4 important attributes you need to have in your Inventory Management System?

Updated: Oct 21, 2020

Having a good and efficient inventory management system is important... no, critical to ensure you don't spend your time trying to figure out how much stock you have and avoid stock-outs. Depending on your needs, it may not have to be complicated. Indeed, Excel documents can go a long way in helping you manage your inventory if you do not want to invest in an Inventory Management software, being online or offline, and its implementation.

Many SMEs or startups in Africa need to better handle their inventory considering the high uncertainties of the Supply Chain in some markets. Inventory control can be very beneficial to buffer for both demand and supply variation, but can also be costly if left to be managed on its own.

However, there are a number of points that are important to note and keep in mind when developing and implementing an Inventory Management System.

1. Catalogue and SKU

The first thing you should consider having is a catalog. It is essential to have one. But what is a catalog?

Basically, you need to develop a database of products, a list providing the main characteristics of each item, such as SKU reference, detailed description of the item, the unit of storage, the unit value in your management currency among other data. You can choose to customize your catalog to fit your Supply Chain's needs and industry.

On top of that, you would need to document a clear process on how to add an item to the list, how to remove an item, or how to make the item "active" or "inactive". These terms should be clearly defined as well, so as to avoid any mix-up in the management of the system (when is a product active or inactive).

When we talk about developing some SKU references, it is to create a referencing system for the items in your catalog and be able to identify them all along the chain of supply. Each SKU reference should be unique, identify an item as per the criteria you have included in your catalog. If not using integrated software, you would need to document how the referencing system works and centralize it in one place / with one person.

For that referencing system, a quick tip is the use of categories of goods, and if relevant sub-categories, which allow you to filter down your goods and find them quickly. Categories would be different from one organization to the other, and you would need to think about what makes all the products in one category similar in some ways. It can be by the type of products, by the usage, or by other patterns of management.

If you want to know more about SKU referencing, check out our video below:

2. Transactions

Once you have a catalog and each item is clearly referenced, you need to record the transactions of goods in your warehouse / Stock / Inventory. Each entry and dispatch of goods should be recorded in a standard way in another database. You should use standard documentation being issued on each process task to record each entry in the system.

Many software offers that standard approach, but that can also be developed on MS Excel or Google Sheet. By creating a table, listing each of the transactions, the quantities in and out of your inventory, you have the necessary data to handle your stock well. Do not forget to add the date (in a standard and consistent way), the unit of stock and the unit value, and the quantity in or out, each on a different line. Referencing the documents like the Goods Receipt Note would help your accountability.

You may even want to go deeper into the granularity of information by including data such as client or project for each movement. By doing that, it gives you the possibility to analyze further through your dashboard or reports the movement of stock for each client or project. Obviously, it has to be adapted to your industry and your own company's needs.

3. Inventory Report

Reporting linked to your inventory is really important too. Indeed, the first main report you want to get is a completely up to date picture of your physical inventory. What you really have in stock for each product and what are the monthly movements of stock, entries, and issues.

You want to have the visibility on your inventory at a minimum, and ideally some alerts on your replenishment levels, should you have some items which need to be replenished. Otherwise, you can use a Kanban system for the demand-based reordering of your stock. You can find a quick read on the Kanban system here. More information on the Kanban system in our video library.

But you need to know well in advance the orders you will need to make according to your demand and the supplier's lead time.

4. Dashboard and KPIs

Like with any other parts in your Supply Chain, you want to have a good grasp on the data produced by your Inventory Management System, almost in real-time. Indeed, it should be able to quickly tell you how you manage your inventory and let you go through your main KPIs (Key Performance Indicators) related to your inventory.

Having a dashboard is important and it should give you a great visual to understand what is going on at a glance at it. Each KPI should have some sort of graph with a chronologic evolution. Obviously, you want to make sure you progress and you want to monitor that progress.

Here are a few of the KPIs you can develop and link to your inventory.

  • Turnover rate per year: One of the most important long term indicators for your stock is the turnover rate per year, which is basically the number of times your inventory will turn in value over a year. You want to hold enough stock to avoid stock-outs but you don't want to hold too much. Therefore, you want to look for a high turnover rate, but that will depend on your industry and the supply risk you may have, as well as the volatility of your demand. However, you should aim at increasing the turnover rate every year, while securing supplies and reducing demand variations

  • Stock valuation, global and per category: Knowing what is the value of your stock is a financial requirement and a necessity in terms of management. Having a global view of the value in your warehouse will give you an up to date visibility on your stock. Then, a per-category valuation will let you know which categories take the most of your value, and therefore allows for prioritization. You then need to wonder why is this taking that much of the overall value (large demand and supply risks or aging inventory, is there a couple of items within that category taking most of the value?...) and then take action on the cause. The objective for that indication is really dependant on your company. Should you do well and increase sales while the supply risk is high, you may need an increasing stock. On the contrary, should your sales get lower or stagnate, you may need to have a reduction of inventory to reduce costs.

  • Stockout rate: Nobody wants to have stock-outs as they are just opportunity losses. However, they may happen should your supplier not be able to deliver as expected, you or your supplier face a supply disruption or you are stroke with an unforeseen spike in demand. However, you need to prevent these and know what items have been in stock-out over the last month. Following your stock-out rate will give you the opportunity to analyze what created that and then take action to prevent and reduce that rate. Your aim here is obviously to get to zero stock-out items, but that might not always be possible.

  • Aging stock: Here again, as much as you want to have a high turn-over rate, you want to understand what part of your inventory is aging, meaning staying longer than expected in your warehouse. Look at the items in periods of time, meaning the proportion of your items that have been in stock for over 1 month, over 3 months, over 6 months, and then over 1 year (periods are to be adapted to your situation). By knowing that, you can take action to understand why they are still in stock, and what you can do to get rid of them, by using them, selling them, or disposing of them.

Obviously, these are only a few of the KPIs you can use for inventory control, but they are a good start. You can apply more indicator and get more granular in your analysis, and adapt it to your industry. By starting with these, you will get a better understanding of your needs and what other indicators you might need to follow.

Although a good Inventory Management System does not have to be complicated, there are some essential features to have, and they need to be used properly for good inventory management. However, as volumes grow, switching to a more developed Inventory Management Software could be beneficial to your Supply Chain.

The above details are the bare minimum an Inventory Management System should be having and it will help you develop the right inventory strategy for your company.

This article only mentions the system managing the inventory, and good practices related to processes in inventory control and data collection, or physical inventory movement, stock management, and material handling should be applied. More Supply Chain topics can be found on our website.

If you have questions about inventory management or need any consulting services on that, please contact us or at info@kaizen-consult.biz.

If you would like to download our Inventory Management System, check out here.

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