Inventory
August 16, 2023
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Inventory is the most critical asset for a business, and managing it efficiently is essential for business success.
Today we will examine what a UOM is and how you can track it.
An inventory UOM or unit of measure is the standardized measurement unit used to count stock items and to express them as specific quantities.
Pieces, litres, kilograms, meters, etc. are some examples of UOM.
Units of measure help in quantifying and tracking items in your inventory.
The physical units help in measuring and managing the different items and help in planning their purchase to ensure fulfilling of customer orders.
Depending on the transactions, different units of measures are used for the same inventory item.
For example, you may purchase cotton fabric in kilos but may use them in production in meters.
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Let’s take a look at the different types of inventory units of measure:
This is the unit of measure used in warehouses for quantifying inventory items.
Inventory transfers, picking, orders, container management, etc. are some of the warehousing transactions where stocking units of measure are used.
These UOMs help make warehouse operations simpler.
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As the name suggests, it is the unit used when placing orders for purchasing inventory items, and for sales orders as well.
This is the UOM used for shipping operations like unloading, loading, and packaging.
Standard UOM means the measurement unit stays the same for ordering, stocking, and shipping.
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UOM helps in quantifying inventory items easily understood by all relevant parties, and hence is critically important in inventory management.
UOM makes it easy to understand how much a business is buying or selling, what price they have to pay, and so on.
Prices are always expressed in terms of UOMs; for example – SAR 500 per kilo, or USD 200 per box, and so on.
Without a well-defined unit of measure in the order and quotes, communicating the exact quantity becomes difficult, leading to confusion.
Units of measure must also be standardized so that all relevant parties have a clear understanding with regard to quantity and total price.
This is especially important in international transactions.
For example, some countries may use kilograms while others use pounds.
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Let us suppose that a retailer has to order rice to stock in his supermarket, for sale to the end-users.
Here it is critical that the retailer defines the unit clearly.
Merely mentioning a number – let’s say 350, can cause misunderstanding.
The retailer may have kilos in mind, while the wholesaler could assume sacks – with each sack weighing 50 kilos!
Therefore, it is important that the retailer clearly mention the unit as kilograms while placing the order so that there is no ambiguity.
Here are some tips that will help you to develop your UOMs.
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Certain items are easier to track than others; let’s take the example of shoes; you buy them as x number of pairs, stock them in pairs, and sell them in pairs.
However, not all products are like that; this is especially so if you buy raw materials in bulk, process them and sell them as finished products.
This would entail breaking down the product into different units of measurement.
Steel rods for example your company buys them say by weight.
But at your factory, they are cut into small pieces for sale.
So how do you account for them – by length or weight?
You may purchase an item like a soft drink in crates, but store and sell them as individual bottles.
Here it is important to know how many cola bottles are packed in a crate.
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Hence, we can see that we need to remember three categories of measurement units to track them:
It may not be necessary to have all these measurement units for each product; however, it’s a good idea to have a UOM that shows the way you track that item – the standard unit.
This will allow your employees to relate to the products in the manner they are familiar with, without any mix-up as the product is moved from purchase to sales.
You can also create your own units to be used internally for convenience.
For example, if you find it difficult to track an item in pieces, you could use dimensions.
For example – instead of just packing bags, you could refer to them as 12×16 bags and 14×18 bags (dimensions)
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It is possible to use the two UOM features; the primary unit is often used for purchasing, pricing, producing, receiving, packing, and shipping but the secondary is used for determining the pricing.
Say you need to purchase, order, or transfer an item in a UOM different from the pricing and invoicing UOM.
Here are a few examples:
The weight of each mango is different as they are of different sizes.
You may sell 10 different mangoes at a different prices as the weight for each is distinct.
Here you will use the primary unit piece while stocking the mangoes, and the secondary unit of grams when you price it.
An average crate of mangoes may weigh 10 kilograms; so, you use that unit for stocking.
The actual weight of each mango will determine the price of each mango – what you bill your customer.
You can use the dual UOM feature to track items in both the primary and secondary units of measurement at the same time.
This can be done throughout the procure to pay and order to cash processes, in various modules like Procurement, Inventory Management, Manufacturing, etc.
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It is essential to record the correct weight of the item you buy or sell so that you can do accurate costing, pricing, and invoicing of that item.
Give an estimate of the price during purchase or sale, and ensure maximum value as per the precise weight that you have received or shipped.
In the case of perishables, the weight may reduce between the time of purchase and sale – evaporation causes weight loss while in storage.
Therefore, it is important to weigh the item just before it is shipped and price it as per this weight.
The Order Management feature allows the creation of a sales order in the primary UOM of the item, and uses the item or standard conversion to calculate the quantity in grams or any other secondary unit.
You can track an item in a unit different from the unit you’re using for stocking.
Say you stock and track the customer’s order in cases, but use kilos to track the quantity for pricing and shipping.
This means you can use both case and kilos to track that item.
Automated flows can be used for updating order lines, and invoicing them as per the primary or secondary quantity used for shipping.
In case you have to transfer goods internally, you can generate the transfer order and fulfil it in the primary unit, and calculate the pricing as per the secondary unit.
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These are the benefits of properly tracking items in different units of measurements:
By linking your UOMs to your prices and expenses, accounting becomes automatically easier, and your business also becomes more flexible, as you can sell products with different UOM.
The best practice would be to link your price and cost to the product’s smallest UOM, the one you use as the standard unit of measurement.
Therefore, in case you receive sunglasses in cartons, you must cost and price them per pair, and not cartons, if you’re selling them in pairs.
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While spreadsheets are very useful to track inventory, they cannot be scaled; so, when you reach the point where there are numerous items to update, you are likely to make mistakes.
It makes good business sense to shift to robust inventory software like Tranquil Cloud ERP before you reach that stage.
Tranquil inventory management module allows you to tie a specific unit of measure to every item and use the appropriate unit for specific items.
This means that you are saved from the worry of remembering which unit to use at different stages like purchasing, shipping, and so on.
With Tranquil, you get the appropriate UOM in the correct context, with the right cost and price assigned.
Still, confused about how it works? Schedule a demo of our product when it’s convenient for you, and we’ll take it from there. Our executives will be happy to walk you through the software and answer any query you may have about its working.
