Inventory management

Inventory management. What is inventory management, and what is the basis for inventory management excellence? What is the definition of inventory management? Having the right inventory, at the right time, in the right place. There is an element of recordkeeping in here: is what our system says is there, really physically there? The other element is the flow of goods: from suppliers to manufacturers to warehouses to points of sale to customers.

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⏱️TIMESTAMPS⏱️
0:00 Inventory management introduction
0:27 Inventory management definition
0:54 Inventory management functional perspectives
2:45 Inventory management trade-offs
3:56 Inventory in the financial statements
6:18 Inventory management excellence

Everyone in the company has a stake in inventory management. If you ask the sourcing department, they will probably propose to buy in bulk from suppliers to get maximum volume discounts. If you ask manufacturing, they will want to make big production runs of the same product, before changing over to produce another product, for maximum efficiency, and lowest cost per unit. If you ask warehousing, they will tell you they don’t have space for all this stuff. After all, a warehouse has similar properties as storage space in your house: somehow it magically fills up!

Sourcing, manufacturing and warehousing might be the departments physically handling the inventory, but there are others that have their own opinion about #inventorymanagement : marketing and sales, finance and accounting, and legal. What? Even the legal department has an opinion about inventory management? You bet! Let me walk you through their viewpoints.
Marketing and sales will argue that we need to have plenty of inventory available when the order from the customer comes in. Finance and accounting will say that the biggest priorities for inventory management are to manage cash flow, and avoid inventory obsolescence. Obsolescence is a fancy word for inventory that is outdated and no longer used, and may have to be written off as a loss. And lastly, legal has gone through the fine print of the contract with a customer, and found that there is a paragraph specifying that in case of a factory outage on the side of the customer, certain critical spare parts need to be delivered to them within one day. If these parts are not delivered on time, there is a severe financial penalty which the company would obviously like to avoid.

What is the basis for inventory management excellence? There is one word that needs to connect all departments: trust. Let’s zoom into three specific examples. If manufacturing trusts sourcing to deliver raw materials just-in-time, with predictable lead-times, then raw material inventory levels can be low, and inventory management can be optimized. If manufacturing does not trust sourcing, then there is an incentive to build raw material safety stock. Same thing with trust between marketing and sales on one side, and manufacturing on the other side. If marketing and sales trust manufacturing to produce on time and on spec, then finished goods inventory levels can be low, and inventory management can be optimized. If marketing and sales does not trust manufacturing, then there is an incentive to build finished goods safety stock. A different type of trust is built between #finance and accounting, as well as marketing and sales, on one side, and warehousing on the other side. The main question around trust in this case: is what our system says is there, really physically there? Both for account reconciliation purposes in finance, as well as product availability for the customer!

Trust is the basis for inventory management excellence. How is that trust built, and what is the payoff? Trust is earned by delivering on commitments. If trust is high, inventory levels can be low. To build trust, investments need to be made! To achieve inventory management excellence, a company MUST invest in systems as well as processes. Data and information, as well as the right human actions. In most cases, those investments pay off big time! If you are looking for powerful inventory software that’s easy to use, then try InFlow inventory management software for free: https://inflow.grsm.io/inventory-mana...

Philip de Vroe (The Finance Storyteller) aims to make accounting, finance and investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!