The inventory system manages the stock of goods or raw materials used in production or sold to customers. The primary purpose of an inventory system is to ensure that a company has the right stock to meet the needs of its customers and to avoid under or overstock, which can lead to additional costs or lost sales opportunities.
Inventory systems can cover various types of goods, such as raw materials, semi-finished goods, finished goods, and goods to be sold to customers. These systems usually consist of a stock monitoring system, an order system, and a purchasing system. Inventory systems can also incorporate lead times, purchasing, and holding costs to help companies determine when and how much to buy or produce.
Inventory systems can be managed manually using a logbook or special computer software, such as a faster and more accurate stock count application for calculating inventory. The software usually has features such as real-time stock monitoring, reorder points and production planning. Companies can optimize their inventory, reduce storage costs, and ensure that customers always get the items they want by using an effective inventory system.
Main Components of Inventory System
Inventory systems usually consist of several main components, namely:
1. Stock Monitoring
It is part of the inventory system whose job is to record the number of items available in the warehouse or store. Stock monitoring can be done manually using a logbook or automatically using computer software.
2. Order System
It is part of the inventory system that manages customer orders and ensures that the available stock is sufficient to fulfill these orders. The ordering system can also send notifications to companies to buy additional items if the available supply is insufficient to fulfill customer orders.
3. Purchasing System
It is part of the inventory system whose job is to manage the process of purchasing goods from suppliers. The purchasing system usually includes making a PO (Purchase Order), sending the PO to the supplier, and receiving the ordered goods.
4. Reorder Point
It is the minimum amount of stock that must be available before the company must order additional goods. Reorder point is usually determined based on lead time (time needed to order goods from suppliers) and average sales level.
5. Lead Time
Is the time required to order goods from suppliers and receive these goods in the company’s warehouse? Lead time is usually calculated as the number of working days from when the PO is sent to the supplier until the goods are received at the company’s warehouse.
6. Purchase Fee
Represents the costs incurred by the company to buy goods from suppliers. The purchase cost usually consists of the price of the goods and shipping costs.
7. Storage Fee
It is the cost incurred by the company to store goods in a warehouse or shop. Storage costs usually consist of warehouse rental, maintenance, and labor costs needed to manage stock items.
Factors Affecting Inventory System
Several factors can affect a company’s inventory system, including:
- Level of sales: level of sales is one of the most important factors in determining the amount of stock that a company must keep. If the sales level is high, the company must ensure that the available stock is sufficient to meet customer demand. Conversely, if the level of sales is low, the company may consider reducing the stock it keeps.
- Lead time: lead time is the time needed to order goods from suppliers and receive these goods at the company’s warehouse. This factor is important to consider in determining the amount of stock that must be kept, especially if the lead time is quite long.
- Purchasing costs: purchasing costs are costs incurred by the company to buy goods from suppliers. This factor is important to consider in determining the amount of stock to be kept, especially if purchasing costs are high.
- Storage costs: storage costs are costs incurred by the company to store goods in a warehouse or store. This factor is important to consider in determining the amount of stock to be kept, especially if storage costs are high.
- Changes in prices: changes in prices from suppliers or markets can affect the company’s inventory system. If the price of goods rises, the company may try to hold a larger stock to buy it at a lower price. On the other hand, if the price of goods falls, the company may prefer to buy additional goods at a lower price.
- Quality of goods: poor quality of goods can affect the company’s inventory system, especially if the goods are easily damaged or easily damaged during storage. The company may consider reducing the stock it keeps if the quality of the goods is poor.
- Optimal inventory level: optimal inventory level is the amount of stock that is considered the most efficient for the company. Customer demand levels, lead times, and purchasing and storage costs can affect this optimal inventory level.
- Demand variability: demand variability is the level of fluctuation that occurs in customer demand. Varied demand can affect the inventory system because companies need to have sufficient stock of goods to meet customer needs at times of high demand but not too many unused stocks of goods when demand is low.
- Production patterns: production patterns used by companies can also affect the inventory system. For example, suppose a company uses a just-in-time (JIT) production pattern. In that case, the company will only order additional goods after the goods are needed for production so that the available stock will be lower.
How to Manage Inventory System
There are several ways you can do to manage the inventory system effectively, including:
- Determining the optimal inventory level: the optimal inventory level is the amount of stock considered the most efficient for the company. This optimal inventory level can be determined using a formula such as the Economic Order Quantity (EOQ) or other formulas that consider customer demand levels, lead times, and purchasing and storage costs.
- Set reorder point: reorder point is the minimum amount of stock that must be available before the company has to order additional items. Reorder point is usually determined based on lead time and average sales level.
- Using a real-time stock monitoring system: by using a real-time stock monitoring system, companies can know the amount of stock available in real-time and take the necessary action if the stock is too low or too high.
- Using an integrated ordering and purchasing system: by using an integrated ordering and purchasing system, companies can monitor customer orders and buy additional items automatically according to predetermined reorder points.
- Using appropriate production patterns: companies can choose production patterns that suit their business needs, such as just-in-time (JIT) production patterns or make-to-stock (MTS) production patterns. Appropriate production patterns can help companies optimize their inventory systems.
- Determining a stock notification system: the company can set up a system that warns related parties when the stock of goods has reached a reorder point or other minimum stock quantity.
- Perform regular reviews of the inventory system: the company must carry out regular reviews of its inventory system to ensure that it is still effective and meets its business needs. The review can be done every month or every year, depending on company policy.
To manage an effective inventory system, you can use the SAP Business One software, which has real-time stock monitoring so that companies can optimize their inventory and customers will get the items they want. That’s a review of the inventory system, and I hope it’s helpful.