2. “When I ask what our inventory is ‘What ever’ is not an acceptable
answer.”
3. Inventory Control and Management
● Control of inventory, which typically
represents 45% to 90% of all expenses for
business, is needed to ensure that the
business has the right goods on hand to
avoid stock-outs, to prevent shrinkage
(spoilage/theft), and to provide proper
accounting.
4. Inventory Control and Management
● Many businesses have too much of their
limited resource, capital, tied up in their
major asset, inventory. Worse, they may
have their capital tied up in the wrong kind of
inventory.
6. The Eyeball System
● This is the standard inventory control system for the vast majority of small retail and
many small manufacturing operations and is very simple in application. The key
manager stands in the middle of the store or manufacturing area and looks around.
If he or she happens to notice that some items are out of stock, they are reordered.
● In retailing, the difficulty with the eyeball system is that a particularly good item may
be out of stock for sometime before anyone notices. Throughout the time it is out of
stock, sales are being lost on it.
● Similarly, in a small manufacturing operation, low stocks of some particularly critical
item may not be noticed until there are none left. Then production suffers until the
supply of that part can be replenished. Such unsystematic but simple retailers and
manufacturers to their inherent disadvantage.
7. Reserve Stock (or Brown Bag) System
● This approach is much more systematic than the eyeball system. It involves keeping
a reserve stock of items aside, often literally in a brown bag placed at the rear of the
stock bin or storage area. When the last unit of open inventory is used, the brown
bag of reserve stock is opened and the new supplies it contains are placed in the bin
as open stock. At this time, a reorder is immediately placed. If the reserve stock
quantity has been calculated properly, the new shipment should arrive just as the
last of the reserve stock is being used.
● In order to calculate the proper reserve stock quantity, it is necessary to know the
rate of product usage and the order cycle delivery time. Thus, if the rate of product
units sold is 100 units per week and the order cycle delivery time is two weeks, the
appropriate reserve stock would consist of 200 units (I00u x 2w).
8. Reserve Stock (or Brown Bag) System
● This is fine as long as the two-week cycle holds. If the order cycle is
extended, the reserve stock quantities must be increased. When the new
order arrives, the reserve stock amount is packaged again and placed at
the rear of the storage area.
● This is a very simple system to operate and one that is highly effective for
virtually any type of organization. The variations on the reserve stock
system merely involve the management of the reserve stock itself. Larger
items may remain in inventory but be cordoned off in some way to indicate
that it is the reserve stock and should trigger a reorder.
9. Inventory Control and Management
● A business needs an inventory control and
management system that:
○ outlines your ideal inventory level
○ establishes inventory purchasing policies and
strategies
○ informs you of at a moment’s notice what your
inventory status is.
10. 'I don't know about this new computer inventory system. It just
ordered a thousand left handed four fingered surgical gloves.'
11. Determining Your Ideal Inventory Level
Factors to Consider:
● Amount of Capital or Financing Available
● Consumer Demand and Projected Sales
● Historical Sales Patterns
● Industry Averages
● Inventory Carrying Costs
13. Determining Your Ideal Inventory Level
More Factors to Consider:
● Quantity Discounts
● Storage Space
● Supply Levels
14. Using the EOQ Formula
Economic order quantity (EOQ) is the
order quantity of inventory that
minimizes the total cost of inventory
management.
15. Using the EOQ Formula
This formula uses 3 variables:
● Demand: The demand, in units, for the product for a
specific time period. (D)
● Relevant ordering cost: Ordering cost per purchase
order. (S)
● Relevant carrying cost: Carrying costs for one unit.
Assume the unit is in stock for the time period used
for demand. (H)
16. Using the EOQ Formula
Example:
ABC Ltd. is engaged in sale of footballs. Its cost per order is P400 and its
carrying cost unit is P10 per unit per annum. The company has a demand for
20,000 units per year. Calculate the order size, total orders required during a
year, total carrying cost and total ordering cost for the year.
17. Using the EOQ Formula
Solution:
EOQ = SQRT(2 × 20,000 × 400/10) = 1,265 units
Annual demand is 20,000 units so the company will have to place 16 orders (=
annual demand of 20,000 divided by order size of 1,265). Total ordering cost is
hence P64,000 (P400 multiplied by 16).
Average inventory held is 632.5 ((0+1,265)/2) which means total carrying costs
of P6,325 (i.e. 632.5 × P10).
18. Developing A Purchasing Plan
1. Buying Direct from Suppliers
2. Joining a Buying Group
3. Selling on Consignment
4. Ordering Inventory after a Sale Has Been
Made.
19. Choosing Suppliers
● Cost of goods and discounts
● Delivery time
● Shipping and delivery costs
● Reorder policies
21. Developing An Inventory Records System
Basic objectives:
1. Approximately or exactly how much of an item you have
in stock at any particular moment in time.
2. Exactly how much inventory you have in stock and have
sold at the end of the month, quarter or year.
3. How much stock is on order.
22. Periodic Versus Perpetual
Periodic Inventory System
● Generally used when the
individual items have small
peso investment (i.e.
groceries).
● Inventory Account and Cost
of Goods Sold Account are
updated continuously during
the period in perpetual
inventory system.
Perpetual Inventory System
● Commonly used where the
individual inventory items
treated represent a relatively
large peso investment, (i.e.
jewelry and cars)
● Inventory Account and Cost
of Goods Sold Account are
updated only at the end of
the period.
23. Periodic Versus Perpetual
● Purchases Account and
Purchase Returns and
Allowances Account are only
used in periodic inventory
system and are updated
continuously.
● Purchases are directly
debited to inventory account
and purchase returns are
directly credited to inventory
account.
24. Periodic Versus Perpetual
● Sale Transaction is recorded via
two journal entries in perpetual
system. One of them records
the sale value of inventory
whereas the other records cost
of goods sold.
● Closing Entries are only
required in periodic inventory
system to update inventory and
cost of goods sold.
● In periodic inventory system,
only one entry is made.
● Perpetual inventory system
does not require closing entries
for inventory account.
25. 'They're not really rare books - it's that our inventory is
in such disarray, they're hard to locate.'
26. Best Inventory Management Practices
Warehouse Design
● Usually, common sense is key in designing an efficient layout.
● Group the fast-moving items together and toward the front of the
warehouse for easier access.
● Decide if you want to store in order of part number or if the size of your
items is too variable for that – but in any case use a logical layout. Put
groups of like items together, for example. You want it to be intuitive for
your warehouse workers.
● Are you using shelving? Leave room for new part numbers or excess
inventory – and/or figure out where you can put overages if the shelves are
full.
27. Best Inventory Management Practices
Warehouse Design
● Are some of the items in large boxes or too large individually for shelving?
Designating a floor “location” is often the best choice. The location can be
up against a wall or taped off in the middle of the warehouse.
● Determine a numbering scheme for your locations. (Example: Section A,
Shelf 1 = Location A1)
● Are the inventory items going to be boxed or bagged? If they are not, you
will need bins for the smaller items. Some companies ask their vendors to
package smaller items in specific quantities for easier picking. If you
always use the item in quantities of 10, get them pre-packaged that way.
28. Best Inventory Management Practices
Label The Warehouse
Locations: Now that you have the warehouse layout designed, you will need to put
barcode labels on your locations and items. There are options for location labeling that
include:
● A barcode label on the shelf that can be adhered to the shelf or on a magnetic strip
that A series of barcode labels at eye-height on one end of the shelving unit (this
works if the top shelves are too high to scan effectively) with the locations encoded.
● Putting a large barcode label on the floor or hanging from the ceiling are ways to
label areas that don’t have shelving. (The type of label material in this case will be
specialized – get help from a label expert before spending time on something that
won’t work.)
29. Best Inventory Management Practices
Label The Warehouse
Items: Item barcodes are typically the actual part numbers. Much of today’s inventory
comes already labeled with barcodes. There are a number of decisions to make when
labeling, so make sure you partner with a company that has a good working knowledge of
the materials and adhesives available for barcode technology – not all barcode resellers
or inventory software companies understand labeling.
● Do you want to label each item individually?
● Would you rather label a case, bag, box?
● Are some parts too small and not packaged for labeling? The best solution is
to place loose items in a labeled bin.
30. Best Inventory Management Practices
Define Your Inventory Management Process
Receiving:
This is the action of receiving a new shipment of items - verifying the shipment is
correct, getting quality approvals (if necessary), putting the items on the shelf and
recording the receipt in the software system. Questions to ask yourself:
● Do you want to receive against a Purchase Order, do a Blind Receipt (receive
without a PO) or both? Make sure you think of all possibilities and plan for
contingencies because too rigid a system can cause time management issues.
● Do you need or want to print an item barcode label at receiving?
31. Best Inventory Management Practices
Define Your Inventory Management Process
Receiving:
● Will you be putting the items away immediately or will there be a holding area?
● Do you want to know where your inventory is at every moment? For example,
are you going to receive into the holding area and QC “locations” or will it move
through those areas fast enough that you don’t need to receive it until it’s put
into its location?
● Do you need to record lots or serial numbers for traceability purposes?
● Do you want to receive by “case” but issue or ship by “each”?
32. Best Inventory Management Practices
Define Your Inventory Management Process
Shipping:
We use the term “shipping” to indicate the process of relieving your inventory of
items. It could be something that is consumed internally (gloves or glue) to be used
and not returned, or an it be a method of eliminating that item from your inventor
audit purposes. Some things to consider in the shipping function:
● A process to reduce inventory of consumables that are consumed internally
could include a requisition, internal work order or – or simply a scan into the
expense form software with the right cost code.
33. Best Inventory Management Practices
Define Your Inventory Management Process
Shipping:
● Issuing to a job or work order will occur primarily in manufacturing, field service or
construction environments. The paperwork that moves with the job can be barcoded,
so the steps would be “scan the work order number, scan the item”. The issuing of
an item takes it out of inventory and assumes it is not coming back.
● Do I need to verify in any way against a Sales Order or Packing Slip that I am
shipping the correct item? Is it OK to do partial shipments?
● Does my customer require a specific type of shipping label format that I need to
produce?
● What if I make a mistake and ship the wrong thing situation?
34. Best Inventory Management Practices
Picking the Right Inventory Management Software for your Small to
Medium-sized Business
Often smaller to mid-sized businesses try to use the inventory software that comes with their
accounting system to manage their warehouse. Most accounting systems aren’t set up to
handle the details required for optimum inventory management, including tracking of lots or
serial numbers, multiple units of measure, multiple locations and/or multiple warehouses,
issuing to jobs, the capability of using barcode data entry, etc.
Stand-alone inventory management software can bring all the functionality your company
requires and is affordable. You understand your business better than anyone – make a list of
your “must have” and your “would be great but not required” features, then evaluate based on
your list. This system will be a powerful management tool, so make sure it has the ability to
record and present (in reports or queries) all of the information you consider important.
35. Best Inventory Management Practices
Picking the Right Inventory Management Software for your Small to
Medium-sized Business
A list of potential requirements:
● Easy to use, requires minimal training and start-up time (watch out for companies that
quote weeks of installation time)
● Uses barcode for accuracy
● Flexible item set-up – can modify terminology to fit my business
● Has all the basic functionality – Receiving, Shipping, Counting
● Has a Purchasing Module
● Can accept a Sales Order
● Can print barcode labels for items
● Can use the manufacturer’s SKU and barcode or my SKU and barcode
● Can attach a picture of the item if necessary
36. Best Inventory Management Practices
Picking the Right Inventory Management Software for your Small to
Medium-sized Business
A list of potential requirements (continued):
● Can hyperlink to or attach drawings
● Allows for multiple units of measure (each, box, quart, inch, etc.)
● Can track inventory by multiple locations and multiple warehouses
● Can set minimum/maximum levels by item and by warehouse or location
● Allows for “blind” receiving or receiving against a purchase order or other document
● Can move inventory from one location to another with minimal steps
● Automates the inventory counting process – allows for periodic and cycle counts
● Can issue inventory to work orders or jobs
● Has a Bill of Materials and Manufacturing Order
37. References
Jan, I. (n.d.). Perpetual vs Periodic Inventory System. Retrieved July 20, 2015, from http:
//accountingexplained.com/financial/inventories/perpetual-vs-periodic-system
Jan, O. (n.d.). Economic Order Quantity (EOQ). Retrieved July 20, 2015, from http:
//accountingexplained.com/managerial/inventory-management/economic-order-quantity
Boyd, K. (n.d.). Cost Accounting: The Economic Order Quantity Formula. Retrieved July 20, 2015,
from http://www.dummies.com/how-to/content/cost-accounting-the-economic-order-quantity-formul.
html
Patsula, P. (2007). Inventory Control. In Personal Planning Guidebook (Vol. 29). Patsula Media.
