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How to Manage Inventory

While the exact process used to manage inventory will vary somewhat, there are a few basics that apply in every situation.

Just about any company has some sort of inventory that requires management. The inventory may be something as simple as keeping an eye on the usage of office supplies or as complicated as maintaining detailed records involving raw production materials, goods in process, finished goods, or parts and materials necessary for the continued operation of the facility. Regardless of the complexity or size of the company, the effort to manage inventory will involve a few basic steps.

Before it is possible to manage any type of inventory, it is necessary to structure a process for tracking the movement of all items into and out of the physical inventory. For example, a raw materials inventory is constantly updated by transferring goods out of the inventory as they are assigned to departments and utilized in the production process. At the same time, the arrival of additional raw materials is transferred into the existing inventory, usually on the same day that the goods are received. In decades past, many businesses used accounting ledgers or a flip chart system to keep track of raw materials on hand. Today, inventory management software products make it very easy to document each subtraction from an inventory as well as add in any new materials entering the inventory.

Once the tracking mechanism is in place, the effort to manage inventory needs will involve setting what is commonly known as usage amounts. Essentially, a usage amount is the number of units of a specific item that are required to allow the operation to continue uninterrupted between the time when new units are ordered and when they arrive. Accurately calculating this figure involves knowing how often the item will be used within the operation and how long it takes for a vendor to deliver an order of the item.

For example, if a piece of machinery requires a new tension belt every seven to ten days in order to continue operating, but it takes two weeks for a vendor to deliver an order of belts, the reorder point or usage may be set at a minimum of two. In order to further allow for unforeseen circumstances, the inventory manager may choose to set the usage at three, thus covering the delivery time and also keeping an extra belt on hand in case a defective unit breaks down before its anticipated lifetime.

Any effort to effectively manage inventory needs will also take into consideration any assessments or taxes that must be paid on the existing inventory. For this reason, properly calculating usage is not only important to keeping necessary materials on hand but also to the task of preventing the inventory including too many units of any one item. This helps to keep the overall costs of running the business to a minimum, both from the perspective of not tying up a lot of money in the physical inventory as well as keeping the tax burden to a minimum.

The individual or team charged with the task to manage inventory levels is often involved in the process of evaluating current vendor relationships and pricing. Part of this process means working with the purchasing agent or team to identify potential vendors who can provide lower unit costs and possibly provide a quicker turnaround on delivery of ordered materials. This aspect of managing the inventory is a further effort to keep inventory costs at a minimum while still ensuring that the business has what it needs to operate at optimum levels.

Each type of inventory will involve other action items and procedures that are unique to the specific kind of inventory involved. Maintaining a raw materials inventory will of necessity be somewhat different from managing a finished goods inventory. Still, all efforts to manage inventory of any type will include these essentials being adapted to the specific circumstances of any inventory management strategy.