Do you question the accuracy and availability of your inventory? Does your team ever set out on a treasure hunt to locate usable combinations of inventory to fulfill orders? Is inventory frequently found outside its designated location? Do significant dollar value adjustments to inventory and warehouse control accounts typically require journal entries at month-end? These issues suggest that your inventory tracking system may not be operating at its full potential, which could hinder the ability to provide timely visibility to accurate inventory information to support your business operations. If this sounds familiar to you, it warrants further investigation of common root causes of inventory challenges and whether you should consider outsourced CFO services for optimal inventory management.
Inventory Optimization Tools: Train People on the Resources Available
First, document and provide clear instructions or illustrated SOPs to set your team up for success. Refrain from relying on employees taking their own notes and expect you will experience turnover; having well-documented resources available will keep things running smoothly, now and in the future.
Next, ensure adequate employee training on the concepts specific to your inventory tracking system, including clarification of quantities reflected as on hand, allocated, available, on order, and available-to-promise. Address any knowledge gaps with a brief training session that reviews these inventory terms so queries and reports are interpreted correctly and consistently throughout your organization.
Available-to-promise answers the question of the availability of inventory in the future, even if it is out of stock at the current moment. Understanding and correctly applying this knowledge can alleviate expediting, carrying too much inventory as a buffer for just-in-case problems, and establishing haphazard ordering patterns with your suppliers for recurring products—all of which likely increase the cost of those products to you.
Optimal Inventory Management: Commit to Consistent and Timely Processes
When you set the trap to catch inventory discrepancies, you are then forced to treat those you are able to catch as expedited exceptions to resolve. Instead of conducting ad-hoc inventory reconciliations and only performing physical counts when discrepancies are detected, it is advisable to implement a proactive and methodical cycle count program. This approach supports a perpetual inventory system that can be trusted and continuously monitored for deviations.
Achieve accurate inventory quantities and values through proper transaction recording and adherence to cut-off procedures. Update books on a regular period-end basis to keep a precise count of the raw or bulk inventory, work-in-process (WIP), and finished goods, which is essential at year-end. Surprises found in inventory almost always lead to surprises in profitability for the year, and these are not usually the fun kind of surprises that owners and lenders enjoy!
Additionally, those responsible for having accurate inventory should clearly assign accountability for transacting inventory movements. Set clear expectations for timeliness and accuracy of recording inventory transactions. If employees cannot visualize the correct way to perform their tasks, they will continue to make decisions without a clear understanding of whether they are moving closer to or farther away from achieving accurate results.
Allocate the necessary resources to invest sufficient time in walking through and demonstrating the correct procedures for processing various inventory-related movements. This includes receiving, warehouse transfers, physical count adjustments, issuing bulk or raw inventory to WIP, reducing finished goods upon sales invoicing, processing inventory returns, and any other types of inventory transactions specific to your environment.
Try to match the timing of transactions with the reality of how material flows through your facilities. Ideally, any physical movement of stock must be recorded. A lag in recording inventory transactions will almost certainly impact the accuracy of available inventory at any given time.
One obvious example is when inventory is transferred to an offsite storage location. Consider staging areas near your shipping, which might include staged inventory for weeks at a time. Or, consider when inventory is pulled from stock for internal uses like R&D or testing, sales samples, or promotional giveaways. The best time to capture those transactions is as close to real-time as possible because they may never be recorded once that moment has passed.
Inventory Stocking: Organize Space
Another challenge can arise in situations where the same inventory is present and stored in different locations within the same facility. This may occur due to distinctions such as back stock versus point of use or primary and secondary overflow warehouse locations. Look to enhance the initial put away of product to direct the receiving into one location or condense in close proximity to each other. If that is not possible, have a clear and easy method of dynamically labeling and cross-referencing the secondary location of the same stock. Consider the use of creating bin or rack location identifiers within the warehouse to support visibility and accuracy of inventory by location. This approach can be done informally as a location reference only or utilized more formally in an ERP system to track bins for every inventory receipt or stock pull transaction.
Keep in mind that location identifiers can also facilitate the creation of directed picking routes and setting up higher-velocity items in primary storage areas while placing lower-velocity items in secondary or relegated spaces. This helps minimize wasted time and space due to unnecessary movement. Neither lost nor miraculously found inventory supports accurate reporting on your materials position, so maintaining well-organized, appropriately segregated, and clearly identified storage locations helps prevent carrying inventory that is unaccounted for.
Inventory Management Goals and Objectives: Coordinate Input and Output Across Departments
Having an accurate view of your materials position offers significant company-wide benefits. With this level of visibility, you can envision opportunities such as aligning production and inventory control with planned sales promotions to minimize the risk of running out of stock. Additionally, it allows the supply chain to optimize inventory and alleviate overstock by fine-tuning the demand plan and predicting when items will be needed or available to promise. It also helps prevent surprising accounting with significant inventory adjustments at the end of the year.
When should you consider outsourced CFO services?
It can be difficult to find the time to think strategically about optimizing processes when you are so mired down in daily details and fighting fires. Despite this, it is important to evaluate current practices to ensure your business is operating as effectively as possible. If this feels overwhelming or unrealistic with your current resources, it may be time to consider engaging an outsourced CFO with inventory expertise to work with your team on inventory management. Contact us to learn more about our advisory services and how we can help identify possible improvements to your inventory software systems and inventory practices.
Teresa Petrie has a cross-functional background in accounting and manufacturing and has developed a specialty in cost accounting and inventory control, where those two disciplines intersect. Her goal is to help clients streamline day-to-day operations, assess the viability of future initiatives, and implement changes that deliver results. Teresa has a proven track record of assisting clients with software selections and implementations for manufacturers and distributors who have unique complexities with inventory management. Please reach out to us to get connected with Teresa to discuss your inventory challenges and identify opportunities for improvement.