Inventory Management

What is Inventory Management?

Answered July 12 2019

Within facilities management, inventory management tracks items from the moment of purchase through its time of use. The best inventory management systems include complete and detailed records of materials and items so that they can be tracked and used efficiently.

Inventory of any nature is simply an investment that incurs ongoing costs such as storage space, management, and insurance. Best practices focus on having the right level of inventory to avoid downtime yet a minimal amount of inventory to manage, store, and insure.

Common Methods of Inventory Management

Most facilities will use either a just-in-time inventory method or a materials requirement planning system.

Those companies who use the first method try to minimize or even eliminate inventory levels by receiving needed items only when they are needed. Ideally, the just-in-time method eliminates storage costs, resources tied up in unused inventory, and overall waste. In the real world, however, it can be difficult to manage just-in-time inventory when demand for items may be unpredictable and supply throughout the larger supply chain may be unreliable.

The materials requirement planning method involves anticipating the materials, items, and supplies a facility may need in a given period and purchasing accordingly. This system requires excellent record keeping as well as reliable tracking of inventory materials so they can be located, used, and recorded accurately.

Let's take a look at how inventory control can be an effective practice to build into your inventory management processes.

Inventory control

Inventory control, also known as stock control, refers to the process of managing a company’s warehouse inventory levels. The inventory control process involves managing items from the moment they are ordered; throughout their storage, movement and usage; to their final destination or disposal. Many systems, processes, and technologies have been developed over the years to help companies streamline supply chain processes.

Note: According to Investopedia, inventory is usually one of the largest “current assets” appearing on a business’ balance sheet. As a result, finding ways to manage inventory efficiently can significantly impact an organization’s bottom line.

Important Inventory Control Processes and Formulas

Over time, different control processes and formulas were created in order to help companies with the complexity that is inventory control. Let’s take a look at what some of these are and why they are important for companies today. 

Quality control

Quality control is an essential part of inventory control and the processes you use have a dramatic impact. When you work with a supplier that has the same quality standards as you do, over time, you develop a long term relationship. Once you have your suppliers, batch tracking ensures your stock consistently meets your highest quality standards.

Organizational control

It may seem like a simple concept, but it does make a difference to have your stock meticulously organized. This begins by labeling your stock with SKUs that are easily understandable and simple to read. Start with an initial stocktake and then use the right inventory management techniques to keep track of movements and levels.

Reorder Point Formula

The Reorder point determines the right time to order more stock. Calculating this means adding together your lead time demand in days and safety stock in days.

Basically, reorder point = lead time demand + safety stock.

Economic order quantity (EOQ)

Finally, EOQ is the optimum inventory you should purchase to minimize the costs of ordering and holding. You’ll need to know your annual fixed costs, demand in units, and carrying costs per unit (H) in order to calculate this. 

Then, you can use the formula summed up by Accounting Coach: the square root of [(two times the annual demand in units times the incremental cost to process an order) divided by (the incremental annual cost to carry one unit in inventory)] in order to find your economic order quantity

Managing Inventory with an Inventory Control System

An inventory control system is a computerized solution that brings all aspects of inventory management into one cohesive system. Its purpose is to help control your stock in order to hold the least amount of inventory in your warehouses and ultimately improve cash flow and lower holding costs.  

A wide range of manufacturing, distribution, and retail facilities use inventory control to manage the movement of items throughout their business. Some businesses may be tracking the movement of finished products from suppliers to customers while others many need to order raw materials to produce a finished product. Facilities managers may need to track maintenance, repair, and operations (MRO) inventory, which includes items like hand tools and janitorial supplies used to keep an organization running.

In all cases, items must be identified with a name or number, barcode, or radio frequency identification (RFID) tag so that they can be easily tracked. Items are then manually recorded or automatically scanned so that they can be followed and managed in a central computer system such as a CMMS.

Integration into a main computerized system as well as high quality data are key to a successful inventory management system.

An effective inventory control system can help you ensure that you have the right amount of raw materials, MRO supplies, or finished items on hand to meet your demand. This may mean higher customer satisfaction or reduced downtime on a manufacturing line.

Understanding what you have in inventory and where it is located can eliminate write-offs and unnecessary re-ordering to replace lost items. If you have an integrated system, you can authorize automatic re-orders on critical items and manage suppliers and invoicing more efficiently as well.

What does an inventory management system do?

An inventory management system keeps track of items that an organization purchases to manufacture or deliver its final product or service to its customers. It usually includes an array of hardware, software, and processes to identify and follow an item from the moment it enters a facility to the moment it is either used in a final product or consumed.

You probably think about inventory items as those things that are used by a company to create its product. For example, an air conditioner manufacturer might carry inventory items such as condensers, fans, belts, coils, and refrigerant.

Although those raw materials are tracked in an inventory management system, companies should also be following maintenance, repair, and operations (MRO) inventory. According to  Supply Chain Mangement Review, roughly 40 percent of a company’s purchasing budget may be spent on MRO items such as janitorial supplies and maintenance tools.

Components Required in an Inventory Management System

A good inventory management system should contain certain components including an identification system, management software, and standardized procedures.

An identification system can be a manual recording of model or parts numbers in a spreadsheet, a bar coding system that tags each item, or a complex radio frequency identification system that involves microchip tags.

A centralized computer system like a CMMS can be used to record, track, and report the information on an ongoing basis. An integrated inventory tagging system and a CMMS can provide insights into real-time inventory data and subsequently help with making better purchasing decisions.

Finally, a company should have clear, consistent processes in place in terms of tagging, documentation, and reporting requirements so that high quality data is generated. All team members should receive regular training on these processes.

Benefits of an Inventory Management System

An accurate inventory management system can improve an organization’s efficiency and productivity. When items for both production and MRO activities are ordered as close to just-in-time as possible, a facility reduces the space, management, and costs associated with carrying excess inventory.
In addition, a lean inventory can improve cash flow, forecasting reports, organization, and supplier relationships.

What are the different types of Inventory Systems?

Facilities typically use one of three kinds of inventory systems: manual, periodic, and perpetual. Although technological requirements and the complexity of implementation increase as you move from the first to the last, efficiency and accuracy are improved as well.

Manual Inventory System

In the past, all facilities needed to track inventory manually by counting items in stock. Today, some small businesses that carry low levels of inventory may still use a manual system. An employee essentially goes through the inventory, counts all items, writes down results, and enters the quantities in a spreadsheet. This information can then be used to re-order materials as needed.

Periodic Inventory System

Periodic inventory systems have become the bridge between manual systems and perpetual systems. Inventory can be tracked manually and periodically; however, barcoding systems have improved periodic inventory systems a great deal.

Facilities can easily implement a barcode system by tagging inventory items. These barcodes are periodically scanned to track the item from its arrival to the facility, throughout its travel or usage within the facility, and its final destination when it is either used in a finished product or consumed.

A central computerized tracking system can then provide routine access to the quantities and locations of items as well as initiate re-stocking orders.

Perpetual Inventory System

The most sophisticated inventory system delivers real-time data. As soon as inventory enters a facility, is moved, sold, used, or thrown out, the central system is immediately updated.

Radio frequency identification (RFID) tags play a large role in perpetual inventory systems. Active RFID tags can constantly send data and provide real-time information while passive RFID tags use electromagnetic energy from a reader to transmit data. Data from RFID tags can be sent to a  CMMS system, giving management transparency into inventory levels that can help them make smarter business decisions.

Improve your inventory management system with a CMMS

According to  industry studies, more than $100 billion is spent on operating and maintenance materials by facilities each year. These studies also estimate that about 10 percent of this inventory never gets used. This may be caused by over-purchasing to obtain a volume discount, repeat buying when already owned materials cannot be located, or errors due to poor inventory records management.

Choosing the right inventory management software will have a tremendous impact on your inventory control processes. And it can be either good or bad. Good software streamlines the process; lower quality software creates an additional set of issues that companies then need to deal with on top of everything else

By employing  CMMS and fostering an employee culture focused on gathering and recording accurate data, facilities can better track inventory levels, manage purchasing decisions, and gain insight into areas where improvements can be made. These inventory management improvements can make a significant impact on a facility’s bottom line. Systems, such as UpKeep’s inventory management software, with an integrated inventory tracking app, can enable you to get insight into your inventory in the time it takes to walk into the storeroom and out. 

When you use a set of processes and formulas in tandem with the right inventory management software, inventory control and inventory management can be simple. It’s up to the companies to build the right framework to support it. 

Want to keep reading?

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To measure performance in inventory management, one of the most common metrics to use is “number of inventory turns" and target a value greater than 1.0.
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Inventory management software like CMMS is revolutionizing how organizations track their valuable assets. Keep reading to learn how UpKeep’s CMMS can benefit you.
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In some facilities, inventory management tends to become a collection of practices that one generation hands down to the next.
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