Effective inventory control requires discipline

While strong inventory, both deep and broad, can certainly be a competitive advantage, savvy business executives are careful to limit the amount of capital they’re willing to commit to this critical asset. No company, not IBM, not Wal-Mart, not Home Depot, and certainly not one of their companies, has enough capital to ignore inventory levels.

Inventory and accounts receivable make up roughly 80% of total assets in most businesses and 100% of manageable assets, so controlling both will provide any business with much-needed capital to grow.

In this article, I want to share with you several inventory management ideas that will help you optimize inventory turns and minimize out-of-stocks:

o Set clear goals for buyers; Make sure buyers understand how your jobs are measured. Inventory turnover by category, gross margin, and out-of-stock (or backorder incidences) are good places to start keeping track.

o Do regular cycle counts, at least once a month. Establish a counting calendar that specifies the days of the month to count specific products. Adjust amounts in your computer system as discrepancies are discovered; This procedure will avoid big surprises at the end of the year. Performing cycle counts on time should be a condition of employment for whoever is in charge of this critical task.

o Discuss with your software vendor the effect on inventory counts of processing inventory receipts on SKUs that show negative quantities. Ask your software vendor for advice on procedures to avoid complex problems.

o Make sure your inventory receiver is not just the one who is available the moment a new shipment arrives. Assign responsibility to one or more specific people to receive the inventory.

Then train them.

Then inspect what you expect.

Assume that suppliers never send too much. It’s not that you don’t trust your suppliers, it’s just good business practice to compare the actual quantities received with the quantity you ordered.

o Adopt a policy that requires drivers of inbound delivery vehicles to drop off their shipping documents at the office or guard gate before heading to the yard or warehouse. Instruct the receiving staff to use the purchase order as the receiving document.

If you implement this idea, instruct your forms provider to “smear” the amounts on the receiving copy of the “PO” so receiving staff aren’t tempted to assume accuracy.

o Direct shoppers to walk the yard and warehouse daily to get first-hand information on inventory levels, product quality, and how specific SKUs are stacked or stored.

o Educate employees involved with inventory management as to the dollars and cents effect inventory accuracy has on company profitability.

o Clearly label stacks, shelves, and bins to reduce errors, especially by seasonal or part-time employees.

o Document all inventory procedures.

o Each month, assign someone with an eye for detail to carefully review all computerized inventory reports.

o Spot check the accuracy of the annual physical inventory counts.

o Periodically review what you expect from staff assigned to all inventory-related tasks.

Inventory control requires regular review so that frontline staff don’t develop bad habits. Take the above list of recommended inventory procedures and see how well your people are following the rules you’ve established. If you have some aspects of inventory control in your company that are not documented, assign a responsible employee who is good at systems design to create the documentation.