Maintaining the best level of stock is not easy. It is a balancing act.
The competing needs are:
- Minimize the investment in stock
- Be able to satisfy customer needs 100% of the time
- Never have stock that cannot be sold or used within a determined time-frame
For many companies that have to carry stock, this juggling act can either make or break them.
The choice of which need you aim to satisfy is dependant upon the company direction.
Are you aiming to be the business that has everything in stock and charge more for it, or are you going to go for high volume and smaller choice with lower prices?
Yes, you can take an each-way bet, but please define which is your specialty.
There is no more critical part of a business than the inventory area (with the possible areas of marketing and credit control).
- Purchasing has to buy in sufficient quantities at the best prices
- Accounts Payable is the department that maintains the working relationship between your Purchasing and the suppliers Sales operations. (Be careful not to jeopardise your trading relations with your suppliers – to them, you are a customer and I hope that you want to become one of their “A” grade customers)
- Production department uses the goods to manufacture new products – insufficient goods at production time means no production (or maybe emergency purchasing at expensive prices)
- Distribution section cannot send out what is not available
- Maintenance department may not have spare parts to service equipment – again production ceases.
I hope that you can see the necessity for a functional stock system. It has to be:
- Updated (cycle count) reasonably frequently
- Set up with the correct purchasing policy. Usually –
o Re-order point
o To order
- Logically laid out with bin numbers
- Able to account for consignment stock (if appropriate)
There are various styles of stock management with probably the most drastic being JIT (Just in Time).
Often seen in the automotive industry, this is great when everybody works to the “plan”. But this can leave a business up for ransom if there is a single hiccup in your suppliers’ supply chain. Be very wary of this style.
If your components or raw materials can be purchased on a one day (or less) lead time, inventory control is not critical compared with a business that imports parts.
All accounting systems give you a stock/inventory module (sometimes optional), but I am afraid that the popular ones are barely adequate.
John Barnett is the director of JB Business Systems