Controllers: Do you have the know the exact value of the inventory you are carrying?
Do you know how your company is allocating purchasing inventory across the different locations?
If you answered No to any of the above questions, you are not alone.
It is obvious that companies have a good handle on the resale inventory.
Most of the small business accounting software like QuickBooks handles that very well.
However, they don’t have a good handle on inventory they are purchasing to manage their business.
For example, if you are a services company (let’s say HVAC) then you need to have parts etc. to support the operations pf the company.
To control cost, you land up purchasing less inventory or not having any inventory at all.
Or you have different systems for purchasing the inventory and issuing the purchase orders to the vendors.
That leads to inaccurate inventory counts, stocks out, or excess inventory.
If you carry additional inventory, it is not only additional capital invested but you also have an additional expense of inventory carrying cost.
So by carrying less inventory you could save capital and expenses but that might be at the expense of revenue.
There is a better way of managing inventory by having an integrated purchase order and inventory process.
That is what we are addressing in this article.
We will cover
Let’s get started
Why managing inventory is such a challenge for many companies?
The first common challenge for managing inventory is companies have siloed systems. That could be because of a lack of automation or how the business has evolved over time.
Taking the example of an HVAC company, let’s see how siloed systems cause an issue for many companies.
Please note that this is generally an issue if you are carrying any inventory.
If you order on-demand to fulfill service orders then of course you don’t have inventory issues, but you are probably leaving money on the table because you are unable to service clients on time.
You probably have a work order management system that you use to allocate work to your workforce.
That system house the data for all the customer jobs, what materials are being used to the service order, and so on.
Technicians are probably ordering parts as needed or calling someone at the warehouse to pick up the parts they need to service customers.
If they are picking more parts so that they can reduce trips to the warehouse, then you want to know how much inventory is in technicians’ trucks at any point in time.
But since the systems are not integrated, that data is being manually keyed in or not synced at all.
The other challenge is that if the purchasing system is not tied to your inventory system then you have to manually update the inventory usage information in the inventory system.
It generally leads to the following issues
So to take the HVAC company example, you are unable to service customers on time because your technicians don’t have real-time visibility into the available inventory.
When you have limited visibility into inventory due to a siloed system, your inventory is not optimized.
With the limited information, you land up in one of the following buckets
If you are currently managing limited inventory and you have stock out scenarios or unable to fulfill customer orders, the natural tendency would be to carry more inventory.
Who wants to leave money on the table because you didn’t have the right parts to service the customer.
Let’s continue with our HVAC company example. In our experience, the following are likely to happen
Since everyone is carrying a buffer to avoid stockouts, you land with more inventory then you actually need.
The other scenario is the opposite of what we described above.
This generally happens when you have no inventory management program or you have just implemented a Just in Time (JIT) inventory model.
The problem you are carrying less inventory is for the following reasons
One of the common questions we get asked if QuickBooks is a good system for inventory management.
If you are looking to just stock items for re-sale, then it makes sense to keep using QuickBooks.
However, if you are looking to purchase items for consumption, for example, supplies then QuickBooks might not be the best option for the following reasons
You can still maintain inventory in QuickBooks if we have another system updating the inventory information in realtime so that you know the inventory value as well as the on-hand quantity at any time.
So far we covered issues companies are facing when it comes to inventory management. In this section, we will talk about an approach to resolve those issues.
Specifically, we will cover how an integrated purchase order and inventory management system helps you get a better handle on the inventory, reduce stockouts, increase revenue while maintaining an optimum level of inventory.
So let’s first define how an optimum approach for inventory tracking should work for your organization.
In an ideal scenario
For example, what are our demand patterns?
Notice, we didn’t say consumption patterns. If you are just tracking what is being consumed, you might be missing the need that is driving that consumption.
To continue with the HVAC example, let’s say technicians use a widget for servicing HVAC equipment for the customers.
If you look at the service requests from your customers for the last 12 months, you should be able to easily identify the demand requirements along with the seasonality of the demand.
For example, the demand should be higher in the summer months as compared with winter months.
With this approach, you would know the exact demand requirements vs. consumption.
That data should also give you an idea about the demand patters. For example, you can calculate the average number of widgets per customer request.
Once you have your demand patterns established, that should help to define the optimum on-hand quantity.
Once you have established inventory levels, do the following
a) Work with your vendors to establish lead times.
It is key that the vendors have established reliable lead times so that you know when you need to re-order the products to keep inventory at a healthy level.
With the lead times established, you should update lead times in your purchasing system so that purchase orders reflect correct lead times.
b) Automate systems for better visibility
The next step is to automate wherever possible so that the data is updated as items are ordered or consumed.
Integrated purchase order and Inventory experience
We will use ProcureDesk as an example to walk you through how an integrated purchasing and inventory process that can help you track and maintain optimum inventory levels.
You could achieve this using any integrated purchasing and inventory management system.
Catalogs help you reduce the data entry for repetitive orders. For example, if you are purchasing the same widget from the same supplier again and again, just put that in a catalog.
Catalogs are important for the following reasons
You can add additional data to make purchasing accurate, for example, pictures of the parts being purchased.
For example, it doesn’t help anyone if you ask for next day shipment on an order when the vendor lead time is 2 weeks.
You can keep track of min and max levels on a catalog, so that way you know when an item needs to be ordered.
Following is an example of a kind of information you can maintain in a catalog
By central visibility into inventory, we mean knowing how much inventory you have at any given time.
Some things to consider while understanding current inventory levels
You can compare this number with your peers and assess if you are carrying less inventory or more inventory.
A central inventory dashboard should look like this.
This is the most important piece of the integrated purchasing and inventory experience because this helps you to present the current inventory levels to the end-user.
When a user is entering an order, they should be able to see whether the item is in stock or not.
Additionally, if the item is in stockout, do you want a user to directly place the order with the vendor or just wait for the inventory to be replenished.
For example, if you have an inventory planner who is responsible for placing inventory orders then it is better if you don’t allow your end-users to place orders directly with the vendor.
So the system should be able to handle scenarios where the user can place the order even when the item is in stockout position.
An additional consideration is whether you need approval for inventory orders. This is important for two reasons.
You need a mechanism for updating the inventory records as and when inventory is consumed or new inventory is being purchased.
The most important benefit of an integrated purchase order and inventory system is that you always have an accurate record of how much inventory you are carrying at any time.
Here are some touchpoints where the inventory record needs to be updated.
If you have an integrated purchasing and inventory tool then you should expect the following results
What is the cost of the stock-outs for you?
Is that lost revenue or is that delayed service for your customers.
Continuing with our HVAC company example – if technicians don’t have the right parts available at the time then that could lead to the following issues
Customer cancels the order
If the customer can’t wait for the product to be available then that is a revenue loss for the company. This is most likely the case with emergency services.
It takes a long time to serve the customer
If the customer decides to wait for the part, this might impact your SLA’s over a long time. Let’s assume your client is a corporation with a long term maintenance contract.
Most of the corporate agreements have service level agreements and if you miss the SLA’s you probably have to issue service credits for missing the SLA’s.
Not only it costs you money, but it also leads to lower customer satisfaction.
The technician waste times on finding the part from a local store
What is the cost per hour for your technician?
Let’s say the cost is $100/hour.
Now assume that the technician has to go to a local store to find the part to complete the job.
Let’s say the total time adds an hour to the job.
You not only lost $100 but think about the opportunity cost because you could have used the same time for another job.
So with all the reasons we mentioned above, companies decide to maintain inventory.
Inventory is an investment and there is a cost for carrying the inventory on the books, So it is critical that your inventory levels are optimum.
The steps we have mentioned in this article should help you carry optimum inventory levels and that should reduce your inventory carrying cost.
How much is inventory carrying cost?
Industry estimates 20-25% as the inventory carrying cost.
So if you are carrying $100,000 of inventory on your books, then the cost for carrying the inventory could be anywhere between $20,000 to $25,000
How is inventory carrying cost calculated?
You can calculate your inventory cost by asking your finance team for these metrics.
The biggest benefit of having better visibility in the inventory process is that you can increase the cross-utilization of the inventory across multiple locations.
Let’s say you need a part that is not available at your location but if you can easily check what other locations keep an inventory then that is very helpful.
For example – depending upon the lead times, sometimes it might be just easier and cheaper to have the product shipped from another location.
If the inventory system provides cross plant/location visibility then it is very easy to deal with these situations.
This increases inventory turnarounds and of course, you need to invest less in the inventory.