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Understanding The Basics of Inventory Management

Megan Cox 
ccurate management of one's inventory is one of the most crucial things that can be done to improve business performance. A wise professor of mine once told me that it is important to move inventory quickly and smoothly through the business because "inventory is like bananas; it goes bad fast." Here are five tips to avoid being stuck with a bunch of rotten bananas.

1. Use a descriptive numbering system. 

The way in which you number your inventory should be simple enough to look at and know essential details of the product. An alpha-numeric system is often most helpful in this respect. Letters can denote color, style, or other details, and numbers can denote key measurements. With a descriptive inventory numbering system, employees throughout the process will understand the basics of any product just by looking at the number.

2. Organize your warehouse. 

If the warehouse is laid out in a logical manner, employees will have a much easier time finding inventory accurately and quickly. This speeds up the production process and helps products arrive to the customers in a timely manner. One efficient way to organize is to use a row/column, letter/number system (e.g. A1, A2, B1, B2, etc) to mark the rows of shelving in your warehouse. With a system like this one in place, inventory may be picked quickly and workers won't waste time searching for items.

3. Track inventory throughout the process. 

This can be achieved by numbering each department in the warehouse and using the individual inventory tracking number to know at all times where a certain item is while it is in your possession. For example, the receiving, raw materials, work in process, finished goods, and shipping departments would each have their own number so that if a customer called to inquire about a specific product, they could be informed as to exactly where their item was in the process. This system would also be important to members of the company if they wanted to track the time it takes for an item to make its way through the process, look for inefficiencies, and improve.

4. Use an inventory valuation method relevant to your business or product. 

This improves management of your inventory because you will have access to the most accurate cost information possible. For example, use FIFO (first in, first out) if you are selling perishable goods such as food because this method best matches the order in which the goods will be sold. Use LIFO (last in, first out) if selling "trendy" items such as new cars or fashion clothing. This is because the latest models will almost always sell before the older items, so LIFO is most consistent with the inventory that will be on hand. 

Another example is to use a lot or bulk purchase system. Under this system, batches of homogeneous items will have a lot number that corresponds to the particular batch, as well as an individual inventory identification number. A lot system would allow you to know which items were all produced together from the same raw materials. 

For instance, producers of medicine may want to employ the use of lot numbers so that if something were found to be wrong with a particular batch, all the individual packages of that medicine could be recalled using the lot number. As you can see, there are many ways to process inventory and it is important to value them in the same way the inventory is leaving the shelves so that the company will have accurate cost information.

5. Employ an Enterprise Resource Planning System. 

Inventory must be managed efficiently and sent through the process in such a manner. An ERP system will allow your company to monitor the process and to implement the other suggestions I have made. Therefore, the products will pass through your premises and into the hands of the consumer in the quickest, most accurate way possible.

If your business puts these pointers into practice, you can avoid many hang-ups and confusion regarding your inventory, and your customers will be satisfied that you have delivered their products accurately and efficiently. 





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