admincritical in any business.
It’s one of the most expensive assets on average representing 40 percent of total invested capital.
On one hand, a company can reduce cost by reducing on hand inventory levels. On the other hand, customers become dissatisfied when an item is frequently out of stock.
Companies must strike a balance between inventory investment and customer service levels. Managing inventory has been beneficial in providing stock of goods to meet anticipated demand by customers.
There is need to meet variations in production demands, i.e. changes in response to sales, estimates, orders and stocking patterns.
Spending too much inventory
It is easy to spend too much on inventory. This has the potential of consuming working capital and eroding profits.
Remember that storage and warehousing is not free. Even the stock that sits on a shelf is subject to damage, depreciation and even obsolescence.
Old inventory can be very hard to move. Some companies have ended up marking it down or dumping it.
You can avoid this by making some decent projections of how much supply you will need and when you will need it.
The best measure is what you have sold in the past. If you have sold 100 items per month for the past 12 months, chances are that you will need 100 this month.
Then the issue of seasonality comes into play, if your home and garden business does well in the rainy season then it is referred to as perpetual inventory.
This results in balances of individual items of inventory in either quantity or quantity and value.
You can also do periodic stocktaking where you check the balance of every item of inventory on the same date, usually at the end of an accounting period. In some industries, continuous stocktaking is more effective as it counts and values selected items of inventory on a rotating basis.
Specialist teams count and check certain stock items on each day.
Inventory tracking
Once you know how much you need, you have to make sure you actually have it on hand.
Opportunities for miscounts are everywhere, during receiving, during order fulfilment and the all-too-common pilferage.
Supermarkets across the country are now using Electronic Data Interchange and bar code scanning as it can help eliminate data entry errors.
Learn to prioritise
It can take an outsized amount of time and resources to keep track of all the details for each inventory item.
However, focus on the items that matter most. Generally, 80 percent of demand will be generated by 20 percent of your items.
Spend most of your effort on those “A” items, forecasting, reviewing in-stock position and reordering more frequently. The next highest-selling 30 percent of items, the “B” items, will typically generate about 10 percent of sales.
The slowest selling “C” items account for half the items you stock, but only generate 10 percent of your sales.
You can also use the first-in, first-out Fifo method of classifying stock. It assumed that stock has been used or sold in the order in which it has been received.
The last-in, first-out Fifo assumes that the most recently received has been used or sold before older stock.
The average Cost Method AVCO of inventory valuation identifies the value of inventory and cost of goods sold by calculating an average unit cost for all goods available for sale.
Till then, do what is healthy for the business. May God richly bless you!
Shelter Chieza is an advisor in management issues. She can be contacted at [email protected].
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