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

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 helping you manage your inventory if you do not want to invest in a software, being online or offline, and its implementation.

Many SME or startups in Africa need to better handle their inventory considering the high uncertainties in some markets. Inventory management 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 which are important to note and keep in mind when developing and implementing an Inventory Management System.

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 helping you manage your inventory if you do not want to invest in a software, being online or offline, and its implementation.

Many SME or startups in Africa need to better handle their inventory considering the high uncertainties in some markets. Inventory management 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 which are important to note and keep in mind when developing and implementing an Inventory Management System.

2. Transactions

Once you have a catalogue 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 softwares offer that standard approach, but that can also be developed on MS Excel or Google Sheet. By creating a table, listing each of the transaction, 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 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 the complete up to date picture of your 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 demand based reordering of your stock. You can find a quick read on Kanban system here. More information on 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 of your Supply Chain, you want to have a good grasp on the data produced by your Inventory Management System. 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 of 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 indicator 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.
• Stock out 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 proportion of your items which 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 to manage your inventory, 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 no have to be complicated, there are some essential features to have, and they need to be used properly for a good inventory management.

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 about the system managing the inventory, and good practices related to processes or physical movement of stock should be applied.

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