’s a good thing, but if the availability or unused space is high, it means the process is inefficient and needs to be changes.

You could revamp the loading, or merge routes. If there is 0 availability, you may need more vehicles.

How Can You Achieve On-time Delivery?

How Can You Achieve On-time Delivery

Delayed deliveries lead to not just poor delivery performance but unhappy customers too.

If you are trying to improve delivery performance, you need to:

  • Study the causes for late deliveries
  • Carry out remedial actions and focus on executing them to prevent delays
  • Make a plan and execute it for corrective action
  • Check results and update it suitably

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

Let’s look at the steps to improve timely deliveries in detail:

1. Prioritize

Prioritize orders according to customers or stops that have to be served earlier. Doing this tells the algorithm how to optimize the route.

Else, orders may get delayed if you find yourself short of resources.

You can specify a high or low priority, and set ‘delivery by’ dates so that the day’s priorities are scheduled.

2. Keep your Promise

Customers today are discerning, and demand the best service – like receiving their purchases in the time window they were promised.

Your reputation will take a hit if you continuously fail in meeting this demand.

With Tranquil Cloud ERP orders are allocated to the correct resource and at the appropriate time, helping you improve your reliability and accuracy.

Giving your customers time windows in route plans helps keep customers happy as you can easily meet those commitments.

3. Ask for Drivers’ Input

Your drivers’ feedback can help in optimizing and improving your routes by:

  • Pinpointing peak times and traffic jams
  • Identifying customers who take up more time during stops
  • Diverting drivers to areas they are familiar with to make the runs quicker
  • Checking for starting or ending location requests; these can be built into the plan

ALSO READ: Understocking vs Overstocking

4. Minimize Wasted Space and Time

Helps you make the necessary route adjustments so that you can minimize the unutilized vehicle capacity and optimize delivery schedules.

It will also help you save time.

With this you can improve your delivery performance and increase customer satisfaction.

5. Minimize Chances of Error

By implementing route optimization software, you can focus on core tasks and avoid mistakes.

This is how you can achieve it:

  • Enable your field team to access the data related to delivery proof, driver location check-ins, and completed stops on read-only basis.
  • Configure for holidays, vehicle maintenance days, and other exceptions, so that you don’t plan deliveries for those days

By defining rules in the route manager, everything will go like clockwork.

ALSO READ: What is Inventory Control System?

6. Minimize Paperwork and Guesswork

Minimize paperwork and guesswork

Can help you stay connected with your drivers and office employees, and give you visibility into on-road updates without having to call them up or guess their progress.

You can get updates on GPS locations, live ETAs, completed deliveries, etc.

Here are certain other matters you need to remember:

  • Improve your forecasting
  • Create accurate purchase orders
  • Manage inventory efficiently
  • Maintain realistic SOPs
  • Minimize errors in production, picking, and packing
  • Keep proper records of shipping
  • Set achievable deadlines
  • Provide customers with an online order tracking facility

What are the Benefits of Measuring Delivery Performance?

What are the Benefits of Measuring Delivery Performance

1. Reduce Transportation Costs

The main component in logistics expenses is transport, and it’s impacted by factors like urgency, distance, delivery location, accuracy, and vehicle capacity.

By measuring delivery performance metrics, you can take decisions that help you optimize routes, vehicle capacity utilization, fuel consumption, distribution networks, maintain your vehicles better, and speed up delivery – and eventually, reduce transportation cost.

ALSO READ: Benefits Of ERP Software For Logistics Industry 

2. Increase Delivery Speed

Delivering your customer’s purchases as quickly as possible is critical when it comes to customer satisfaction.

You can learn about your fleet’s productivity by measuring the metrics and analysing different types of data.

You can then take informed decisions to improve delivery times.

3. Improve Customer Experience

Quicker deliveries lead to happier customers; in fact, the customer of today is willing to pay more for an enhanced shopping experience.

Tracking metrics that impact customer satisfaction, like on-time delivery, average delivery time, accuracy, etc will help improve customer service significantly.

It will help you retain customers and gain new ones, boosting revenues.

ALSO READ: What is Storage Cost of Inventory?

4. Plan Better Schedules and Routes

Plan better Schedules and Better routes

Tracking metrics on route management like cost, safety, compliance, planned vs actual performance, etc can help you in optimizing delivery routes and schedules.

Take feedback from lower-level executives, logistics teams, drivers and dispatchers to maximize route performance in the future.

5. Scale Operations Easily

This is critical in today’s competitive market; companies are always coming up with more convenient and quicker delivery options.

By analysing important metrics, you can maintain an edge over your competitors.

Order accuracy, average delivery time, on-time delivery, and so on can be analysed for effectively scaling operations and growing your business.

ALSO READ: Guide on Storage Cost of Inventory

6. Agile Delivery

Having an agile delivery operation allows businesses to adapt to dynamic situations and be more efficient.

To implement agility, you need KPI data; this will help you enhance performance, increase delivery speed and plan deliveries on the fly.

7. Continuous Improvement

Continuous Improvement

Using metrics is an efficient method of measuring the overall organizational success and to identify areas of improvement.

Continuous improvement is the only way a business can succeed in a highly competitive environment.

And it is a key metric that will help in understanding the actions required to attain those goals.

ALSO READ: Complete Guide to Cash Flow Analysis

Tranquil Cloud ERP software solution is a comprehensive business solution that will help you optimize your inventory, sales, and deliveries, among other things. Schedule a demo at your convenience to see for yourself how our software can help your business.

 

What is the Order Up to Level Model of Inventory Management?

Inventory is the most important and valuable asset.

Any business (apart from a service company) needs to purchase, store, consume in production, and sell inventory; this includes managing raw materials, accessories, parts, and finished goods.

They also have to process and store inventory.

It is the single most important business function for an organization.

Managing inventory efficiently is even more critical for manufacturing companies as they have to track and manage the inventories from raw materials to finished goods.

Inventory management attempts to streamline inventory so that there is neither excess nor shortage of inventory.

ALSO READ: What is Assemble to Order Process?

Why is Efficient Inventory Management Important for a Business?

Why is Efficient Inventory Management Important for a Business

Inventory is at the core of the business for any company that manufactures or sells goods, and getting caught short of goods can hamper the business as it means pausing production or turning away customers.

On the other hand, having too much inventory can lead to heavy expenses.

Arranging warehousing, paying insurance, utility bills, and labour for handling; some types of inventories may need special arrangements like refrigeration, temperature control, or security.

Depending on your region, you may also incur taxes on unsold inventory.

What’s more, you also run this risk of inventory getting damaged or spoilt, and it could get stolen too.

If it remains unsold for a long time, it may go out of fashion or be rendered unsaleable because of the appearance of new and improved products in the market.

This is why it is imperative that businesses manage their inventory properly.

ALSO READ: Common Inventory Management Mistakes to Avoid

There are several factors to be kept in mind: when to restock inventory items, what quantities to order, how much to produce, what is a good price to pay for the stock, when to sell, what price to sell, and so on.

While these may sound like simple matters at first, they are not that simple, and things can become very complicated and confusing.

The norm for small businesses is to manually track inventory and calculate the reorder levels and reorder quantities using excel sheet formulas and a lot of guesswork.

In any case, it may not be the best thing to do.

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

A large company simply cannot afford to rely on manual entries, counting, and spreadsheets.

Only a reliable ERP solution like Tranquil with a robust inventory management module can ensure effective inventory management when there are multiple products, hundreds of inventory items, and thousands of transactions.

There are several strategies, formulae, and techniques that different companies follow when it comes to inventory management.

Take a look at what they are:

  • Materials Requirement Planning method
  • Just in Time Inventory Management
  • ABC Analysis
  • Economic Order Quantity or EOQ method
  • Perpetual Inventory System
  • Periodic Inventory system
  • Safety Stock Maintenance

These are the most popular and common techniques.

There are also other methods used by some companies like drop-shopping and cross-docking, backordering, and consignment.

Order up to level is a formula that will help you efficiently manage your inventory – and without hassles.

You can rest assured about your inventory levels once you apply this formula.

It is in two parts.

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

What is Order Up to Level and How Do You Calculate it?

What is Order Up to Level and How Do You Calculate it?

Under this method, there is an intermittent review of stock levels, and a specific quantity of that each inventory item is purchased so that inventory levels can go back to the target levels.

This strategy is concerned with placing orders so that the inventory item is brought back to the optimal level – basically, it ensures that you have adequate inventory, but just enough.

It eliminates the possibility of excess stocking.

Having too much inventory can be expensive for a business, as we saw earlier.

Order lesser than what you need, and you are highly likely to run out of raw materials in the middle of production, causing you to pause production.

This means a cascading effect of delays, right up to delivery.

Or, if you’re selling goods, it means turning away customers and disappointing them.

ALSO READ: Physical Stock Verification and Its Advantages

Order Up to Level

The order up to level is put into action when the inventory level reaches the reorder point or has gone below it.

By taking stock of your inventory items at regular intervals, you will be able to maintain the order up to level.

The Formula for Order up to level

The simplest formula for calculating the order up to level is as follows:

Target level – reorder point = order up to level (quantity)

We can calculate the reorder points in two different ways:

Reorder point = basic stock + safety stock + (sales per day in units * number of days taken for delivery)

This of course assumes that the business maintains basic stock and buffer stock.

Supposing it doesn’t maintain basic and buffer stocks, the formula would not have the first part.

The formula would be:

Reorder point = sales per day in units * number of days taken for delivery.

Therefore, the order up to level formula would be:

Quantity of Order up to level = Target level – (basic stock + safety stock + (sales per day in units * the number of days taken for delivery )) – For companies that maintain basic and buffer stocks.

And,

Quantity of order up to level = Target level – (sales per day in units * number of days taken for delivery)

Today, there are numerous ERP software systems for supply chain management that have state-of-the-art modules for inventory management, which simplify and streamline these activities.

Many ERP solutions have supply chain management modules and inventory management modules separately as well.

In these systems, you can configure the software to notify you when the stock reaches the reorder point so that you may be able to eliminate the periodic review process.

ALSO READ: Benefits of Stock Status

Order Up to Level vs. Reorder Point

Order up to level vs. Reorder point

Both these – reorder point or level, and order up to level, are policies of inventory control.

There are a few differences between them.

Let’s take a look:

Stock Review

Companies following reorder point or reorder level strategy review stock continuously, but companies that follow order up to level review inventory levels only periodically.

ALSO READ: Understocking and Overstocking in inventory

Order Quantity

Under the order up to level method, the quantity of the order differs depending on the requirements.

Under reorder level method, the quantity of the order is fixed.

Time of Placing Orders

When you follow the reorder point approach, you place orders for the inventory as soon as the stock reaches the reorder level – even if the last order was placed just a few days ago.

However, there is a fixed interval of time between orders in the order up to level approach.

ALSO READ: Importance of Stock Keeping Unit

Difference between Order up to Level and Reorder Quantity

Difference between Order up to Level and Reorder Quantity

Target Level

Reorder quantity refers to the quantity of the inventory item that needs to be ordered to reach the target level, while the order up to level conveys the inventory level at which point the new order has to be placed to ensure that the stock level reaches the target level.

Purpose

Reorder quantity focuses on the quantity or number of items to be ordered, whereas order up to level focuses on when the order should be placed.

ALSO READ: What is Stock Adjustment and Stock Transfer?

The Factor that Affects Each

The reorder quantity will be impacted by the shipping costs, discounts, and lead time.

But order up to level is mainly concerned with the lead time, or the time taken by the supplier to deliver the stock.

Variations

Reorder quantity is likely to differ every time you order, but order up to level is likely to be more or less fixed, with barely any change.

ALSO READ: Why Is Inventory Reduction Important?

How is Reorder Level Calculated?

The reorder level can be calculated by multiplying the lead time in days with the average demand in numbers and adding safety stock (if the company maintains safety stocks.

This last step can be avoided by those who don’t maintain it)

Safety stock = (Lead time * Average demand) = reorder level.

Conclusion

Most businesses do a lot of guesswork when it comes to inventory management; they may manually try to forecast the demand based on just the previous year’s figures and base their inventory decisions of purchase, production quantities, and so on, on solely that.

This can turn out to be quite disastrous.

The business environment is very different today, as the competition is intense, and most companies have adopted tech in a huge way.

ALSO READ: What Is an Inventory Control System?

Technology helps them track historical data over the past few years, and can also factor in current trends, consumer behaviour, and economic factors to deliver demand forecasts that are far more reliable.

You can also save time, effort, and money, and get data in real time, with a bird’s eye view of your organizational processes and data.

With a cloud-based ERP like Tranquil, you can also be assured about the safety of your sensitive data as the storage is remote and well protected.

If you are still relying on legacy systems and siloed information, you could be missing out on business opportunities and incurring expenses that can be easily avoided.

ALSO READ: What Is Cloud Data Protection?

Tranquil Cloud ERP can help you automate data entry and other time-consuming and monotonous processes, streamlining your organization. Do schedule a demo of our software at a date and time of your convenience, and we will explain how it all works. Our team will be more than happy to resolve all your queries.

 

Why Is Inventory Reduction Important?

Businesses today have to be flexible and agile so that they can respond to fluctuating customer demands quickly and with less inventory.

Stockpiling inventory is not the smart way to do business, as it ties up too much money, increased lead times, and leads to opportunity costs.

Money invested too heavily in inventory means less working capital your business has to spend for marketing efforts, innovation, modernization, paying off loans, expansion, and so on.

Ergo, inventory reduction should be a top priority for inventory managers.

ALSO READ: Inventory Management Problems and Solutions

What Does High Inventory Indicate?

Often, there is so much excess inventory that a lot of it becomes obsolete and can’t be sold.

It can also indicate systemic, deep-rooted, pan-organization problems that can cost the business a lot.

Poor systems and processes can lead to improper demand forecasts, inadequate specifications for orders, poor quality, haphazard production schedules, lengthy cycle times, improper KPIs, and so on – and these can have ripple effects.

ALSO READ: Importance of ROP

For example, long lead times usually necessitate long-range forecasting, which is in itself not accurate; this means actual demand is not what was predicted, meaning unsold inventory, and so on.

The cycle gets repeated, impacting cash flow, customer service, and profitability.

Why is Inventory Reduction Important?

We can think of three main reasons – it helps prevent inventory shrinkage, minimizes carrying costs, and maximizes fill rate.

Every business should aim to transfer inventory to customers as quickly as possible before they get obsolete, spoilt, or stolen.

When you reduce inventory levels, it shows that you have implemented warehousing procedures effectively and can predict demand properly; this leads to a high fill rate and optimal inventory.

ALSO READ:  Guide on ROI on ERP Implementation

Benefits of Inventory Reduction

Benefits of Inventory Reduction

When you reduce inventory levels, your business can enjoy several advantages:

1. Materials Cost

When you don’t spend a huge sum on purchasing inventory, you can use that money for activities like marketing, research, expansion, and so on.

You also have lower costs related to shipping, insurance, utilities, taxes, and labour.

There will be no cause to worry about loss, spoilage, and theft as the inventory will be moved quickly.

Managers can ensure that only minimal funds are invested in goods that sell slowly and that you avoid dead stock.

By ordering frequently, you can also compare prices and get discounts on seasonal clearance, etc.

In case you want a business loan, showing lower administrative and business expenses demonstrates good management skills to creditors, increasing your chances of getting a loan.

ALSO READ: Different Ways to Improve the Procurement Process

2. Set Competitive Prices

If you have intense competition, you can divert the funds saved from inventory reduction to pricing your products competitively so that you can sell more.

You can tap into new markets and expand your business, positioning yourself as a market leader in your region or industry.

3. Increased Profitability

By reducing expenses from low inventory, you can increase profitability; this money can be ploughed back into your business to expand it, or you can simply enjoy the increased income.

ALSO READ:  Advantages of Batch Picking 

Lean Manufacturing and Inventory Reduction

Lean Manufacturing and Inventory Reduction

The fundamental idea of lean manufacturing methods is driving supply and production from actual customer demand, which means having zero inventory.

This is not always possible, so then you try to achieve minimal inventory.

Supposing you have a constant demand, your vendors can deliver supplies that are adequate for production for just that day.

Materials are taken to the production floor straight from the loading dock, and finished goods straight to the shipping department, where they are shipped out the same day.

But we know that in reality, this is not possible – variation is bound to happen, as many external factors also impact demand.

You will need to balance the advantages of reducing inventory with the risks of inadequate inventory and handle the variability.

ALSO READ: What is Cross Docking? 

Ways To Reduce Inventory

Ways To Reduce Inventory

Most managers agree that it is essential to have lean inventory to prevent funds being tied up in unprofitable heads.

However, most of them are unsure about the causes of excess inventory and hold preconceived notions regarding inventory management.

Let’s take a look at a few inventory reduction strategies:

1. Inventory Control May not be the Culprit

The absence of proper control does cause excess stocking, but the underlying reason is often the desire of management to avoid material shortage at all costs; they are not particularly alarmed by high inventory levels.

Ergo, you need to make those in charge aware of the need to reduce inventory.

The desire to hold more stock than necessary is also often due to inefficient cross-functional business processes.

So, what you need to do, is identify the root cause and fix that, so that you won’t need buffer stocks, and can reduce inventory.

Without rooting out the cause, reducing inventory may compound the underlying problem.

ALSO READ: Strategies with Inventory Batch Tracking

2. Obsolete Stock and Multiple SKUs

Obsolete Stock and Multiple SKUs

Obsolete stock is inventory that has little market value currently because it is out of vogue or has been made redundant due to innovations and improved products.

Management may be reluctant to write it off and suffer a minor loss but they don’t realize that the obsolete stock takes up space and doesn’t earn anything.

That space could be used to stock fast-selling inventory, which will improve cash flow and profitability.

You could try and sell it off at a nominal price and get back some of your investment.

If you have multiple SKUs for the same product, it means excess stock.

ALSO READ: What is Stock Adjustment and Stock Transfer?

Let’s suppose you custom make the same product for a few customers; this could result in multiple SKUs for essentially the same product, with a different SKU for each customer.

What you could do instead is customize the product only prior to shipping – giving you a single SKU for that product.

Simpler inventory management, and lower inventory!

You could also have a situation where a product is available in packs of 4, 6, 10, and 15 – triple A battery cells, for example.

Your market research tells you that the 4 and 10 packs are much more popular; so, you eliminate the rest.

This way you can trim your inventory significantly.

Getting rid of obsolete stock and minimizing SKUs frees up funds and warehouse spaces – now get your profit-earning products there.

ALSO READ: ABC Analysis in Inventory Management

3. Improve Supply Chain Management

Reducing lead times significantly can mean no requirement for buffer stock; it can also help you provide better customer service and improve product quality.

When you re-engineer and streamline your supply chain, you can free up funds, reduce cycle times, lower expenses, improve profitability, and reduce time to market in addition to reducing inventory.

It is important to work on reducing the order-to-delivery cycle to enhance overall efficiency in your business.

This can be achieved by improving communication with vendors and customers and leveraging technology.

The right tools can help you set alerts to place orders and notify your vendors regarding delivery dates.

Having a good rapport with a few suppliers will help you get better service like quicker deliveries, reduced rates, better product quality, etc.

ALSO READ: How Can you Track UOM?

4. Schedule Production Properly

When you don’t schedule your production properly, it can have a cascading effect, like imbalances in product flow, and decreased throughput.

In turn, this leads to high inventory, inconsistent output, poor customer service, long cycle times, and the like.

5. Use Effective KPIs to Measure Performance

Unfortunately, quite a few manufacturers reward activities that lead to excessive inventory.

Let us take this example: measuring utilization, standard hours produced, and efficiency in production – mainly to absorb overheads, could lead to producing parts that become part of your inventory even when there isn’t a proper reason for doing this.

ALSO READ: What is Storage Cost of Inventory?

When you measure the sales function properly, and hence operate on the absolute booking amounts without keeping in mind the timing or product mix, you get an excess word in progress inventory, or finished goods inventory, while your customer service suffers.

6. Utilize “pull” Based Demand

Utilize “pull” based demand

Often, manufacturers work on unreliable long-range forecasts and use this data to determine the stocking levels of raw materials and finished products.

Thanks to these inaccurate figures, business performance overall is impacted negatively.

Companies that depend on the ‘push’ system of inventory management are more likely to stock high levels of products or materials.

If you choose the ‘pull’ system of inventory management, you will be able to divert more working capital towards more essential activities.

When your production process is efficient, the products will be manufactured quickly enough to prevent them from becoming a liability.

Your efficient management of the supply chain is what matters here.

ALSO READ: Understocking vs Overstocking in inventory

7. Visual Communication

Visual Communication

To have a lean warehouse, it is imperative that you are efficient.

One way to achieve this is through visual communication: mark SKUs prominently on bins and shelves, mark aisles, traffic lanes, and so on, so that there is no confusion for anyone working in the warehouse.

Use magnetic labels and signs so that they can be changed easily if you need to make adjustments frequently to your product mix.

ALSO READ: What is Pipeline Inventory and Decoupling Inventory?

To mark things like the floors and shelves, make sure that you use durable and tough permanent labels which don’t fade quickly; this can waste employees’ time in trying to figure out what goes where.

If you have inventory items that have to be refrigerated or frozen, or stored outdoors, make sure you have labels that can withstand extreme temperatures and outdoor weather conditions.

8. Develop Flexible Manufacturing

If your production schedules are long, it goes without saying that you may need higher production levels even if demand is low. When the manufacturing schedule is not flexible, high production levels are maintained to absorb the overheads.

While this may look good on paper, it leads to more expenses and inefficiencies – they are just covered in inventory.

It is imperative to be flexible in your manufacturing and operations to improve responsiveness to customer demands and minimize inventory.

ALSO READ: Physical Stock Verification and Its Advantages

Final Thoughts

Today’s customer is not always about the lowest price but getting value out of a product – good quality, quick delivery, exemplary service, and then eventually, a fair price. If a business is not able to keep up with these expectations, they stand to lose customers and business.

Tranquil Cloud ERP has a robust inventory management module that can help you efficiently manage your inventory, in addition to many other things. Find out how – schedule a demo at your convenience, and see for yourself how it works.

 

A Guide to Avoiding Understocking and Overstocking

How much product to stock?

This question can give businesses (whether street sellers or multinational corporations) a huge headache.

Stock too less, and you have disappointed customers going away; stock too much, and you have rotting produce or out-of-fashion clothes.

Poor inventory management can cost businesses tens of thousands of dollars annually.

This problem has existed since the early days of markets in town squares and exists even in today’s environment of multi-location stores and E-commerce.

Marketers and supply chain teams would definitely wish that they had a magic wand that will fill their shelves and warehouses with the perfect inventory stocks.

What Do Understocking and Overstocking Mean?

Overstocking inventory is also known as excess stock, inventory surplus, or excess inventory, and it simply means having too much stock that you are unable to sell.

This can happen due to several reasons like ordering too much stock, sudden dips in demand due to external factors, the general state of the economy, competition, and so on.

Understocking happens when a business has inadequate stocks to fulfil customer demands.

ALSO READ: What is Demand Forecasting? 

What Causes Overstocking and Understocking?

What Causes Overstocking and Understocking

Inventory problems are caused either by mistakes made by the business or due to factors beyond their control.

When companies are unable to implement efficient procedures and control inventory, it can result in overstocking or understocking.

The most common reasons:

1. Erroneous Data

Returns and inventory shrinkage due to damage or theft can affect your inventory; when you don’t have accurate records, you may think you have a lesser or more quantity of specific products than what you have or need.

It’s also important to be able to predict when your products will be in higher demand.

When you have precise data, you can discover trends and forecast demands more effectively, and know the ideal quantity to order.

ALSO READ: Importance of Stock Keeping Unit

2. Mismanaging Technology, Employees, and Processes

Without employees capable of selling your product well, having full shelves won’t help you – you may lose sales and be left with inventory that remains unsold.

This is a frustrating situation.

Let’s say your employees are well-trained and efficient at their jobs – but you don’t have proper processes, and hence are unable to get reliable results from them.

Well-implemented procedures ensure that each employee knows what is expected of them, and there is no confusion about their responsibilities or roles.

The third thing is having the right tech, and knowing to use it correctly; only then will managers be able to interpret data to take informed inventory decisions.

ERP software like Tranquil can help staff and managers to study trends and draw up plans for the future.

It integrates seamlessly with other business software you have, making it user-friendly and intuitive.

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

3. Paucity of Funds

Understocking can happen because a business lacks the finances to purchase the required inventory.

If so, you have to free some funds to remedy this situation.

Fast-selling items should especially be available whenever customers want; else it could hit your profitability badly.

4. Timing it Wrong

It’s not just how much to reorder, but when to reorder that is important.

You need to be proactive and calculate how long the new shipment takes to reach you from the vendor.

This will depend on how far your vendor is, the regulations and formalities in other countries, and so on.

You must be able to order at the right time so that new stocks arrive just as or before your existing inventory gets sold out.

Tranquil has a robust inventory management module that helps you factor in supplier lead times to determine optimal reorder points.

ALSO READ: Tips For Efficient Stocktaking 

5. Improper Communication

Miscommunication or infrequent communication with vendors could mean orders that are delayed or even missed – translating into lost sales.

You must have written communication so that everything is on record, and deadlines are clearly mentioned.

This way they will be remembered and met.

By maintaining good relationships with vendors, you can also get them to cooperate when you need rush orders in case you have sudden spikes in demand.

ALSO READ: Detailed Guide on Stock Status

Understocking Risks

Understocking Risks

When you have insufficient stocks, you make your business vulnerable to several risks like the following:

Loss of Customers

When customers have to be sent back as due to a lack of products in stock, it can make them unhappy.

They will buy from your competitor, and may not return; which means you lose a customer for good.

They may lose their trust in your business and even do negative publicity.

ALSO READ:  What is Zero Inventory?

Paying More

When you make rush purchases, especially with vendors nearby because you’re running out of stock, you may have to pay more than what you normally do.

You also pay more when you buy small quantities as discounts are offered by vendors on bulk purchases.

Higher Shipping Costs

Ordering small batches of products very frequently means you keep incurring shipping, handling, and processing costs.

This can be avoided by ordering the appropriate quantities at the outset.

Danger of Overstocking

Danger of Overstocking

Having too much stock also has its fair share of problems, like:

Excessive Carrying and Opportunity Costs

When you stock a lot of inventory, you incur multiple expenses like warehousing, labor, insurance, security, utilities, and taxes.

There are some products that require additional security, or temperature control, which means more expense.

You can recover these costs only when the products get sold – otherwise, it is a dead investment.

Moreover, when you tie up funds in inventory, it leaves you with less working capital to use for other purposes like marketing, R&D, and even from stocking inventory that sells faster or is more profitable even if it sells in lesser quantities.

ALSO READ: Complete Guide on Economic Order Quantity (EOQ)

Inventory Shrinkage and Obsolescence

Perishable items are subject to degradation and spoilage when stored beyond a specific time.

Certain items can shrink, and others can get stolen or damaged.

Clothes, accessories, footwear and the like can go out of fashion; medicines and cosmetics have expiry dates; electronics and appliances can become obsolete because of innovations.

Remember film roll cameras that became obsolete almost overnight?

That also meant the obsolescence of film-developing equipment.

The value of such products can come down to near zero if not sold quickly.

ALSO READ: Why Safety Stock is Important?

Minimizing Inventory Understocks and Overstocks

Minimizing Inventory Understocks and Overstocks

Efficient inventory management means holding optimal inventory with little excess stocking and eliminating stockouts.

Here is what you can do to achieve that:

1. Get Rid of Slow-moving Inventory

Deadstock or obsolete inventory is a nightmare for any business; when you have huge quantities of products that nobody wants to buy, you may stand to lose a major portion of the funds spent on acquiring them.

By studying historical sales data and interpreting current trends, you will be able to understand when certain products may become obsolete; this will help you plan ways to sell off those products quickly and avoid dead stock.

You can offer discounts to sell them quickly; this may reduce your profits but it’s a better option than being stuck with goods you can’t sell; the revenue generated can be used to purchase stocks of popular and profitable products.

2. Shorter Lead Times

You must have a vendor who can supply products to you as fast as you want them – especially for products with high demand.

It is important that you calculate the lead time of different vendors so that you know who can ship your purchase to you the quickest.

When you get your supplies quickly, you can avoid getting stocked out, and meet consumer demands.

ALSO READ: What is UOM in Inventory?

3. Centralize Data

Having all your data in one place is a good place to start when you want to eliminate understocking.

Siloed information and disparate information systems create confusion, data redundancy, and inefficiencies.

With a reliable ERP like Tranquil, you can have data from multiple departments in a centralized dashboard.

At a glance, you can get information from sales, marketing, inventory, shipping, finance, and everything else.

This is even more necessary for businesses with multiple warehouses and store locations.

Your employees will be able to access data from every department, keeping them all on the same page, and enabling them to take timely, data-driven decisions.

This can not only help in optimizing your inventory but can enhance overall efficiency and productivity.

4. Forge Strong Relationships with Vendors

It is important to build robust relationships with vendors, just as you would with customers.

After all, they make the products you want to sell. When you maintain good relationships with them, they are more likely to make you a priority customer, and give you good service, including timely deliveries, fair prices, and favorable payment terms.

This means you can avoid stockouts and overstocking, and keep costs low.

ALSO READ: Debit notes vs Credit Notes

5. Automate Inventory Management

Even the most efficient and experienced employees can make mistakes, especially when handling mountains of data day after day.

The best way to avoid this situation is to automate your inventory management processes.

The Inventory Management module in Tranquil ERP offers several smart tools that allow you to configure alerts that are sent to you when inventory touches specific threshold levels so that you can reorder; you can even set it to send out the orders itself.

It can make predictions regarding future demand for specific products, tell you about the speed at which different products are getting sold, and much more.

Using a robust solution like Tranquil will help you manage your inventory efficiently so that you carry optimal stock.

No overstocking inventory to increase expenses, and no understocking to cause loss of sales, customers, and revenues.

ALSO READ:  Reasons to Move your PLM to the Cloud

How Does Software Help Prevent Inventory Understocks and Overstocks?

How Does Software Help Prevent Inventory Understocks Overstocks

Inventory management software like Tranquil ERP helps you track and manage inventory efficiently, and optimize your inventory.

This means no overstocking or understocking.

How does this happen?

  • The inbuilt inventory control features enable you to track inventory efficiently, allowing you to fulfil orders and eliminate stock shortages. The inventory control feature records past sales, providing you with real-time information of your current inventory, and allowing you to configure reorder points. This way, you can know when to reorder goods without resorting to guesswork.
  • Inventory management solutions help businesses to understand consumer behavior through the analysis of past sales and current trends. They can make smart predictions about customer demands for the near future based on this data.

ALSO READ: Procurement vs Purchasing

  • Tranquil is a cloud-based ERP solution, which means that any employee who needs information can access it quickly, regardless of where they are. This helps them take immediate, data-driven decisions that help in improved inventory management.
  • Robust ERP solutions can especially help in the case of complex businesses that have multiple locations, warehouses, thousands of products, hundreds of vendors, a huge customer base, and multiple processes. The software can coordinate inventory transfers between locations, creating a streamlined process for the same, and ensuring employee collaboration.
  • Modern ERP solutions like Tranquil integrate seamlessly with third-party business software, making it easy and convenient for you to access and update data, and interpret it to take better decisions for your company. You can increase efficiency and productivity, enhancing your bottom line.

ALSO READ: Things to Know About the P2P (Procure to Pay) Cycle

Tranquil Cloud ERP is one of the most reliable and economical software solutions that can help in efficient inventory management. Schedule a demo with us to know how we can help you transform your business.

Complete Guide on Economic Order Quantity (EOQ)

Knowing when to order products and how much to order, to replenish your stock, is a critical element of inventory management.

Unfortunately, many businesses do this without much forethought, and in a haphazard manner.

They place orders on guesswork rather than use a scientific approach.

This may not always be effective, as several external and internal factors can impact your need for those goods.

In other words, you may place an order for 100 units of a product, knowing that the demand is 25 units per week, and it takes 2 weeks to reach.

You plan to reorder when you have 50 units left.

But let us suppose that for some reason, the demand spikes up, and you sold 75 units in two weeks.

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

You place the order, but the product gets stocked out – you end up losing sales, as the customers who come later cannot find the product.

The opposite can also happen – you order too much, and you end up with excess or dead stock.

Therefore, instead of ordering what you think you need right now, it makes sense to use the Economic Order Quantity formula to order a specific inventory item.

This scientific approach will save you money and aid you in informed decision-making regarding reordering inventory items.

What is EOQ?

EOQ means economic order quantity.

It is a formula used by various departments like supply management, logistics, and operations.

Quintessentially, economic order quantity in inventory management is a tool that helps to establish the volume and frequency of orders needed to fulfil a specific level of demand, and at the same time, ensure minimal cost per order.

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

The Importance of EOQ

The Importance of EOQ

We have seen above that the EOQ helps to lower the cost per order, as well as inventory carrying costs.

When you have large volumes of orders, the per-order cost of ordering inventory reduces, thanks to economies of scale.

But then, when the inventory size increases, the inventory carrying costs also increase.

EOS is the point that balances and lowers both these costs which are inversely related.

EOQ is an important measurement that can showcase the sustainability of your organization, as ordering in excess can leave you with fewer finances for other business activities, apart from incurring high carrying costs.

Departments like R&D and marketing can help in lowering expenses and increasing revenues, but may not get sufficient funds if you have a lot tied up in inventory.

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Inventory is part of your working capital; this is a capital that comprises business assets required to conduct operations regularly.

However, excessive working capital can hamper your profitability, and increase your opportunity cost.

EOQs are not required for things like office supplies, but for expensive, high-volume purchases.

When the volume of your orders and inventory stocks grows, EOQ will have a more significant impact on your profitability.

With accurate forecasting of inventory, your business can boost profits instead of having to deal with dead stock that can cause losses.

In short, this is the golden rule as far as inventory forecasting is concerned: the lesser the funds that are tied up in inventory, the more ideal is the level of inventory stock maintained, and the more precise the ordering.

ALSO READ: What is Demand Forecasting? 

What Does Economic Order Quantity Tell Businesses?

EOQ conveys to a company, the ideal ordering quantity for each product they stock.

The formula for EOQ however, makes an assumption that there is no variation in the demand for a product for the year.

However, if your business is growing and the demand keeps changing, then this method may not be the best one to calculate your optimal order size.

After calculating the economic order quantity, you will be able to know how many orders you ideally need to place in a year and the optimal size of the orders.

You can adapt the model to include defective items, backorders, discounts in pricing, and so on.

In fact, the answers provided by your economic order quantity calculator will let you have an ideal schedule of your supply chain order.

ALSO READ: Understanding the Importance of Distribution Management

Benefits of Economic Order Quantity or EOQ

Benefits of Economic Order Quantity or EOQ

The most important benefit of economic order quantity is increased profit.

Let us see what other benefits this tool provides, in some detail:

Improved Order Fulfilment

EOQ ensures that you have the requisite products with you when you need an inventory item for order fulfilment or manufacturing.

This means you can continue uninterrupted production or ship out the order in time, and keep your customer happy.

It translates further into enhanced customer experiences and better sales.

ALSO READ: Important ERP Implementation KPIs to Know 

Reduce Excessive Ordering

With proper forecasts, you will know what you need so that you don’t order too much and have funds overinvested in inventory.

Reduced Wastage

With optimized order schedules, you can avoid obsolete or dead stock; this is especially important for companies dealing in perishable inventory or products likely to go out of vogue soon.

Decreased Cost of Storage

When your orders are aligned with your demand, you will have lesser inventory and thus lower inventory holding costs, like storage rentals, utility bills, insurance, security, labour, and more.

ALSO READ: Why Safety Stock is Important?

Bulk Order Discounts

When you plan and the time your orders properly you can avail good discounts, as most suppliers offer discounts on bulk orders.

Challenges of Economic Order Quantity

While EOQ is very beneficial for determining optimal order sizes, this method comes with its own challenges; it is not very easy to achieve.

Here are some of them:

Unreliable Data

This is one of the main challenges of EOQ calculation.

Often, businesses have manual systems or use simple spreadsheet-based systems.

These systems are unlikely to give you up-to-date and high-quality data; this can even cause improper calculations.

ALSO READ: What is ABC Analysis in Inventory Management?

Obsolete Systems

Old systems are not likely to have complete and updated information, leading to several problems.

This can be solved by implementing an ERP solution like Tranquil.

Not Ideal for all Businesses

The EOQ formula is great for businesses that have fairly consistent inventory requirements.

But a rapidly growing business cannot rely on this method, as it can cause a shortage in inventory and stocked out situations.

Seasonal Demands

For companies selling products that have seasonal demands, EOQ, while not impossible, certainly becomes difficult.

The demand keeps changing throughout the year, and hence it does not make sense to have one single formula.

ALSO READ: What is UOM in Inventory?

EOQ Formula

EOQ Formula

After carefully considering what could be the factors affecting economic order quantity, a formula to calculate the same was devised.

The EOQ is calculated by reducing the total cost per order by defining the first-order derivative as zero.

The formula elements that comprise the total cost of each order are the expense of carrying that inventory and the expense of ordering the said inventory.

You need to remember these components and their abbreviations:

D – Quantity of Demand per year
Q – Quantity or Volume in each order
S – The fixed cost of ordering or Ordering Cost
C – Variable per unit cost
H – Variable holding cost
i – Interest rate or carrying cost

ALSO READ: What is Storage Cost of Inventory?

Ordering Cost or S

The number of orders that are placed each year can be derived by dividing the yearly demand by the volume in each order.

It is expressed as:

No. of orders = D/Q

For every order that has a fixed cost – regardless of the quantity or number of units, the yearly ordering cost or S is arrived at by multiplying this fixed cost by the number of orders.

Expressed as:

D/Q * S

ALSO READ: A Complete Guide to Cash Flow Analysis

Holding Cost

Stocking inventory has a cost associated with it; this can be direct costs like the storage cost of the inventory, or indirect, like the opportunity cost of storing inventory rather than using those funds for purposes like marketing.

The per unit carrying cost is expressed as the per unit cost multiplied by the interest rate, like this:

H = iC

This of course, assumes that there is no variation in demand, and the stock in hand gets depleted at a steady rate.

When the inventory finishes or reaches a certain level, the company places orders for replenishing the inventory.

The inventory holding cost is arrived at by calculating the total inventory product at a given time and the carrying cost per unit. It is expressed as:

Q/2 *H

ALSO READ: Debit notes and Credit Notes

Total Cost and the Economic Order Quantity

Adding the two costs tells us the total cost of orders for the year.

To find the ideal quantity that can be ordered to keep this cost at a minimum, the total annual expense is differentiated with regard to the element Q.

It is expressed thus:

Annual Total Cost (TC) = D/Q * S + Q/2 * H

EOQ Formula

EOQ = dTC/dQ = √2SD/H

ALSO READ: Why is Physical Stock Verification Necessary?

Using EOQ to Improve Inventory Management

Using EOQ to Improve Inventory Management

When you calculate the economic order quantity, you get the optimal order size that will help you get maximum profits for your business.

It eliminates the need for guesswork and helps you avoid situations like stockouts and excessive ordering.

You can leverage the data and figures to take improved, informed, and timely decisions about the inventory requirements of your organization.

Economic Order Quantity can have an especially significant effect on your business if you have a big business if you are incurring heavy inventory carrying costs, or if your inventory is very expensive in itself.

You can significantly enhance your operations to improve productivity and efficiency, cash flows, and profitability for the future.

Tranquil Cloud ERP has a robust inventory management module that can help you manage your inventory efficiently, and always maintain the optimal stock. This can help you cut expenses and boost profitability, and make sure that your financial and other resources are not unduly tied up in inventory. To see how our software works and how it can benefit your business, do schedule a demo at your convenience. We will be happy to give a detailed explanation and answer any queries you may have.

 

What Is an Inventory Control System?

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?

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

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

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?

What Is an Inventory Control System

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

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.

 

Why Safety Stock is Important?

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

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

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

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

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

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.

 

What is ABC Analysis in Inventory Management?

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

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

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

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

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

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.

 

A Detailed Guide To Stock Keeping Unit (SKU)

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

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?

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

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

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?

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

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.

 

Importance of Reorder Point in Inventory Management

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

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

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

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

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.