You know you have cash in the bank (we hope you do!). You know you have some invoices out there waiting for your customers to write you a check. You also have money (in some cases a LOT of money) in other places. Are you aware of how much capital you have tied up
- Sitting in shelves, pallet racks etc... on the shop floor
- In bins stashed around work spaces, in trucks, and toolboxes
- In the process of manufacturing, but not yet turned into salable products
- Finished Goods sitting around waiting to be shipped
This is called Inventory. There are even more in depth, sophisticated elements of Inventory, but our goal is to cover what it truly takes to get the basics of Inventory up and running in a small business using Inventory Software.
Why tracking Inventory is crucial
Tracking Inventory is crucial because inventory is basically cash on the shop floor rather than in your bank account.
And its isn't just the amount of money, it's the LOST PRODUCTIVITY when the manufacturing team can't continue because there is no raw materials. I've literally seen a full stop on the shop floor, and 5-6 people stop, look at each other, and then sit down and wait.
Do the math
(Quantity of workers (lets say 6)) X (minutes sitting (lets say 10)) X (Average Burden Rate per hour (lets say $50))
This equals 1 hour lost time, and at least $50 in costs.
But wait, there is more...
How much SALES or PROFIT would that hour produce? You lost that as well.
So there is a balance to be maintained. You need enough inventory to keep production going, but every bit of inventory you have extra on the shop floor is cash you cannot use or put to work. I've also seen companies buy so much raw materials to avoid running out, they cannot make payroll.
So there are several factors to tracking Inventory, the time it takes to manage it, as well as the potential impact
Tracking Inventory: Manual vs Inventory Software Systems
Before we go further, let us be clear. You can manage Inventory using a couple of simple manual techniques. Here is a quick list of a few, some of which might work for certain organizations that are either very small or very simple:
- Visual: This is where your operation uses very consistent raw materials, and they are large enough and organized on shelves or racks easily visible by whomever is responsible for managing Inventory. It also presumes raw materials are used quickly in relation to when they are needed. I've literally seen organizations where someone scheduling production or materials pick up a phone, look out through the door, and manage inventory in real time with the supplier. They simply place an order based on what they can see, and as long as they don't run out, everything is fine.
- Systematic: There are basic systems that track Inventory using differing kinds of structures.
- Min/Max: Each Item you want to track Inventory. Each container (bin, shelf, spot etc...) has some kind of label or sign that shows the MINimum and the MAXimum amount you want to have for that item. Periodically someone walks around and notes how much they need to get to the MIN amount. If the amount on hand is the MAX amount, they can decide to reset the MAX amount to something lower.
- KANBAN: This system uses a series of cards/signs that help the operation respond to Inventory levels, oriented around a PULL type system. Demand for inventory drives the process from consumption. It can be a very effective system, especially in LEAN manufacturing systems. You need to have very little limits on resupplying, And some good grasp on future demand.
For any but the most simple, or small organizations, manual systems cost more than they can save. The time it takes, the lack of accuracy, and the inability to adjust to increased demand (even worse if the increase is temporary) make it hard to keep up. We need a small business software system.
All Inventory software is going to track 2 basic types of transactions at a minimum. There are always more and more concepts to dig into, but lets stay focused.
Inventory really is like a bank account on the shop floor, and every bank account needs a register
The Ins and Outs of Inventory
The amount of Inventory a software system calculates is basically the sum of all the Ins (deposits) and the Outs (withdrawals). The remainder is your balance. That is how much you have right now. Of course in most checkbooks, you have checks you will need to write in the future, as well as checks you wrote but haven't been "cashed" yet. More on these later.
A good small business software system will track the Ins and Outs as they happen, and calculate that information on demand for the user. Here are some simple examples of Ins and Outs
Examples of Ins
Receiving purchased materials
Putting Inventory back from a return from a customer
Receiving parts from manufacturing back into Inventory
Examples of Outs
Shipping products to customers
Consuming raw materials in manufacturing
Loss from scrap, quality rejections, and theft
Good Inventory Software will track the transactions listed above. This means that you will need to conduct those transactions within the same Small Business Software system:
Sales Orders and Shipping: Entering what Customers want, and tracking how you and when you ship them. This is normally making packing slips (for product based operations), or having projects passing a certain point in manufacturing. At this point, you have many of the elements of Invoice/Accounts Receivable, which drive accounting.
Purchasing and Receiving: Entering what you buy from Vendors, and tracking when and how you receive them. This is normally entering Purchase Orders for each item, and receiving it by entering the information from the Vendors Packing Slips. At this point, you have the elements of Voucher/Accounts Payable, which drive accounting.
Adjustments: Transactions that take away or add Inventory but don't go through the above transactions. Scrap, Rejects, Theft, and periodic adjustments.
These simple elements work together to provide inventory information to you. But like many things, just having information isn't good enough. Using it is the point. It's an important element of any good small business software system that manages inventory to provide elements that focus your attention to relevant pieces.
Part Numbers: Each item you wish to track needs it's own part number, unique and usable.
Part Elements: Costs, Prices, and groupings are key. If you want more than just HOW MUCH Inventory is on hand, but HOW MUCH VALUE is on hand, you need to track costs, prices etc... If you want to know inventory for a group of related parts, there needs to be ways to related parts like Product Codes, Inventory Codes etc...
Transaction History: The numbers are important, but also the chronology of HOW you got to your number can be very important when you need to verify or audit your Inventory numbers. Having the transaction identifiers (Sales Order Number, Purchase Order Number etc...) are very helpful.
These elements may seem overwhelming, but in reality any good system has these. They might use differing terms, or have unique elements of how they track them. The important part is to have a good strategy on what parts you need to track, how much you need to track, and what elements are the most effective. .