A Small Business Guide to Inventory Control
Before a small business can reasonably make a promise to supply its customers, it needs to have some assurance that it has what its customers have ordered. For a small business to have control of its inventory in this way, it needs to have processes in place to count, verify and audit all of the items in its inventory. The goal of any inventory control system should be to have 100% accuracy. That means that you not only know what you have on hand but how much of that is available to ship.
How to Know If You Have an Inventory Control Problem
There are several methods you can use to pressure test your inventory control processes. One method is to undergo a review of recently missed shipments to your customers. Were any of these missed shipments due to a lack of understanding of what you have on hand and available to ship?
For example, you might have had 100 each of Part A and a customer asked for 100 each. But they didn’t need you to ship it until the next week, so the 100 each of Part A sat in your warehouse. The next day, another customer called and asked for a 100 each of Part A. You were away from the office, taking care of the forty million other things a small business owner needs to take care of, so your one other employee took the call. That one other employee checked and saw the 100 each of Part A sitting there and shipped it the second customer.
The following week, you needed to ship the 100 each of Part A to the first customer, and it wasn’t there.
Your small business might have an inventory control problem. It’s important to know not only what your small business has on hand, but what you have that’s available to ship. In the case above, while your one employee saw that you had 100 each of Part A to ship, there was no process in place to let her know that the 100 each were allocated to another customer.
Another method you can use to pressure test your inventory control is to do a floor-to-sheet audit. That means that you walk out onto your warehouse floor (or stock room, or hall closet, or garage – wherever your small business keeps its inventory) and you select a handful of items to count.
We’ll discuss how many items to count later on, but when you’re finished, you then take those count numbers to your system that tracks inventory. This might be your WMS (warehouse management system), ERP/MRP (enterprise resource planning/material requirements planning), an Excel spreadsheet, a ledger book or, possibly, a pile of Post-Its. If you don’t have a system that tracks your inventory – even if it is only a pile of Post-Its – you have an inventory control issue.
In floor-to-sheet audits, you then compare the physical counts you just did to what your inventory control system thought you had. Again, your goal should be 100% accuracy. If your physical count numbers didn’t align exactly to what your inventory control system thought you had, do you know why? And can you implement countermeasures to prevent that from happening again? Some of the most popular reasons that counts don’t align include:
- You received a shipment from your supplier, but you didn’t count the parts in the boxes. The packing list shouldn’t be counted on as 100% accurate. Open the boxes and count the contents. If your supplier says they sent you 1,000 parts and they only sent you 990 parts, and you don’t catch the error – you not only have an inventory control issue, but you might end up short-shipping your own customers.
- You shipped parts to a customer but didn’t decrement your inventory correctly. Or at all. Make sure you’re deducting your outbound shipments from your inventory totals real-time.
- Quality issues forced you to remove a portion of your inventory from your usable pile of inventory. However, your inventory control system doesn’t have a way to differentiate between usable and non-usable, so your system says you have more than you can use. Having the ability to differentiate between usable and non-usable inventory is not only an important feature that allows you to keep track of parts with quality issues, but it can also be a mechanism to allocate inventory to a customer while keeping those parts in stock.
- Are your products valuable and easy to walk away with? A company that sells anvils might have less of a pilferage issue than a company that sells gold coins. Make sure your inventory control plan includes a way of maintaining the security of your products. And implement a cycle count program that helps you keep track of your inventory.
Cycle Count Program Basics
A cycle count program is what’s happening during those floor-to-sheet counts. A cycle count program is a process by which you regularly count a percentage of your parts so that, over a year, you’ve counted them all (or at least all of your most valuable parts).
You can use a cycle count program in conjunction with an annual physical inventory, which typically helps reduce the variances of those physical inventories. Some companies use cycle counts instead of annual physical inventories, but I don’t recommend that.
To determine the parameters of your cycle count program, you need to determine:
- How many total parts do you have to count?
- Are you going to count them all over the course of a year? If not, how are you going to determine the cutoff point? Typically, companies follow the 80-20 rule, i.e. 80% of your inventory value comes from 20% of your parts – so focus on counting that 20%.
- How often are you going to count?
- Who’s going to conduct the counting? If your company is large enough, the cycle counter should be someone whose job performance is tied to inventory accuracy. This helps take out any potential conflict of interest in the cycle count process. A cycle count is an audit – not a job performance rating tool.
- How is the count going to be conducted? The floor-to-sheet process is the preferred method. A cycle counter should be given a list of part numbers and locations. The counter then goes onto the floor and counts them. He shouldn’t have any idea of how many to expect to be there. Another method is a sheet-to-floor count. This is the reverse of the floor-to-sheet method. The sheet-to-floor method starts when you hand your counter a list of parts and their corresponding counts according to your inventory tracking system. The counter then audits the physical quantities on the shelves as compared to the system count.
By understanding the above cycle count process factors, you can then build your cycle count program. For instance, if you have 500 part numbers to count and you can count once every week, then you can count 10 parts per week (or just two per day). By the end of a 50-week year, you will have counted all 500 part numbers. Just remember to count different part numbers with each count, to avoid over-counting one part number and under-counting another.
During this process, it’s important to know when your inventory counts are off. That’s why a cycle counter shouldn’t be a warehouse supervisor or inventory control clerk. It’s human nature for those employees to put fixes into place without escalating the underlying issues to management. As a small business owner or manager, you need to know when the underlying inventory control processes aren’t working, so you can implement countermeasures to prevent downstream issues.
Solving Inventory Control Problems
A cycle count program, combined with an annual physical inventory, goes a long way toward solving inventory control problems. Cycle count programs help identify shortfalls in inventory control, but it’s up to you to make changes to rectify the issues that your cycle count program uncovers.