The purpose of just in time inventory.
This continues our series looking at and what software tools to use for your business.
The reasons for keeping records of inventory movements are manifold. The first, and most
obvious, is to know what you have got. Knowing what is in the warehouse gives one confidence to ship goods to clients once they are sold. If you don’t have those items in stock, you can’t sell them, and therefore not make any money. The customer will then go to one of your competitors and you have lost, not just that sale but probably all future sales from that source.
Running out of Products?
Yet that is not all you need to do. If you don’t keep count of what units of a particular product are sold and therefore shipped, you won’t have depletions of that item from your warehouse. Without that knowledge won’t know what items you are running out of. This is important as you it usually takes time to receive goods from your supplier and you may need to modify/assemble the ones you have to get them ready for market. This delay is important as by the time you realise that you have run out of an item, you not only will not be able fulfil exiting orders, but any orders placed in the in-between periods before stocks arrive. This is worse than our initial problem as we will not only loose the sale from existing customers, but all potential sales FROM ALL CUSTOMERS for the intervening period before the goods are ready and available.
The importance of minimum order levels.
That is the reason a “minimum order level” should be assigned to each item you have in stock. You could have a blanket policy of 50, but for most business each item must be understood on its own because of the variable nature of suppliers, demand and complexity of preparation. When you are dealing with 1000’s of products, which are then assigned into a product build, then things get even more hairy. If you set the minimum order to high, too many items are received. If these items are not popular then you tie up the business’s cash with inventory. A supplier stopping credit, or an unexpected tax bill can cause a cash flow crunch and it gets difficult to pay the bills. This is the reason that a balance sheet on annual accounts are separated between fixed assets and current assets. This determines if the business can meet its creditor obligations. If you need to sell old stock it will be usually at a discounted rate. If you set the “maximum order” level to low you don’t order enough and you run out of that item again making ordering haphazard.
Like goldilocks of the old fairy tale, it can’t be too hot, or too cold but just right.
Advantages of software for just in time inventory.
The software we implement runs a wizard that analyses the stock levels to highlight any items that may be below the current minimum order level. It then will raise bulk purchase orders to the default supplier for a specific purchase number meaning you always have enough for just in time stock. It also generates reminders for when stock should be received to prompt a follow call to the supplier.
See our “modular software> procurement purchase order systems” or contact us for an on-line demonstration.
Next in our series, “Inventory control, predicting future demand.”
About the Author.
Malcolm Ford has worked for over 8 years in the ERP space providing advice on logistics and warehouse issues to businesses across the UK. Having an accounting background allows for an appreciation of the financial implications involved with stock control.