Inventory and Inventory Management

Storage is one of the jobs that take place within a storage unit. It requires a series of preparations to be implemented and many others to be managed on a day-to-day basis. The inventory is already one of the tasks of those who take care of the stock. An extremely laborious task, which we will detail below. According to ABEPRO, the Brazilian Association of Production Engineering, “inventory management basically consists of controlling material reserves to meet the supply needs of both customers and the company itself, also controlling costs. Therefore, inventory management must balance the needs of customers with the costs incurred. It is worth highlighting here the definition of the renowned professor and writer Idalberto Chiavenato by action: “It is the composition of materials (raw materials, materials in process, semi-finished materials, finished materials and finished products), which at a given time are not used by the company, but which will be used in the future.” In other words, we are talking about the management of future needs, which requires a deep knowledge of the corporate universe in which the company is located.

According to the Magazine Luiza website, “the efficient management of the incoming and outgoing flows of goods can allow you to anticipate purchases more efficiently. This helps to reduce losses due to expiration dates and even theft, as well as enabling better negotiation with their suppliers.” We can then say, in a simplified way, that inventory management is nothing more than the rational control of the entry and exit of products in the company.

This is the ideal scenario, when everything works correctly. But what would be the signs that the stock was not well controlled? The Empresa Jr. website gives some examples of problems that should be carefully observed:

• “Constant delays in delivery times for finished products and replacement times for raw materials;
• Purchases of stocks greater than the existing demand;
• Supply chain instability;
• Production stoppage due to lack of materials;
• Obsolescence and loss of validity of the goods;
• High storage costs;
• Breaking and theft of items in stock;
• Product inventory does not match purchasing spend.”

Overcoming these problems requires careful data collection, with mapping of the processes implemented and the professionals involved. It is also necessary to acquire good management software, such as a WMS (Warehouse Management System), adequate planning, employee training, adoption of KPIs for subsequent evaluation, and frequent inventories.

While we’re on that topic, let’s talk a little bit about stock inventories. The Nomus website defines this task as follows: it is “a complete list of all products stored in a company’s stock. This inventory identifies, classifies and determines the value of each product.

Inventories are normally classified as follows, according to Blog R3:

• “General Inventory – Covers the counting and identification of all the assets of an organization, such as warehouse items, supplies, goods, machinery, etc. It is generally useful for accounting and stock valuation.
• Partial or dynamic inventory: refers to the counting of a specific part of a company’s assets. This is the case of warehouse stock control, in which the focus will be on a predetermined set of merchandise.
• Annual Inventory – This is a count of a company’s assets at the end of the so-called fiscal year. Which, in Brazil, coincides with the calendar from January to December.
• Rotating Inventory – Corresponds to inventory counts carried out several times at daily, weekly or monthly intervals. This occurs in specific parts of the inventory and requires careful assessment as to timing, as it requires the availability of labor.
• Cyclical Inventory – Looks for the periodic adjustment between the amount of goods in stock and the information used in the accounting entries. Therefore, while the rotating inventory meets administrative needs, such as avoiding losses and controlling stock levels, the cyclical inventory seeks to provide security to the company’s database.

But when should we take an inventory? Well, when looking at the results of daily operations, some failures indicate the need for physical verification, such as stranded, missing, stolen, and lost orders. Right now, knowing what you have in stock is the first step to putting your house in order.

Delage’s website gives 11 guidelines for conducting an inventory well done:

1. Set date and time for the start of the count. Preferably a calm day, without movement. This prevents losses and work overload for employees.
2. Select the employees who will participate in the count and form teams with leaders. As this is a very important task, select collaborators who are committed and attentive to details.
3. Choose the tools to be used. Using the WMS system together with mobile devices makes all the difference. In this case, it is essential to define, for example, the best system for your company (configurable according to your business needs) and what device to use (wireless data collector, computer with barcode reader, smartphones, tablets, etc. .) . Forget spreadsheets and paperwork, as tally records initially made by hand by an employee and then typed by someone else are subject to error.
4. Organize the storage area. It is important that the products are in identified positions (internal addresses), that the streets and corridors are free and that the areas are well signposted. If possible, make barcodes visible to facilitate counting, define how pallets, cases, and fractional items will be counted, and determine if defective products should be counted or directed to specific areas.
5. Determine the counting strategy. Develop a roadmap. Define if the count will be in sequence or in parallel; whether to start from the bottom up in the pallet racking or vice versa; either from the center to the ends of the streets or vice versa; the rules for counting (who counts does not count) and the maximum number of counts; and how already counted areas will be marked.
6. Create strategies for the best use of your resources. If your warehouse has products assigned to higher positions, you need to define the best way to count these items: whether an employee will use a lifting device to count, or whether pallets will be placed on the floor for your conference.
7. Train your employees and conduct tests. The employee needs to know what to do and, above all, what action to take in each type of situation that occurs in the inventory (lack, surplus, breakdown, etc.). The employee needs to know how to count each product, whether to count per package or per unit (counting rules), and understand the type of barcode used on each identification (unit or box), among other details.
8. Indicate how you will monitor the inventory, defining the indicators used during and after the count. The WMS system provides a number of unique KPIs for inventory, so it’s critical that you evaluate what metrics are on offer before choosing the software that’s best suited for your business.
9. After planning, it is time to execute the task. Keep track of the count to make sure everything is running smoothly. If mistakes are made, stop, get the teams together and try to find a solution.
10. Don’t forget to audit the count. When the count is finished, verify that all previously defined locations and products have actually been verified. If everything has been accounted for, it’s time to evaluate the results.
11. Evaluate the results and take the necessary actions to correct any errors. Given the complexity of this task, it would be great to have technology on your side. Look for computer programs that can speed up this mission.

After carrying out the inventory, with planning and precision, we must choose a working method to move the stock. There are eight models that are widely used, according to the Ramo Sistemas Digitais website:

• PEPS – The FIFO (First In, First Out) inventory management method, also called FIFO (First In, First Out), is one of the most practiced and refers to the issue of goods in the order of arrival. This technique helps reduce waste, especially when we talk about perishable products.
• LIFO (Last In First Out) – Also known as LIFO (Last In First Out). In this case, management prioritizes the removal of the items that entered stock last. This method does not work for companies that work with perishables.
• Average Cost – The Average Cost, also called MPM (Moving Weighted Average) is accepted by the Federal Revenue Service for tax purposes. In this method it is necessary to add the value of the products and then divide by the total number of goods. The result is the average cost per product. This amount will be used to calculate business taxes.
• Just in Time – This model is recommended to maintain a minimum inventory, indicated for companies that want to reduce storage costs. But it is a stock control method that is not accepted by the Treasury when calculating the taxes to be paid.
• ABC curve: in this methodology, factors such as billing, revenue and profitability are considered to classify products into three groups:
  • Type A: 20% of products and 80% of stock value;
  • Type B: 30% of products and 15% of stock value;
  • Type C: 50% of products and 5% of stock value.

The ABC Curve increases knowledge about inventory turnover and product relevance, which can optimize the operation.

• Specific Price – Indicated for items such as automobiles or machinery. In this calculation, the specific price of the merchandise guides the process of removing the products from the stock after the sale, considering that the total value of the stock consists of the sum of the specific costs of the items.
• Inventory turnover – Inventory turnover control is calculated to identify the performance of the company in the distribution of its products in a given period, identifying the flow of merchandise. We must evaluate the storage capacity and output of the items. For example, if the company stores 5,000 cell phones simultaneously and sells 100,000 per year, the calculation is: 20 annual rotations every 18 days, on average.
• PDCA Cycle: The PDCA cycle for inventory control is based on the Plan (plan), Do (do), Check (verify), Act (act) processes. It focuses on operational performance and troubleshooting. A step-by-step example includes:
• Identify the process that causes the problem and needs to be optimized;
• Map the causes of the problem;
• Prepare action plans to solve the causes of the problem;
• Implement action plans;
• Check if the problem has been resolved.

Having this methodological knowledge and choosing the best solution for your company brings a series of advantages. The Magazine Luiza chain of stores highlights some of the benefits of having good management in the storage sector:

• “the anticipated projection of orders to suppliers;
• the optimization of the investment with the stock;
• knowledge of which are the goods with the highest and lowest production;
• a better estimate of sales;
• improving production planning;
• the creation of adequate offers and prices”.

Did you like the text? At Águia Sistemas we are national leaders in intralogistics and we can help your company to always find the best solution in this field. Keep in touch!

(The previous text was written with information from the websites, ABEPRO , Magazine Luiza , Empresa Jr. , Nomus , Blog R3 , Delage )