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The inventory advisor

Dec 15, 2015

What is more important – Inventory Management or Inventory Control?

Every business has an Inventory Control System which tracks the physical movement of inventory. These system are essential to account for inventory, track inventory and monitor inventory.

What do Inventory Control Systems do?

These systems are transactional systems that have everything to do with the physical movement of products. They enable you to see what inventory you have on hand, what inventory is being sent to which locations/warehouses and what inventory is owed to customers. In addition, they ensure everything is accounted for at any given time.

The functionality of such systems typically includes:

  • warehousing; receiving, binning, picking, shipping, stock takes, cycle counting
  • accounting; inventory costing, provisions for obsolescence, aged reporting, general ledger posting, accounts payable/receivable, etc
  • additional functionality may include, for example, radio frequency identification (RFID), bar-coding and scanning, space and volume planning

All SME ERP’s contain inventory control functionality and most are pretty good at it. However, most (or all) SME ERP’s contain very basic inventory management functionality.

What do Inventory Management Systems do?

Most provide functionality that tells you what to order, when to order and how much to order. By ordering the right amount of the right products at the right time, you will generate less excess inventory and improve your service to your customers while simultaneously reducing overall inventory value.

This frees up cash to help you to grow your business and reduces the costs associated with inventory, for example:

  • Working capital required for purchasing
  • Warehouse space and storage costs
  • Provisions for obsolescence
  • Cost of write-offs
  • Depreciation
  • Insurance

An effective Inventory Management System:

  • Identifies the most important items through a classification process so that the time spent managing items yields the maximum results
  • Generates accurate statistical forecasts
  • Allows manual forecast adjustments, where required
  • Measures the risk factors in the supply chain
  • Sets optimal safety stock levels to cover the risk
  • Calculates optimal ordering levels
  • Generates optimal replenishment orders

Setting appropriate inventory levels and recommending optimal replenishment enables you to create the best possible orders at the time of ordering.

An Inventory Management System also plays a key role by:

  • Providing early warning of potential issues, enabling you to proactively address these rather than reactively fighting fires
  • Highlighting key inventory exceptions in descending order of impact, so you can allocate your scarce time to issues that will have the biggest impact on your business
  • Flagging changes in demand early, to enable manual intervention where forecasts require review
  • Monitoring supply reliability and automatically factoring improvements or deterioration into safety stock levels
  • Dynamically adjusting your re-order levels to accommodate changes in forecasts, seasonality, improving or worsening supply performance, and changes to target service levels

Dashboards provide focus:

An Inventory Management System will typically provide dashboard functionality which display KPI and highlights key inventory exceptions, such as:

  • Stock-outs; the most critical of all problems
  • Potential stock-outs; your early warning signal of future stock-outs
  • Surplus orders; where due to changes since the order was placed, you now have too much on order
  • Excess stock; above dynamic optimal levels

With the right Inventory Management System, all of the above will be achieved in the minimum of time and with the least effort.

In conclusion

Your business needs an Inventory Control System to function, to keep track of your inventory from a physical and an accounting perspective. Such a system is historical, with transactions captured to document something that has already happened.

An Inventory Management System recommends replenishment based on dynamic optimal levels, ensuring that the next order you place is the right quantity for both your customers and your business.

In addition, exception lists highlight both current issues and potential future issues, and rank them based on the impact on your business. This enables you to proactively manage your inventory, reducing the costs associated with inventory, the cost of your inventory, and increasing your service level to your customers.

So, you need an Inventory Control System to run your business, but an Inventory Management System is a strategic system that can change your business.

While it is obvious you really need both, I’ll let you decide which is more important!