Having the right product in the right place at the right time is the mantra of inventory management. 

With too much inventory, you can suffer from obsolescence, spoilage and excessive carrying costs. With too little inventory, you can suffer from lost sales, loss of reputation and poor customer service.

The principle is simple. In practice, execution of this principle is hard.

Several factors can help you keep the right inventory in the right place at the right time. You can mitigate mistakes by using rapid freight, but this will nearly always drive up costs. You can overstock inventory, but this can increase carrying costs and tie up valuable capital. You may get lucky from price increases in your stocked product, but you are more likely to suffer value loss while holding the inventory.

Computer systems have helped many businesses maintain inventory levels by automatically decreasing inventory when a sale or shipment takes place and increasing inventory when ordered materials are received. Inventory needs to be accurately maintained by making adjustments for theft, damage, improper picking from the warehouse and other issues.

Automating reorder points

Accurate inventory is a must before trying to automate an inventory ordering process.

Procedures must cover everything that can happen to inventory, and it is important that you have cyclical or periodic inventory counts to verify the accuracy of your inventory quantities.

Once you have accurate information about the quantity on hand, you have to make an intelligent guess about future demand. You can do this by observing past run rates. You can look forward making guesses about future demand from new trends, promotions and seasonality.

You should additionally consider a safety stock number – a quantity on hand that you never want to drop below. Reorder points can then be set to take existing inventory minus future orders, minus safety stock, with an allowance for time of production and transit.

For example, let’s say you have 100 items in stock. On average, you sell 10 of these items daily, meaning you have a 10-day supply. It takes four days for an order to arrive, and you like to have a three-day supply on hand at all times. Your safety stock number would be 30 (three days sales at 10 items per day).

With this type of run rate, you are dealing with an item that has a reasonable turn rate, so being out of stock would almost certainly cost you sales. You may get a break on freight for ordering 50 items at a time, and you would want to take this into consideration as well when you set your reorder point and quantity.

For this product, a reorder point of 80 would serve the bill fairly well. You would place an order once or twice a week and vacillate between 80 down to around 40 while waiting for an order to arrive. When your 50 items arrive, your stock level would return to around 90, and you’d place another order a day or two later. Dealing with items that have a fairly consistent turn rate at reasonable volumes from a consistent supplier is the easy part of dealing with reorder points.

Automation can help with routine management of inventory for items that move on a somewhat regular basis. This is where reorder points, in conjunction with automated ordering via electronic data interchange (EDI) using an automated supply chain, can free up time to focus on the exceptions.

Trickier management occurs when you have items with slower turnover, specialty items or items that have a long receipt lead time. In these cases, you will not want to use automated ordering and may find setting a reorder point distracting because the item will show up in reorder lists routinely requiring management time.

If your goal is to always have at least one of every item in stock, note that you will need to set a reorder point of 1 to alert you that you are down to the last item of a particular product. At that point, you need to make a decision either to discontinue the item – setting the reorder point to zero – or to order this product again based on business strategy, desire to continue to sell the item or previous sales demand.

As a business owner, you want to:

• Make sure your procedures are as simple and complete as possible, ensuring that all transactions are properly processed to maintain inventory accuracy in real time
• Have internal control procedures to verify the accuracy of your information and provide checks and balances against theft, loss or damage
• Make sure that your system or your system count and your physical counts have minimal variances
• Estimate future customer demand and allow for production and shipping time, so products can arrive in time to fulfill orders

Taking advantage of EDI

Business owners are aware that, if purchased items arrive too soon, they sit in inventory longer, may devalue over time and often have to be relocated multiple times. The longer raw materials are held, the more they depreciate (rarely appreciate) in value. Holding inventory – raw or finished – costs money!

Supply chain management is intended to help manage those costs. Automating this process with bar codes, RFID, point of sale and inventory management systems makes this easier. Reorder points can create orders that can be approved manually or automatically and submitted to suppliers through an EDI system with minimal intervention.

Most accounting systems have inventory management modules available. Fewer have EDI systems, and fewer still have full-scale supply chain management systems. For smaller businesses, seeing a daily or weekly report of items that need to be ordered is sufficient. Having an easy way to release these orders to an order management system is a big step forward.

A traditional EDI system will communicate product codes, quantities and other specifics of the order to major suppliers. The supplier, in turn, will supply an order confirmation with shipment date, method of shipment and other information that can be used to update your accounting system.

As an alternative to EDI, Netfira (www.netfira.com) has taken a different approach. Netfira is a Web-based solution that is not accounting-product specific. It integrates directly into the seller’s and buyer’s databases to supply data in real time, providing the most up-to-date information possible. This is unique, in that most EDI transactions do so via batch requests. Netfira’s ability to provide real availability data in real time is appealing.

Simple bar code systems to support inventory management reorder points and EDI automation systems can be purchased and implemented internally from companies like Wasp Barcode Technologies (www.waspbarcode.com). Its products can be used independently or integrated with entry-level accounting systems like QuickBooks, Peachtree or Simply Accounting up through mid-market solutions like MAS 90 or Dynamics GP.

Suppliers such as Wasp also have point-of-sale systems, plus barcode readers and printers, needed to create a complete system. Automating warehouse, retail operation and/or cash register operations can close the loop for your inventory system, making reorder points more meaningful.

Time is money

Automating reorder points and orders through supply chain tools such as barcodes, EDI or new options like Netfira are conveniences that save management time on routine decisions. This saved time allows companies to redirect management efforts to other issues.

It is relatively inexpensive to buy barcode equipment, accounting software and supply chain solutions, but what makes them work are good procedures and proper decision-making. Automate as many routine decisions as you can through reorder points, and focus on the exceptions of inventory management to maximize your profits.