Good Inventory Practices
31 October 2022
Good Inventory Practices
A law of the universe dictates things will always descend into chaos unless energy is supplied to maintain organisation. It applies to galaxies, stars, humans, businesses, and inventory!
A recent logistics survey found a dominant concern of companies was poor data hygiene. In other words, most struggle to ensure inventory information is complete, accurate, timely and accessible. Working inventory transactions should be easy, quick, and mistake-proof.
The carrying cost of stock is generally held to be between 20% and 30% of stock value. So, if your stock value is $100k, then expect to lose $20k to $30k of this over time because of obsolescence, loss, waste, over-ordering, market shifts, shrinkage, damage, and perishable product expiry. Excess inventory is a cash black hole!
Good data hygiene with TidyStock
First, remember data should only be necessary and sufficient – not too much and not too little. Don’t make things too complex, especially with names and item numbers.
It’s important to categorise well, as it is the first level of inventory organisation. There are two ways to categorise, either by commodity (product) or accounting ‘needs’.
Commodity categorisation is usually the best: for example, Steel, Aluminium, Chemicals, Fasteners and so on. This allows you better reporting plus the ability to negotiate with and consolidate suppliers. Restrict to major commodities, 20 to 30 at most. Resist complexity and coded sub-categories. Good categorisation quickly shows where most of the company’s cash is going.
Accounting categorisation examples: Consumables, Projects, Freight and so on. We often find accounting and commodity categories mixed up in the same database. This leads to item schizophrenia – is a bolt a fastener or a consumable? What if a part is costed to a project today, but was issued as a consumable yesterday? Accounting categorisations are usually a hangover from older systems and practices, where workarounds were needed to satisfy Profit and Loss (P&L) requirements.
A better way of doing this in TidyStock, is to commodity categorise, and then book items such as Personal Protective Equipment, (PPE), fasteners, abrasives, chemicals etc to an internal overhead project named ‘Consumables’, ‘Workshop’ or similar. This retains full cost visibility of workshop consumption while simplifying the Xero P&L. For TidyStock, if consumable items are confined to one or a few commodity categories, they can be mapped to a consumables account.
Item Numbering and Names
Can everyone, internal and external, quickly, and unambiguously identify an item without tribal knowledge or consultation with various company elders?
Item names should always be constructed as Object Name (Noun), adjective 1, adjective 2, …, dimensions, colour. The adjective sequence runs from least variation to most variation.
Why? Because it sorts items into neat, easily identifiable groups
|Bolt, 316 stainless, Hex, M8 x 50||M8 hex bolt 50mm long stainless steel|
|Fan, 3 Blade, remote control, 600mm, Black||600mm 3 blade fan with remote control, Black|
As a general principle, it is best for material items to be assigned a unique company item number, and not given a supplier’s item number. A supplier number works if the item is unique and single sourced but doesn’t work if there are multiple suppliers. Supplier numbers may be saved in the ‘Reference’ field, allowing the company and supplier numbers to be shown on a custom template Purchase Order (PO).
Meaningful or Meaningless Item Codes?
Meaningful codes try to encode meaning into an item code with a company invented code, such as FN600-3RBK for a black fan. Meaningless codes are just that – a short, usually sequential number for any item.
|Short, easy to remember||More difficult to remember|
|Does not limit the number of items||Depending on complexity, can run out of characters|
|Does not need decoding skills||Works only for those understanding the code|
|Less chance of error||Mistakes more likely, especially if O and 0 or I and 1 used in same code|
|Mandates accurate descriptions as they are the primary search mechanism||Lax with descriptions, as search by code can be used if the code is understood|
Best practice tends to meaningless codes. Majors (Supermarkets, Hardware, Military...) mostly use numeric meaningless codes. Tidy auto-numbering will preface a sequential number with a M prefix. Other businesses assign a numeric code to categories and preface a numeric item code with the category code, thus: 100-10001. This is easy and quick to work with.
Managed and Unmanaged Stock
Managed stock is equivalent to tracked items in Xero inventory and stock in other systems
Unmanaged stock is equivalent to untracked items in Xero and non-stock in other systems
|Inbound and outbound stock auto-adjusts Xero’s nominated Stock on Hand account||Expensed to nominated Cost of Goods account at receipt|
|Full audit trail. See all inwards and outwards movements||No audit trail|
|Average cost method||Cost is last purchase price method|
|Negative stock is not permitted (good idea)||Negative stock is default (not a good idea)|
|Batch and serial numbers||No batch numbers|
|Reporting of stock value as at specific dates||Stock value valid only at report date (snapshot)|
Managed stock is preferable for all physical items, even if they are one-time project buys, due to traceability. Unmanaged stock should be used for non-physical or proxy stock items like freight, services, airfares, and accommodation.
Use the Catalogue Pricing facility of TidyStock to save supplier current prices, especially in this era of rapid inflation. If suppliers publish price increases by means of a spreadsheet, new prices can be bulk uploaded to TidyStock with the Import/Export facility. There is a third-party app that can manage price uploads.
Stock replenishment can be helped by setting re-order levels, but the best way is to manage replenishment by customer demand with a ‘pull’ system. Essentially, this replenishes items as soon as they are sold, like pulling on a chain from customer through the company to the supplier. Yes, buffer stock will be needed to cope with peaks. 30 days of cover, depending on the lead time of the supply chain, is a good target number. More frequent, smaller orders keep the supply chain moving.
We hope you find this information useful. Look out for more ‘How to’ articles from Edward in the next few newsletters.
We are always interested in talking to those who may be interested in becoming part of our group of partners. Take a look on our Tidy website for more information.
If you would like to chat to our team about becoming a ‘Partner’ please drop us a message at email@example.com
31 October 2022