Issue 007 - Simple Ideas to Cut Your Inventory Costs Using Technology (part 2)

This week we will focus on simple ideas to cut your inventory costs using technology.

Last week we focused on how to choose a system for your Food Company and how effective purchasing can lower your inventory costs. This week we will further investigate inventory and how to assure your investment is paying a proper return.

Let’s continue our focus on the highest TURN AND EARN INDEX (from issue 5) items in your inventory. Since these items are your highest value stock you should make sure you know how many you have and how many you are going to need in order to maximize your investment. To manage your inventories successfully we present to you the following key software features that you should have in your inventory module:

1. “ABC” item assignment to define your inventory in “value segments”

2. Physical Inventory reports to aid in the effective counting and reconciliation of inventory in the warehouse.

3. Early warning signs through reporting that allow for reminders that you need to invest more in the valuable stock.

Let’s discuss these three points, and how they are used to cut inventory costs. Remember, we are still using the 80/20 rule so that we are not overwhelmed with the work that needs to be done to check all of our investments.

ABC is simply an assignment of a letter code (the ABC letters are totally arbitrary) to our most valued inventory i.e. highest TURN AND EARN INDEX items. We will assign the items with the highest index an “A”. This allows a variety of reports to be run against solely those items not your entire inventory. We will start with Physical Count Worksheets. These sheets run for “A” items, and should, for efficiency reasons, give us a list of items by warehouse location order to count from. Next, we assign our most attentive inventory employee to count these items on a regular basis too make sure our inventory position is accurate and we do not under invest or over invest in these key items. This should be done weekly or even daily, especially if they are very perishable items, which we know carry a higher cost. This being done, putting the Physical Counts back in the system should produce a Variance report. This report alerts you to your shrinkage on these key items. At this point, with an effective audit trail from your software, you should “reconcile” your investment to assure you know where your money went. If you suspect inaccuracy in your physical count, counting responsibility should go to different individuals to avoid counting conflicts.

I can not express enough the importance of knowing your key items TURN AND EARN INDEX in order to maximize your time investment. Most small to mid size distributors hardly have time to breath as it is. Focus will allow the greatest return of your time investment.

Now that we have a fix on what we own and where it goes our software should allow minimum restocking levels, also known as PAR.

This sets a safety level of stock that we should run our “ABC” reports against to make sure we have invested enough in those highest value stocks. More sophisticated systems will allow auto re-ordering routines that forecast what we should buy (discussed last week issue 6). This report should be looked at daily because it represents a relatively small segment of your total inventory investment.

Also, remember there are stocks that might not be high in value dollars but are high in value when it comes to customer service or necessities you have to invest in to support your basic business model. Value is defined in an arbitrary way when not focused on dollars or return and can help you to represent your company’s inventory investment to best serve your markets.

In closing, assign value, count and reconcile and reorder effectively and inventory costs will be reduced as you maximize your Gross Profit dollars.

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