Unlocking Secrets to an Effective and Successful Inventory

How can I have an Effective and Successful Inventory? There are nine secrets to having an effective and successful Inventory.

For Companies with inventory, the inventory has a high value. If you had to rank different segments within your company based on value, you would rank inventory in the top 4. Below is my guess.

1. Your People and their Knowledge.
2. Your Brand
3. The Plant, Property & Equipment
4. Total Inventory

How close was I?

Without Raw Material Inventory, you cannot produce Finished Goods. No Finished Goods Inventory, you would not have anything to sell. Without anything to sell, what would you be? An online business like me! J/K.  All inventory deserves the same respect as you provide your people, brand, and equipment.

But, I am a service company. I wash cars. Service companies usually have inventory, even hand-washed vehicle service. As you will see later in the article, proper usage and application of cleaning are essential. There is correct and non-correct usage levels and applications in cleaning. Overuse can damage the material that you are cleaning and increase costs. Under usage will be ineffective in cleaning 100%.

How can we resolve inventory conflict, and how can we play a role in avoiding inventory conflict? If it was your choice, wouldn’t you want to avoid conflict?

What are the goals of an Effective and Successful Inventory System?

• Provide Exceptional Customer Service.
• Provide Cost-Efficient Operations.
• Minimize Working Capital Investment.

Let’s keep these measurements in mind while we explore the Rules.

Effective and Successful Inventory Rule #1: Who is Not Allowed

Do we need “Rules” with Inventory?

Absolutely!

What Rules do we need?

I am glad you asked.

My intentions are good when I say this, Rule #1 – keep the sales staff out of the Finished Goods and the Production areas. Here is a perfect example of breaking this rule:

Bob from the Sales Team is walking in the warehouse. He notices a product in a certain location…25 cases of product XYZ. Bob returns to the office and starts working at his desk. He hears a conversation between the Sales Manager and a Salesperson.

The Sales Manager says, “Jim, I don’t care how you do it, but I want the order for ABC Company to be delivered tonight, 100% complete.

“Sir”, Jim replies, “We are short 5 cases of Product XYZ”.

“Jim, I don’t care. Get this done!”

As Jim walks out of the Sales Manager’s office, in a quiet voice, Bob says “Jim, let’s walk.”

“Bob, I don’t have time. I have this huge problem and I don’t know how to solve it.”

“Seriously Jim, walk with me.”

Bob takes Jim to the Finished Goods Warehouse where he saw the 25 cases of product XYZ.

Bob says, “Here you go. Aren’t you glad to listen to me?”

Jim replies, ” Damn Bob! This is great. I can’t believe those guys in Production and Shipping. They are all boobs. Bob, grab that pallet jack…let me put this pallet on it…help me with these 5 cases…”

There are many different problems with this. Maybe Production would produce the 5 cases needed for the ABC Company this afternoon. The cases taken by the Salesperson were for another order. When a Shipping Picker pulls the 25 cases for the DEF Company, it will have two different code dates on the product. This is not good!

Salespeople have who’s best interest? The client. Every company client is important to them, but their client has their interest above others. I do not blame them. I would want to take care of my clients, also. But we need the system to operate as designed. No need to start playing favorites now. Keep the Salespeople out of the warehouse.

Owners would fall into this category also. Why? Most Owners started the business to capture unserved groups of people. With the Owner’s passion for their product or service, most owners want to satisfy the customer. Just do it. There lies the problem.

An owner will often do whatever it takes to satisfy the customer. Not considering paperwork to account for materials and labor when meeting the customer’s needs. The result, Owner makes the customer happy. On the other hand, the Inventory Manager takes a beating because of the short inventory. How fair is that?

On more than one occasion, I have witnessed the “Owner’s favorite” (whether in Sales or Technician) freely roaming the warehouse, taking what is needed for a customer. Interestingly, the “Owner’s favorite” becomes the loudest when there is an Inventory shortage.

The solution, everyone is responsible for properly processing paperwork.

It is difficult to say and even more difficult to put in place. But, we all need to perform our jobs at the highest level of quality.

Effective and Successful Inventory Rule #2: A-B-C Warehouse – Volume Pick Slots

Arranging inventory properly in the warehouse is crucial. You will save time and money with your people and equipment if done properly. You may not see this day to day, but you will notice it more weekly or month-to-month.

What is the secret? A-B-C Analysis of product movement. Please tell me more!

Have your analyst define product volume movement for the past 12 months. The list should be in descending order of quantity. First, count the total number of products. Do not include products with 0 or less quantity in the past 12 months.

• A = Number of Products x 0.20 (20%)
• B = Number of Products x 0.30 (30%)
• C = Number of Products x 0.50 (50%)

Divide your list based on A, B, and C.

Consider the closest area to the Staging Area as Prime Real Estate. You don’t want your cheapest product taking up Prime Real Estate, do you? Instead, you want the A products closest to the Staging Area. With this in place, you will reduce the time required to pick the product. If selected by machinery, such as a forklift, you will save money on your equipment.

Arrange the C products in the back while placing the B products between A and C.

The Front Counter Sales Staff has 10,000 – 11,000 tickets per year. This is an average of 40 – 44 tickets per day. The lowest I have seen is 32, while the highest is 83. Wow! 83 tickets in 1 day is high! Reviewing the Sales by Bin Location, I uncovered several items further away from the Front Counter Sales counter. What does that mean? The Front Counter Sales staff would have to walk extra steps and bend over to pull a box from the backside of the shelf to pull parts. We changed the position of those parts (25 different items) by moving them closer to the Front Counter. We placed them on an open shelf at waist level. This eliminated 20 extra steps and bending over to pull out boxes to find the parts. Save time for the customer and save wear and tear on the Front Counter Sales staff.

An Effective and Successful Inventory is about quickly getting the customer in and out. The customer is not there because he enjoys your business but because he needs something. I am sure the customer wants to make a purchase, apply what he purchases, and be able to enjoy the result. Being friendly, but getting them in and out efficiently.

Effective and Successful Inventory Rule #3: Technology

You can apply this next rule to all aspects of the business.

Technology will not fix broken processes!

Broken processes are from bad human habits. Either correct the bad habits or eliminate the human.

Technology is an asset and can help in processes. It can define the location(s) of raw materials and finished goods. Technology can tell us where the product should be placed in staging. It can tell us how much we should have available to use or sell.

Technology cannot find the raw material if the user input incorrectly. It cannot tell us where to place the product if the user did not enter the proper data. Technology will not fix broken processes that someone else has created.

Below is a barcode scanner that can be plugged into a computer via a USB port. This barcode scanner will require more equipment and software to operate. This scanner may help you scanning products at your cash register.

This is a wireless scanner. USB wireless technology connects this. This scanner has a range of 400m transmission in Open Air / 100m transmission indoors. Operating will require additional equipment and software.

I have used several different scanners, but I have to say this is unique. Is it worth spending the money to see how it works? Maybe so, then I can blog about it and define the positives and negatives.

This barcode scanner is more expensive because it has a program built into it. This may help you more with your inventory.

This Zebra ZT220, Direct Thermal Only Industrial Label Printer, has been built to print many labels daily. At a speed of 6 inches per second, it is only minutes to print 500 of 4 x 3 labels. That is 500 similar labels in under 5 minutes. I have worked with Zebra printers in the past for high-volume printing on pressure-sensitive labels, and the Zebra printer is a workhorse.

There are many different forms of barcode scanners, printers, software, and systems. You should determine what you can easily add to your system while ensuring productivity. Warning, providing productivity does not equal saving money. Productivity provides a systematic way of achieving your goals. Achieving your goals towards an Effective and Successful Inventory.

Effective and Successful Inventory Rule #4: Organized

Organized! The entire team must adopt an organized mindset. If not, someone must go behind the disorganized employee to correct what he/she left behind.

For example, let’s say you have a master case with 24 packs inside the master case. The disorganized picker picks the last three packs in the master case. The picker should take the empty master case to the cardboard bin. But he doesn’t. This means the next picker will have to deal with the empty case. This isn’t fair!

If you are building your team from the ground up, select the right people for the job. You can refer to our classes on Organization Charts, Job Descriptions, and DISC.

On the other side of the coin, you are responsible for ensuring the proper identification of the Aisles and Slots. You don’t need your people wandering around the warehouse to find products. The Pick Ticket should define the location for your Pickers. The Picker should find the products easily as the Pick Ticket prints the information, and the Aisles and Slots have proper numbering.

You can place Product Information on the Rack if the product is static. Ideally, the Rack would have a Bar Code for the Aisle, Side or Direction, and Slot. This would be static on the slot’s far right or far left side. On the bar in the middle of the rack would be the Product Bar Code.

Let’s assume a forklift works six hours per eight-hour shift. Six hours multiplied by five days multiplied by 50 weeks equals 1,500 hours. With the Aisles, Racks, and Slots properly marked, each forklift saves 30 minutes daily. This means the forklift is off for an additional 30 minutes per day. This equals 2-1/2 hours per week, 125 hours per year. This is an 8.3% energy savings.

Effective and Successful Rule #5: KPIs

We can break the KPIs for Inventory into two different classes. The first class is the KPIs for the Top-Down view. Inventory Turns, Days In Inventory, Days Sales In Inventory, Stock Sales Ratio, etc… are great Inventory KPIs from the Top-Down view.

Let’s look at the Inventory KPIs based on a line item. Yes, each sellable item will have these metrics. These metrics would be by units, not dollars.

• Days Inventory On Hand = (Average Inventory On Hand / Cost of Goods Sold) x 365
• Stock to Sales Ratio = Inventory On Hand / Sales
• Sell-through Rate = (Units Sold / Units Received) x 100
• Backorder Rate = (# of Delayed Orders / Total # of Orders Placed)
• Lost Sales during a certain time = Define the number of units and dollars lost because we did not have the product or could not find it.

Remember, this information is by line item.

Summarize this information by Supplier. If you are a manufacturer without a Resale Distribution of Products, you cannot complete this report.

Remember, you can’t manage what you don’t measure! To accomplish an Effective and Successful Inventory, measurement is a must.

To learn more about Leading KPIs, read our blog post here. If you prefer to watch a video on Leading KPIs, click here. Click here to learn more about Lagging KPI’s.

Effective and Successful Inventory Rule #6: Cycle Counts

Cycle Counts can be beneficial. Cycle Counts on Raw Materials can validate or uncover issues with the Bill of Materials or Product Structures. If there is an issue with the Bill of Materials, it will distort the numbers. This includes Financial Statements.

I break Cycle Counts similar to the A-B-C Analysis. The A-B-C movement analysis determines the Cycle Counts.

• A would be your Primary Raw Materials. Primary Raw Materials are items that would be used frequently, maybe daily. This would be counted daily, no less than 3 times per week. The adjustment would be keyed into the computerized inventory management system.
• B would be your Secondary Raw Materials. Secondary Raw Materials are items that are not used frequently. I recommend you count these items every other week or the day after they are used. I prefer the day after they are used. The adjustment would be keyed into the computerized inventory management system.
• C would be your Raw Materials used sometime during the month but not regularly. I would count these the day after they are used, no less than one time per month. The adjustment would be keyed into the computerized inventory management system.
• D would be your Raw Materials that are not used regularly. These are items that are close to dead inventory. I would count these items once a quarter.

With an up-to-date raw material inventory, you can verify the Production Raw Material Efficiencies, and your update will assist Purchasing in determining when and how much to order.

More accurate inventory can be a major asset for Inventory, Production, Purchasing, Order Pickers, and many other departments. Cycle Counting is Game Changer #2 in accomplishing an Effective and Successful Inventory system.

Effective and Successful Inventory Rule #7: Inventory Reconciliation

The Inventory Reconciliation is a key report that you should use. Inventory Reconciliation for Finished Goods will look slightly different from Raw Materials. However, the reconciliations supply needed information.

As an Inventory Manager, you should review this report daily. You may have 100 items in your inventory, or you may have 5,000 items in your inventory. In the beginning, looking at this report daily may seem like a waste of time. But if you study the report, you can see activity trends.

Let’s look at the Finished Goods Reconciliation first.

Item Nbr/ Description	Beginning Balance	Purchased/ Produced	Sold	Damage or Warranty	Perpetual Balance	Physical Count	Variance
	Plus ( + )	Plus ( + )	Minus ( – )	Minus ( – )	Equals ( = )	Minus ( – )	Equals ( = )

Finished Goods Reconciliation Column by Column

• Item Number and Description. The report defines the Item (or Part) Number and the Description by line item. You can find this in your ERP system.
• Beginning Balance. This is the Ending Balance from the previous period.
• Purchased or Produced. If you buy the product to be sold, consider this column as your Purchase. If you produce the product to be sold, consider this as your Production. As the Inventory Manager, you need to know these numbers are correct. Discuss these numbers with your Receiving Supervisor and Production Control.
• Sold. We have shipped this. Discuss these numbers with your Shipping Supervisor.
• Damaged or Warranty. If you are receiving products in your warehouse, at some point, you are going to have damaged products. When you encounter a damaged product, you must segregate it and file a claim. Filed against who? Great question. This depends on the contract terms.
• The Ending or Perpetual Balance is a calculation: Begin Balance + Purchased or Produced – Sold – Damaged or Warranty.
• The Physical Count is what we have in the warehouse. There are exceptions to the rule. The system you are using will define the exceptions. I have seen systems that will encumber products. This means it is in a holding bucket. If this is true about your system, you may need to add a column.
• Variance is Physical Count minus Ending Balance. If this is negative, you are short. A positive, you are over. For every non-zero value, you and your team need to research.

Let’s look at the Raw Material Inventory Reconciliation.

Raw Material Reconciliation Column by Column

• Item Number and Description. By line item, the report defines the Item (or Part) Number and the Description. Your ERP system contains this information.
• Beginning Balance. This is the Ending Balance from the previous period.
• Purchased. This represents the total quantity purchased for the time frame. As the Inventory Manager, you need to know these numbers are correct. Discuss these numbers with your Receiving Supervisor.
• Sold. This is what has haveshipped. Discuss these numbers with your Shipping Supervisor.
• Damaged/Warranty/Transfer In/Out. This column is a catch-all for the miscellaneous transactions.
  The system defines the product as damaged, under warranty, or on Quality Control (QC) Hold, Transfer In or Out.
• Standard Usage. The materials used at standard for the products produced are represented in this column. There are two factors in this number. The production and the Bill of Materials (or Product Structure) for each item.
• The Ending or Perpetual Balance is a calculation: Begin Balance + Purchased or Produced – Sold – Damaged or Warranty – Standard Usage.
• The Physical Count is what we have in the warehouse. There are exceptions to the rule. You will define the exceptions using the system you are using.I have seen systems that will encumber product. This means it is in a holding bucket. If this is true about your system, you may need to add a column.
• Variance is Physical Count minus Ending Balance. If this is a negative, you are short. A positive, you are over. For every non-zero value, you and your team needs to research.

Effective and Successful Inventory Rule #8: Supplier Performance

Your Suppliers are an important factor in your success. How so? When you go to your favorite chain restaurant in your hometown and visit the same restaurant 1,000 miles away, is it different? Probably not. Why not? Because the ingredients meet a certain standard at this location and the one in your hometown. Have you ever eaten a McDonald’s Big Mac where the bun did not have sesame seeds on it? Have you ever eaten a McDonald’s Quarter Pounder where the bun had sesame seeds on it? The answer is no to both questions. Why? Because McDonald’s has a standard for each sandwich. We make each sandwich with these ingredients and follow a specific process, without any exceptions. This is true everywhere in the USA.

You need this consistency for your company. But you must define the parameters for your suppliers. What does this mean? It means you need a “Standard” developed for your raw materials. If you require 75/25 Beef, and you have told your supplier of your requirement, you should receive 75/25 Beef all the time.

Just because you have defined this requirement to your supplier, you still have the responsibility to verify the raw material at your door before unloading the delivery. Whether individuals from the Receiving Department or Quality Control, they should examine and verify the product label. If your standards require QC testing, you must conduct it prior to unloading. Unloading the product poses a greater challenge in dealing with supplier-related issues such as damage, warranty, and claims.

Successful Inventory Inventory Rule #9: Policies and Procedures

Policies and Procedures are so, so important. The Policy will define the goal of the process. Whereas the Procedure will provide step-by-step instructions to accomplish this task. The procedure could change because of growth, finding a better way to accomplish the task; or even different technology inserted into the company. But the Policy does not change often.

The video below is what one entrepreneur did to start her business.

Before opening her business, she developed an SOP (Standard Operating Procedure) Manual. This allowed her to be scalable and open another location.

As an example, the Policy is to make deposits by 1:30pm daily. Twenty years ago, the procedure would be to make a copy of the checks, stamp the back of the check with “For Deposit Only…”, and write the check from name on a line of a deposit, when complete total the amounts. Ten years ago the procedure was process each check through the check reader, define the total, batch summary, etc… The procedure has changed but the Policy still is the same… make the daily deposit by 1:30pm on a daily basis.

If you have not started your business yet, I encourage you to make this leap into writing Policies and Procedures before the business starts. There are several Policies that will be the same from industry to industry. What you write today for the business idea you have will be close to what you need another business five or ten years from now. You can define the written Policies as an assest in your planning process.

If your business is operating now, develop a plan with your managers to accomplish this task. Sitting with your managers to help each other to develop this asset can be beneficial for the manager and you.

Click here to view our article on Policies and Procedures.

Closing

We asked earlier in the article, “What are the goals of Inventory Management?” Let’s revisit the 3 goals:

• Provide Exceptional Customer Service. How did we achieve Exceptional Customer Service? With the correct inventory balances, your purchasing habits should improve. In turn, this will reduce the chance of shipping short.
• Provide Cost-Efficient Operations. When your team is working together using the tools available, the efficiency of operations will improve. When the operations improve, the costs will decrease.
• Reduce Inventory Investment. When you have the proper data (inventory in-stock, available, inbound, and outbound orders), you can schedule production properly (the correct item and quantity). Purchasing can order the proper raw materials and resale finished goods.

What would you change in your business to make your life easier?

Have a great day and be safe… David

Frequently Asked Questions-FAQs