It is part of company’s equation in the balance sheet that determines its business valuation.
As you are aware, inventory management is one of the most important aspects of an organization. It is part of company’s equation in the balance sheet that determines its business valuation. But on top of inventory value, there is certain information that is needed to manage them efficiently thus giving you business intelligence you need in everyday decision making.
Here is the essential inventory information:
1. Item Type – when you intend to manage your inventory, you have to list down different types of inventory you wish to manage. For manufacturing companies they have, raw materials, WIP, finished goods. For a retail, buy-and-sell they have merchandise inventory. For food, they have their food menu, prep items, and ingredients. Some companies want to manage their spare parts and consumables. For the admin department, the office supplies, and equipment.
2. Stock Keeping Unit (SKU) Code. Its the unique identifier of an item. It is ideal that it is inline with your item types. It can be alphanumeric. For example, a coffee bean is a raw material for a food business. So the SKU can be RM-0001.
3. Item Name / Description – if an employee is new to the company, it helps that the item description is specific and descriptive. Some companies incorporate the specs or packaging on the description itself, e.g. Coke Reg in Can 330ml.
4. Unit of Measure (UOM) and Conversion Unit. All items should have at least one unit of measure. ideally its the count unit. But when you purchase, UOM may differ. You may opt to lay out all possible UOM for each item and incorporate its conversion factor. For example, a CASE of Coke in Can is equivalent to 12 PCs. But you also use coke in your ingredients hence you’ll also add ML. So a PC of Coke in Can is equivalent to 330ML.
5. Costing Method – the best practice is moving average. But there are some that implement FIFO and weighted average. It depends on the industry you’re at and the nature of your inventory items. In importation, they practice weighted because of the delays in the duties and taxes that will take part in the landed cost. I believe the government enforces FIFO. In any case, decide based on the assumption that this will reflect on the company’s income statement as the direct cost or cost of goods sold.
6. Barcode – this is the ultimate inventory management. It will automate the capturing of lot numbers, serial nos, and expiry date. Some items have its own barcode in place by its supplier but some companies generate their own using a barcode program and printer.
7. Price levels – these are different types of pricing based on customer profile. In a typical trading company, there’s the retail price and wholesale price. Some have employee price, promo price and so on.
8. Location – racks, chillers, bins. These are information that determines the location of an item in a big warehouse. This is important when fulfilling an order. The logistics manager will be able to know which locations have stock for picking.
9. Reorder point and Reorder Qty – This information will determine items on a critical level for replenishment. This can be defined based on usage. In theory, fast-moving items should have higher reorder point. Some ERP systems have automatic computation based on a formula and the variables in the formula are automatically picked up from its record. Reorder qty, on the other hand, determines how many should be replenished to come up with the most efficient stock level.
10. Sub categories – these are information that may be useful in sales reports such as brand, model, color, size type. At the end of the day, it’s the management report that matters. The owner will be able to know which brand is the best selling, its color, and size.
With everything in place, gross profit reports and margins can be generated real-time thus the owner may see how the company performs, which products to maintain and which has high margins. In a big operation, this is difficult to implement but its worth it.