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Assignment Inventory

Real Estate

Key Assignment Inventory Spreadsheet Template

Inventory Templates

The Key Assignment Inventory Spreadsheet Template is used to track and manage inventory in a systematic manner. It helps in keeping a record of all the key items, such as equipment, supplies, products, etc., including their quantities, locations, and other relevant information.

The Key Assignment Inventory Spreadsheet Template is typically filed by the person responsible for managing and tracking the assignment of keys, such as a building or facility manager.

Q: What is a Key Assignment Inventory Spreadsheet Template? A: A Key Assignment Inventory Spreadsheet Template is a pre-designed spreadsheet that helps in keeping track of key assignments and their associated details.

Q: What information can be included in the Key Assignment Inventory Spreadsheet Template? A: The Key Assignment Inventory Spreadsheet Template typically includes fields for the assignment name, description, due date , responsible party , status, and any additional notes.

Q: Are Key Assignment Inventory Spreadsheet Templates customizable? A: Yes, Key Assignment Inventory Spreadsheet Templates can be customized according to your specific needs. You can modify the existing fields, add new columns, or change the formatting to suit your requirements.

Download Key Assignment Inventory Spreadsheet Template

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Inventory Management: Definition, Types, and Examples

Effective inventory management is the unsung hero of successful business operations, whether in the bustling retail world or in systematic manufacturing processes.

It’s a critical component that can dictate a company’s ability to meet customer demand, manage cash flow, and maintain a competitive edge.

According to a report by the National Retail Federation , the retail industry loses nearly $50 billion annually due to inventory shrinkage, a problem that effective inventory management can mitigate

By leveraging data and modern inventory management systems, businesses can ensure that inventory levels are optimized, excess inventory is minimized, and inventory costs are controlled.

This foundational aspect of supply chain management affects the balance sheets and impacts customer satisfaction and business agility.

In this article, we will share inventory management definitions, explain inventory management meaning, give an inventory example, and discuss how inventory management relates to both inbound and outbound logistics.

Inventory Management Defined

Inventory management refers to ordering, storing, using, and selling a company’s inventory. This includes managing raw materials, components, finished goods, and warehousing and processing of such items.

Automotive and healthcare industries rely on effective inventory management to streamline production processes and reduce hold-ups. Historically, inventory management was a manual process.

Still, today it has evolved into a sophisticated inventory management system integrated with supply chain logistics, thanks to advancements in technology like Enterprise Resource Planning (ERP) systems and inventory management software. These tools provide real-time data that businesses use to efficiently forecast, plan, and execute their inventory management processes.

Advantages of Inventory Management and Supply Chain

The advantages of sound inventory management are manifold. Primarily, it allows businesses to have the right products available at the right time, which is crucial for meeting customer orders and maintaining solid sales channels. This is particularly crucial for the inbound logistics process.

Good inventory management can lead to better inventory turnover, ensuring fresh and relevant products, which is especially important in industries with rapid product lifecycles, such as fashion or technology.

Also, effective inventory management reduces costs by decreasing the need for excess inventory and storing inventory, which can drain resources and capital if not appropriately managed.

Inventory vs. Stock Explained

While often used interchangeably, inventory and stock have subtle distinctions.

Inventory encompasses more than just the products available for sale (stock); it includes raw materials, work-in-progress items, and all components involved in the production process.

Understanding this nuance is vital, as it affects how businesses plan their inbound logistics, procurement and manage inventory levels across the supply chain.

Counting Inventory

Counting inventory , or taking a physical list, is a crucial task that validates the quantity and condition of items on hand. It’s a fundamental process that informs financial reporting, inventory forecasting, and supply chain planning.

Accurate counts are essential for maintaining inventory data integrity, which impacts everything from order management to customer satisfaction. This process is critical at the end of accounting periods to ensure that reported inventory levels reflect the actual value of assets held by the company.

Types of Inventory Management Methods

Several methods help businesses optimize their handling of goods and materials.

Just-in-Time Management (JIT)

Just-in-Time Management (JIT) is a strategy where inventory is delivered only as it is needed in the production process, reducing the cost of storing inventory. Significant for industries like automotive manufacturing , JIT can lead to reduced inventory levels and associated costs, promoting an efficient supply chain.

Materials Requirement Planning (MRP)

Materials Requirement Planning (MRP) systems calculate the materials and components required to manufacture a product. This method is vital for manufacturing industries, ensuring that materials are available for production without the excess that can tie up capital.

Economic Order Quantity (EOQ)

Economic Order Quantity (EOQ) is a formula used to determine the optimal order quantity that minimizes inventory costs involving holding and ordering costs. This is significant across various industries for maintaining balance in inventory management.

Days Sales of Inventory (DSI)

Days Sales of Inventory (DSI) measures how quickly a company can turn its inventory into sales. A lower DSI indicates that a company is more efficient at selling off its stock. This metric is critical for retailers to gauge their inventory management efficiency.

Common Problems within Inventory Management

Though crucial, inventory management is fraught with challenges that can ripple through the supply chain and impact logistics operations.

One common issue is overstocking, which ties up cash flow and can lead to excess inventory that may become obsolete or expire. Conversely, understocking risks stockouts, leading to delays in the production process and dissatisfied customers.

Prominent Examples of Inventory Management

Inventory management plays a crucial role in industries where products have a limited shelf life, such as food and beverage or pharmaceuticals . Here, it’s pivotal to prevent spoilage and ensure compliance with safety regulations.

In fashion retail, inventory management must be dynamic to keep up with changing trends and seasonal demand, making it essential for maintaining inventory freshness and reducing instances of dead stock.

Disadvantages of Inventory Management

Despite its many benefits, inventory management can have downsides. Holding inventory inherently involves storage costs, and stock that sits in a warehouse too long can lead to increased expenses without generating revenue.

Moreover, complex inventory management systems can be costly to implement and maintain, requiring significant technological and training investments. These systems can sometimes lead to a dependency that may cripple operations if the system goes down or is attacked by cyber threats .

Inventory Management and Software

Inventory management software has revolutionized how companies approach their inventory processes. This technology allows for real-time tracking of goods, inventory forecasting, and more accurate demand planning.

Inventory Management vs. Supply Chain Management

While inventory management focuses on overseeing and controlling goods within a company, supply chain management encompasses a broader scope, managing the entire flow of goods and materials from suppliers to the end customer.

Tracking Inventory and Internal SKU Systems

Tracking inventory through internal Stock Keeping Units (SKUs) is an intricate part of inventory management. SKUs help businesses quickly categorize and locate inventory, facilitating faster inventory turnover and more precise inventory data.

Forecasting and Controlling Inventory with Software

Modern inventory management software often includes sophisticated forecasting tools that utilize historical sales data, seasonal trends, and other variables to predict future demand. This predictive capability helps businesses maintain optimal inventory levels, reducing the risk of overstocking or stockouts.

Types of Successful Inventory Management Techniques

A variety of inventory management techniques are employed by businesses to maintain efficiency and cost-effectiveness in managing stock levels.

These methods are tailored to match the needs of the company and the nature of the inventory it holds.

Economic and Minimum Order Quantity

Economic Order Quantity (EOQ) and Minimum Order Quantity (MOQ) are foundational concepts in inventory management.

EOQ calculates the ideal order quantity to minimize total inventory costs, while MOQ determines the minuscule amount a supplier is willing to sell. Both are vital for optimizing inventory levels and reducing costs.

ABC Analysis

ABC Analysis categorizes inventory into three categories (A, B, and C) based on importance and volume.

‘A’ items are high-priority with stringent control, ‘B’ are moderate, and ‘C’ have the most negligible financial impact. This prioritization is essential for efficient inventory control.

Just-In-Time Inventory

Just-In-Time (JIT) inventory management is a strategy that aligns raw-material orders with production schedules to minimize inventory costs.

It’s crucial for businesses looking to reduce waste and increase efficiency in the production process.

Safety Stock

Safety Stock is additional inventory held to prevent stockouts caused by inaccuracies in demand forecasting or supply chain disruptions.

It’s a critical buffer that ensures customer demand is met without delay.

First In-First Out (FIFO) vs. Last In-First Out (LIFO) Explained

FIFO and LIFO are methods to manage the flow of inventory costs. FIFO assumes the first items stocked are the first sold, reducing the chance of obsolete inventory.

LIFO, less common, takes the last things in are the first sold, which can benefit in specific tax situations.

Reorder Triggers

Reorder triggers are pre-determined inventory levels that prompt a new purchase order.

They are vital for maintaining stock levels and ensuring consistent supply without overstocking, playing a significant role in inventory management systems.

Batch Tracking

Batch tracking monitors the production and expiration dates of batches of inventory items.

It’s crucial for traceability in case of recalls and managing stock with expiration dates, maintaining the integrity of the supply chain.

Consignment Inventory

Consignment inventory allows retailers to stock goods without purchasing them upfront; payment is made only after the sale.

This method is vital for inventory management as it reduces the retailer’s capital in inventory and transfers the risk of unsold stock to the supplier.

Perpetual Inventory

A perpetual inventory system continuously tracks inventory levels, updating in real-time with every sale and restock.

It’s essential for accurate inventory data, allowing for timely ordering and reduction of excess stock.

Dropshipping

Dropshipping is a retail fulfillment method where a store doesn’t keep products in stock but instead transfers customer orders and shipment details to the manufacturer or a wholesaler, who then ships the goods directly to the customer.

This method is vital as it eliminates the need for managing physical inventory, significantly reducing handling and storage costs.

Lean Manufacturing

Lean manufacturing emphasizes waste reduction within the manufacturing system without sacrificing productivity.

It’s vital for inventory management as it promotes a just-in-time approach, minimizing stock levels and reducing holding costs.

Six Sigma and Lean Six Sigma Techniques

Six Sigma and Lean Six Sigma focus on quality improvement and process efficiency.

They are vital to inventory management by identifying and eliminating process defects, resulting in lower inventory costs and improved customer satisfaction.

Demand Inventory Forecasting

Demand inventory forecasting uses historical sales data to predict customer demand and manage inventory accordingly.

It’s essential for preventing stockouts and overstock, making inventory management more responsive and cost-effective.

Cross-Docking

Cross-docking is a logistics procedure where products from a supplier or manufacturing plant are distributed directly to a customer or retail chain with marginal to no handling or storage time.

It’s vital as it reduces the need for warehousing while increasing inventory turnover rates.

Bulk Shipments

Bulk shipments involve transporting large quantities of a single product, which can significantly reduce transportation costs.

It’s vital for inventory management as it can lead to economies of scale, making larger shipments more cost-effective.

Cycle Counts

Cycle counting is an inventory auditing procedure where a small subset of inventory in a specific location is counted on a particular day. It contrasts with traditional physical inventory counting, where operations are halted to count all inventory.

Cycle counts are less disruptive and more accurate, allowing for regular verification of inventory accuracy and providing ongoing insights into inventory levels without the operational shutdown.

The Significance of Inventory Management, Control and Optimization

Effective inventory management, control, and optimization methods are crucial for maintaining the delicate balance between too much and too little inventory.

They ensure that capital is not unnecessarily tied up in stock, preventing stockouts that can lead to lost sales. These methods can result in improved cash flow, better customer service levels, and the ability to quickly respond to market changes.

How Inventory Affects Logistics

Inventory levels directly impact logistics operations; having the right stock in the right place at the right time is essential for effective logistics.

High inventory levels can cause bottlenecks and increase storage costs, while lower inventory levels can result in inefficient transportation and higher shipping costs for urgent replenishment.

ERP Inventory Management Style

ERP inventory management incorporates all facets of a company’s inventory system into a unified system, including tracking, management, and forecasting.

This method offers comprehensive insights into inventory, streamlines processes, and can improve overall efficiency.

Retail and Manufacturing Inventory Management

Inventory management in retail focuses on having the right products available to meet consumer demand while manufacturing inventory management ensures that production materials are at hand without overstocking.

Both require strategies that optimize stock levels, though retail is more directly driven by consumer trends, and production schedules and supplier lead times influence manufacturing.

Unveil the essentials of inventory management with these succinctly answered frequently asked questions.

What does inventory management do?

Inventory management oversees stock levels, manages orders, and forecasts demand to optimize business operations.

What are the 4 types of inventory?

The four types are raw materials, work-in-progress, finished goods, and maintenance, repair, and operations (MRO) inventories.

What are the 3 major inventory management techniques?

The three main techniques are Just-In-Time, ABC Analysis, and Economic Order Quantity (EOQ).

Inventory Management Techniques Summary

Effective inventory management is a cornerstone of successful business operations, ensuring that inventory levels are balanced, customer demand is met, and inventory costs are minimized.

Businesses can enhance their supply chain management and maintain a competitive edge in today’s market by employing strategic inventory management techniques, such as Just-In-Time and Economic Order Quantity.

Additionally, advancements in inventory management software have made it easier for companies to track and manage their inventory more efficiently, further optimizing their inventory management processes.

7 Inventory Management Techniques to Optimize Your Inventories

If you run a business that sells physical products, you know how important it is to keep track of your inventory. Inventory management is the process of planning, organizing, and controlling your stock levels to meet customer demand and avoid overstocking or running out of products. Inventory management techniques are the methods and tools you use to optimize your inventory management process.

In this blog post, we will explore some of the most effective inventory management techniques that can help you improve your business operations, reduce costs, and increase profits.

What is Inventory Management?

Inventory management is the process of keeping track of what you have, where it is, and how much it costs. It’s a crucial part of running a business, whether you sell physical products or services. Inventory management helps you optimize your cash flow, avoid stock outs or overstocking, and improve customer satisfaction.

There are different types of inventory, such as raw materials, work-in-progress, finished goods, and spare parts. Each type has its own challenges and requires different strategies to manage effectively.

Why is Inventory Management Important?

Poor inventory management affects your bottom line. It can lead to:

Overstocking: You waste money on storage costs, spoilage, and obsolescence.

Understocking: You lose sales and customers due to stockouts and delays.

Inaccuracies: You make wrong decisions based on unreliable data.

On the other hand, good inventory management can help you:

Reduce costs: You optimize your inventory levels and avoid unnecessary expenses.

Increase sales: You meet customer demand and offer faster delivery.

Improve quality: You ensure product availability and freshness.

Enhance productivity: You streamline your operations and reduce errors.

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Seven Essential Inventory Management Techniques

1. abc analysis.

This technique involves categorizing your inventory items based on their value and importance. The most valuable items are labeled as A, the moderately valuable items as B, and the least valuable items as C. Then, you allocate more resources and attention to the A items, less to the B items, and the least to the C items. This way, you can prioritize your inventory management efforts and optimize your cash flow.

2. EOQ Formula

This technique involves calculating the optimal order quantity for each item. The Economic Order Quantity (EOQ) formula considers the demand rate, the ordering cost, and the holding cost of each item. The goal is to minimize the total cost of ordering and holding inventory. The EOQ formula is:

EOQ = √(2 x D x S / H)

D = Annual demand in units

S = Ordering cost per order

H = Holding cost per unit per year

By using the EOQ formula, you can determine how much to order and when to order each item.

3. JIT Method

This technique involves ordering and receiving inventory just in time for production or sales. The JIT method reduces the need for storage space and eliminates the risk of overstocking or understocking. However, it requires accurate forecasting, reliable suppliers, and flexible production processes. The JIT method is suitable for businesses that deal with perishable or fast-moving items.

4. Cycle Counting

This technique involves counting a small portion of your inventory on a regular basis. For example, you can count 10% of your inventory every week until you cover the entire inventory in 10 weeks. Then, you repeat the cycle. Cycle counting helps you maintain accurate inventory records and identify any discrepancies or issues. It also reduces the disruption caused by annual physical counts.

FIFO stands for First In, First Out, and it’s a way of managing your inventory that makes sure you sell the oldest items first.

Why is this important? Well, imagine you’re running a grocery store and you have a bunch of bananas on your shelves. You don’t want to sell the ones that you just got from your supplier, because they’re fresh and have a longer shelf life. You want to sell the ones that have been sitting there for a while, because they’re more likely to go bad soon. That way, you reduce waste and increase customer satisfaction.

FIFO helps you do that by keeping track of when you received each batch of items and making sure you sell them in the same order. FIFO is also useful for accounting purposes, because it gives you a more accurate picture of your cost of goods sold and your profit margin. By using FIFO, you can match your sales revenue with the actual cost of the items you sold, rather than the cost of the items you bought most recently. This can help you avoid overestimating or underestimating your income and expenses.

LIFO stands for Last In, First Out. It’s a way of managing inventory that assumes that the last items you bought or produced are the first ones you sell. This means that the items left in your inventory are the oldest ones.

Why would you use LIFO? Well, one reason is to save on taxes. If the prices of your items are rising over time, then selling the newest ones first means that your cost of goods sold is higher, and your taxable income is lower, which is beneficial for your bottom line.

But LIFO also has some drawbacks. For one thing, it doesn’t reflect the actual flow of goods in most businesses. Usually, you sell the oldest items first, not the newest ones. That’s why LIFO is not allowed under some accounting standards, like IFRS. Another problem is that LIFO can distort your inventory value. If you have a lot of old items in your inventory that you bought at low prices, then your inventory value will be understated compared to the current market value. That can affect your balance sheet and your financial ratios.

LIFO is a method of inventory management that has some advantages and disadvantages. You should use it carefully and only if it makes sense for your business and your industry.

7. Inventory Management Software

This technique involves using a software system that automates and simplifies your inventory management tasks. Inventory management software can help you:

Track your inventory levels in real-time

Generate purchase orders and invoices

Manage multiple warehouses and locations

Integrate with other systems such as accounting, e-commerce, or CRM

Analyze your inventory performance and trends

Create reports and dashboards

Factors to Consider When Choosing the Right Inventory Management Technique for Your Business

Choosing the right inventory management technique for your business depends on several factors, such as:

Type and nature of your products: Are they perishable, seasonal, or fast-moving? Do they have a high or low turnover rate? Do they require special storage or handling conditions?

Size and complexity of your operations: How many locations, warehouses, or distribution centers do you have? How many suppliers and customers do you deal with? How much inventory do you need to keep on hand at each stage of the supply chain?

Level of demand and competition in your market: How predictable or volatile is your customer demand? How often do you need to replenish your stock? How do you balance the trade-off between stock availability and holding costs? How do you differentiate yourself from your competitors?

Goals and objectives of your business: What are your financial and operational targets? How do you measure your inventory performance and efficiency? How do you align your inventory strategy with your overall business strategy?

Tips for Effective Inventory Management

To make the most of your inventory management techniques, here are some tips that you can follow:

Set clear and realistic goals. For example, you can aim to reduce your inventory costs by 10%, increase your inventory turnover by 20%, or improve your customer satisfaction by 15%.

Review and update your inventory policies and procedures regularly For example, you can revise your reorder points, safety stock levels, or order quantities based on the changes in demand, supply, or market conditions.

Train and educate your staff on the importance and benefits of inventory management. You can educate employees on how inventory management affects the cash flow, profitability, and customer loyalty of your business.

Communicate and coordinate with your suppliers, customers, and other stakeholders. Share your inventory forecasts, orders, and feedback with your suppliers to ensure timely and accurate delivery. You can also inform your customers about your inventory availability, lead times, and delivery options to manage their expectations and satisfaction.

Measure and monitor your inventory performance and progress. Use key performance indicators (KPIs) such as inventory turnover ratio, days sales of inventory, gross margin return on investment, or fill rate to evaluate how well you are managing your inventory.

How Creately Helps You to Manage Inventory

You can use Creately to design your inventory layout, track your stock levels and visualize processes to figure out inefficiencies.

Create and inventory layout. You can draw a layout from scratch by dragging and dropping shapes from the library or choose a customizable template. You can customize the shapes with colors, labels, and icons.

Connect the shapes with lines to show the flow of your inventory. You can use different line styles and arrows to indicate the direction and type of movement. ta panel. You can enter information such as item name, quantity, price, and barcode and any other necessary attachments.

Use the filters and search functions to find and highlight specific items in your inventory. You can also sort and group your items by different criteria.

Share your inventory diagram with others by exporting your diagram as an image or PDF, or embed it on your website or blog.

Wrapping Up

Inventory management is a vital aspect of any business that deals with goods or materials. By applying the inventory management techniques discussed in this post, you can optimize your inventory levels, reduce your inventory costs, increase your sales, improve your quality, and enhance your productivity.

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FAQs About Inventory Management

How to Organize Inventory for Small Businesses in 9 Steps

Published August 3, 2023

Published Aug 3, 2023

REVIEWED BY: Meaghan Brophy

WRITTEN BY: Brigitte Korte

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This article is part of a larger series on Retail Management .

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Step 1: Choose an Inventory Management Method

Step 2: Organize Product & Vendor Information
Step 3: Create & Submit Accurate Purchase Orders

Step 4: Receive Orders Accurately

Step 5: Tag & Label Inventory

Step 6: Organize Your Stockroom or Warehouse

Step 7: track inventory in real time, step 8: conduct regular inventory counts, step 9: reconcile discrepancies, bottom line.

Inventory management is the process of having the right products, in the right quantities, at the right time to sell to customers. Accurately managing inventory can increase revenue by preventing stockouts, excess inventory, and unsold products.

While I have seen it done manually, the easier and more reliable solution for managing inventory is to use a software program that automates your inventory management processes. Our recommended solution for inventory management for small businesses is Lightspeed, as it combines both the POS system and inventory management suite to streamline your operations.

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If you’d rather manage inventory manually, download our free inventory management workbook:

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Lightspeed offers the best inventory management system for small businesses.

Before you begin working with your stock, you need to choose an inventory management method. As I mentioned earlier, the methods you choose should be ones that best allow you to maintain the right products, in the right quantities, at the right time to sell to your customers.

In my experience, combining a few different inventory management methods is the best way to successfully manage inventory.

The inventory management method (or methods) that makes sense for your business will depend on a few factors, including:

Product quantity
Product value
Cost of goods sold (COGS)
Turnover ratio
Product type (perishable vs non-perishable)
Product size/weight
Product quantities
Product variations
Turnover rate
Carrying costs

Once you have chosen your inventory management methods, you can implement them by programming an ordering cadence, automations, and alerts on your inventory management software or point-of-sale (POS) system . Or, if you are managing your inventory manually, you will need to monitor your books and item quantities to ensure implementation.

Below, you can click through a few of my most recommended inventory management methods.

First-in, first-out inventory management , also known as FIFO, is one method to assign costs to ending inventory. FIFO assumes that the first items that are purchased will be sold first to assign a cost to the inventory remaining at the end of the year.

The last-in, first-out inventory method , or LIFO, assumes the most recently purchased inventory (“last in”) as the cost of goods sold (COGS). In other words, recently purchased goods are expected to be expensed first or transferred to the COGS.

This method is popular in the US because it’s allowed for tax purposes, and many proponents believe it most closely matches the replacement cost of inventory.

Average Cost

The average cost method , or AVCO, is another method used to determine the cost of inventory at the end of the year and the COGS during the year. Under AVCO, the cost of inventory is based on the weighted average cost of inventory purchases during the year. Because it uses an average cost of goods in inventory rather than tracking individual units, it is typically simpler to use than FIFO or LIFO.

A perpetual inventory system calculates your COGS after each sale, as opposed to periodically. This is also called live sales tracking in a POS system and simply means that your inventory information will update as transactions happen. You will also want to be sure that this includes all your sales channels, including online and additional locations.

A periodic inventory system calculates your COGS periodically when you perform physical inventory counts. This is a more common practice for businesses managing their inventory manually but is also used less frequently in conjunction with automated perpetual inventory management systems.

Specific Identification

The specific identification inventory method identifies each individual unit of inventory and assigns its actual cost. This inventory management method doesn’t use assumptions like the FIFO, LIFO, or AVCO methods. The COGS and ending inventory are determined by the actual cost assigned to each physical unit of inventory and what is actually sold and unsold.

Step 2: Organize Product & Vendor Information

The first step in organizing your inventory is to set up your stock and supplier information in a reliable and accessible system. Some businesses will use manual tracking methods such as spreadsheets to keep track of their products and vendors.

However, as was the case at my store, the best option for retailers is to use a POS system that will keep searchable vendor and product directories.

There are lots of POS systems to choose from, and they all have unique inventory systems. Read our guide to learn more about the best POS inventory systems for your business.

Product Information
Vendor Information

To organize your products, you’ll first need to record information about each item and file it on a product page. Product-specific information should include:

Product name
Your internal product stock-keeping unit (SKU) number
Manufacturer’s Universal Product Code (UPC)/European Article Number (EAN) or other unique identifiers
Short description
Product category, class, or family
Wholesale cost
Regular retail price/MSRP
Your selling price
Colors or sizes
Vendor, supplier, or manufacturer name
Reorder quantities
Shipping details: size, weight, box pack, cost, dispatch time, etc.
Picture or product image

Screenshot of Lightspeed product details example

Keep track of your product information so you can reference it over time and reorder easily. (Source: Lightspeed)

In addition to creating a log of your products and their information, you will need to file your vendors’ information into your inventory system. That information should include:

Vendor name
Vendor contact name
Vendor billing information
Vendor phone
Vendor email
Vendor website
Order volume
Payment terms
Line rep or showroom contact
Fulfillment and shipping times
Top products from vendor

Not ready to invest in a POS system with inventory management capabilities? No worries. There are also several free inventory management software available.

Expert Tip: Build Relationships With Product Suppliers

Even with the best inventory management plan, issues can still arise where you need products ASAP to fulfill an order. When this happens, retailers are at the mercy of their suppliers. If there is a quality control issue or a discrepancy with a purchase order, having a good relationship with your supplier can help resolve these issues quickly.

I was able to build strong relationships with product suppliers by sticking with the same suppliers when I could, meeting suppliers in person at trade shows, and, perhaps most importantly, paying invoices on time.

As sustainability is becoming more critical to consumers and they demand greater environmental efforts from businesses, 53% of businesses are increasing their focus on sustainable sourcing .

Step 3: Create & Submit Accurate Purchase Orders

A purchase order (PO) is a buyer-created record of an order that is submitted to the vendor and serves as a legal contract for the sale of goods. You use POs to cross-reference actual goods and invoices received to those ordered and paid for. If there is a discrepancy between your PO and the goods received, you can use your PO to return to the vendor and settle up.

Screenshot of Lightspeed Retail built-in vendor directory

Purchase orders record what you ordered from your vendors and act as a receipt that you can compare to the goods you actually receive.

I submitted my POs to vendors electronically through email or the vendor’s online ordering portal, as is preferred over any paper system. While I didn’t use one at my store, some POS systems, like Lightspeed, have PO features that let you create and manage POs right from your POS system. Some systems even include vendor directories to manage vendor contact information, automated PO creation at set stock points, and receiving tools with POS data built in.

In the news:

As the economy continues to dip and consumer habits become more conservative, the inventory-to-sales ratio is rising, hitting 1.29 in April 2023 , with an upward trajectory. This means that for every sale, retailers have an average of 1.29 pieces of inventory. To account for this new economic environment, retailers should slow their purchasing rates to match slowing sales rates.

Once you have submitted your purchase orders and your suppliers have fulfilled them, you want to be sure that you receive your stock accurately. Supplier error is fairly common, and if you aren’t being systematic about receiving your inventory, you might get shorted, overcount, or underestimate your inventory levels—which can lead to shrinkage (having less product than your records show) and a decrease in your margins.

To ensure the accuracy of my orders, I followed these steps:

Unpack the shipment and organize items by product.
Count/scan products.
Compare the count to your PO.
If the counts and products match, file as received.
If you find errors like wrong, shorted, or missing items, note these on your PO and contact your supplier immediately to resolve them.
Shelve or store all correctly received stock (tag or label first if needed for your system).
Enter your invoice into your accounting system.

The inventory management system that I used had an accompanying app that turned my phone into a barcode scanner. I could then select “receiving” as the task and scan products, and the app would count and log my shipments for me. This made my life so much easier, so I would suggest looking for a barcode scanning app as a POS feature.

Screenshot of Receiving inventory accurately

Accurately counting and receiving stock is important for preventing shrinkage and ensuring the accuracy of your orders. (Source: Pinterest)

Did you know?

According to a widely reported stat, only 6% of companies report full visibility into their supply chain.

Step 5: Tag & Label Inventory

Once your products are physically on hand and accounted for, you will need to tag and label them so they are ready for the sales floor and organized internally.

To ensure your tags are ready for both the sales floor and the stockroom, they should include these main things:

Price: The selling price of your item. All your inventory will need this before it can go out on the floor and be customer-facing.
Product Labels: You should have some sort of labeling system for your inventory so you can easily organize and track it internally. We recommend using both a barcode label —so you can easily scan items in your inventory system and at checkout—and a descriptive written label, like “red shirt” or “child’s leggings,” that corresponds with where the item goes in your store and in storage.

Learn about the different types of labels you can use for your products to keep them identifiable and organized with our guide to UPCs and SKU numbers .

Regardless of the type of labels you use, a good time to tag and label inventory is during the stock receipt process. This ensures the task isn’t overlooked and prevents the unlabeled stock from being shelved or displayed for sale.

Once printed, labels should be fixed directly to the product. Some inventory might even arrive prelabeled with the manufacturer’s barcodes, description, and price. If you aren’t using an internal labeling system, this makes your job easy. You can just start organizing.

Use our guide on how to create barcodes (plus a barcode generator) and check out our picks for the best barcode label printers to get started labeling your products.

Having an organized stockroom will not only make things easier to find but will allow you to fit more merchandise and keep better tabs on your inventory. I remember taking the first week at my store to completely reorganize the stockroom to improve its functionality and make my life 10 times easier.

In retail stores, tall storage shelves or double-tier hanging racks can maximize your wall space while allowing movement and easy access. Additionally, storage bins can be stacked and labeled on the ground to use floor space efficiently.

In larger warehouse settings, there is typically more room to store goods within aisles that have built-in shelving and hanging storage. The biggest thing you will want to ensure is that you choose storage devices that make sense for your merchandise and can change over time.

For example, my store had a very small storage room, so we used lots of hanging racks and stacked bins to maximize the little space we had. The racks were easy to roll, and we could label them any way we needed with rack tags. Similarly, the bins were great for our heavier/knitted items that took up too much hanging space or couldn’t be hung, and were easy to label, depending on the inventory we had on hand.

Whatever your method, your stored inventory needs to be well-organized, clearly labeled, and accessible for pulling and inventory counts. This can be done using the boxes goods come in, stacking bins, or even hanging separators for hung apparel.

Utilize your wall space to fit as much product as possible in limited space. (Source: Pinterest)

Do you use a warehouse to store your products? Learn how to keep your warehouse operation efficient with our guide to warehouse layout design planning .

Tracking your inventory levels in real time is key for keeping the right items on the shelves in the right quantities—i.e., good inventory management. Whether by hand or through your POS system, a sound inventory management system records every sale in detail and adjusts inventory levels as each item is sold.

There are some great inventory management software that you can use to get real-time updates and stay on top of your inventory. Learn more about the top products on the market with our guide to the best inventory management software .

While you can use a spreadsheet for inventory tracking, I used a POS system with integrated inventory management. My POS system tracked inventory levels in real time and adjusted quantities with every sale. Then, as my inventory numbers would dip below my designated safety stock level , I would get automatic low-stock alerts and PO generation for the low-stock items.

A POS system will make tracking inventory levels and reordering your supplies quick and easy and, most importantly, will base your inventory levels on actual sales, not on your best guess.

I used to believe that inventory counts were unnecessary if you had a POS system keeping tabs on your inventory levels. Physical inventory counts can be mundane and tedious, so why not defer to technology?

The answer: Technology isn’t always 100% accurate, and it can’t account for products lost to shrinkage. Getting into your stock room and actually counting your products is the only way to know exactly what you have, allowing you to settle disparities between actual levels and those on your POS and manage your stock accurately.

Most small businesses do a full inventory count once each year for tax purposes but will also perform smaller partial inventory counts, or cycle counts, throughout the year.

Here are the types of counts you should perform to ensure you have an accurate eye on your inventory:

Quantity on Hand

The basis of both annual and cycle inventory counts is your current Quantity on Hand (QOH) or the amount of inventory you should have in stock for every item you carry. The formula for QOH is as follows:

QOH = (Previous QOH + Received Inventory)-Sold Inventory

Your QOH is the number you will measure your annual and cycle counts against. So, for example, if I thought I should have 272 packs of gum based on my QOH calculation, I would be looking for 272 packs of gum in my cycle or annual count. If I found a discrepancy, say only 250 packs of gum, that would indicate an error or theft that I could then look into further.

Annual Inventory Counts

Annual inventory counts are a complete inventory count, typically done at the close of each fiscal year for income tax purposes. These counts give you an overall picture of how much inventory you have on hand at the close of your year. They can also help businesses uncover inventory shortages due to miscounts, shrinkage issues, misplaced stock, and/or receiving errors.

While most retailers perform more frequent counts, some small businesses with limited staff or small inventories will only perform this type of inventory count each year. While annual inventory counts are a good practice regardless, by year’s end, it’s too late to fix most of the problems they reveal. To catch inventory issues before they become costly, you’ll also want to conduct periodic counts, called cycle counts.

Regular counts will also help you understand what stock is not moving and might need to go on sale to avoid incurring greater carrying costs (the expenses a small business must pay to hold and store unsold merchandise).

Cycle Counts

Cycle counts are periodic spot counts that take inventory of specific categories or subsets of products. For example, at my boutique, we would do a couple of cycle counts each week for different types of clothing—basics T-shirts one day, jeans another, earrings the next. Cycle counts helped us see how specific products were performing and determine whether it was time for a restock.

Typically, you perform cycle counts on a regular basis. So, you might decide to count shirts every other Wednesday and jeans every two months. As a best practice, you would cycle count all of your products daily to keep a good grasp on their levels. Without the right tech and staff, however, this is next to impossible. Schedule your cycle counts based on the speed with which you move through your inventory, with items that sell faster getting more frequent counts.

Manual vs Automated Counting

When it comes to how you count your inventory, you have two options. You can either do it manually or use a POS system to automate your processes. Here, we will look at both:

Manual Counting
Automated POS Counting

While we would suggest using a POS system to count your inventory for you, if you do decide to go the manual route, your first step will be tallying your QOH based on your POs, last year’s inventory, and a sales tally of each item sold. From there, you’ll need to create inventory count sheets to record your physical counts and begin counting.

Manual counts are less accurate and more time-consuming than your automated POS option.

While a POS system can’t count all the physical items in your inventory, it can place live QOH counts and inventory lists at the tips of your fingers to help accelerate and streamline your inventory counts. We suggest a POS system to help eliminate errors in your inventory management and make your business more efficient.

If you do decide to go with a POS system to count and track your inventory, we recommend Lightspeed. It keeps live QOH counts as you receive and sell items, continuously tracks your inventory levels, alerts you to low-stock items, and provides reports and data to help you better understand and manage your inventory.

Ideally, your physical inventory counts will match your projected quantities on hand (QOH). However, in my experience, this is seldom the case, and there are frequently differences you have to reconcile. If you count more or less of a product than you anticipated, you will need to investigate the discrepancy to figure out where things went wrong.

There are two primary reasons for inventory shrinkage. Either there has been a clerical error, or theft has occurred. Sometimes, clerical errors are not actual losses—an item could have been misplaced or a key mistyped. Other times, shrinkage indicates actual loss, and you should investigate where it happened so you can work on preventing shrinkage in the future .

As retail theft increased (and continues to do so), retail shrink was worth $100 billion in 2022. Learn how to prevent theft with our guide to retail theft prevention strategies .

If you determine that your missing merchandise is truly gone, you should adjust your QOH in your records or inventory management system/POS. After that, you need to record the dollar value lost due to the shrinkage in your inventory.

Inventory Management System Quiz

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Inventory Management Frequently Asked Questions (FAQs)

Expand the questions below to get answers to some of your most asked questions about inventory management.

What is inventory management?

Inventory management is the process (or all the processes) involved in keeping the right products, in the right quantity, in stock at the right times. In other words, inventory management is anything you do to avoid stockouts and to have in-demand products in stock for your customers to buy when they want them.

What is the best inventory management system for small businesses?

Overall, our top pick for inventory management systems for small businesses is Zoho Inventory. For retailers specifically, however, we recommend Lightspeed.

How do you do inventory management?

To do inventory management, you first need to organize your existing products and vendor info, place purchase orders, receive your orders, tag and label new inventory, organize it into your storage area, and then continually track and count inventory over time so you can monitor when it is time to place new orders or put items on sale.

How do small companies manage inventory?

Small business inventory management involves using a spreadsheet and tracking by hand or with an inventory management software solution to automate the process—and it isn’t very different for larger companies. We suggest Square as a free option that is perfect for small companies. Learn how to use Square to manage your business.

A good inventory management system means that you always have an accurate picture of your stock so that you can avoid waste and provide the merchandise and experience that your customers expect. Whether you’re looking to learn the basics of how to organize inventory for small businesses or reinvigorate an existing system that has become disorganized, these steps will help you set up and streamline your operations.

About the Author

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Brigitte Korte

Brigitte is a retail specialist and staff writer with brick-and-mortar management experience. Before joining FSB, she managed a storefront for several years, working in everything from merchandising, to buying, to sales analysis. Brigitte also has a background in writing, research, and publishing, with an undergraduate degree in writing.

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What is Inventory Management? Benefits, Types, & Techniques

In this article, learn about inventory management and its related disciplines from inventory experts. At the end, you will find an FAQ list on inventory.

What Is Inventory Management?

Inventory management helps companies identify which and how much stock to order at what time. It tracks inventory from purchase to the sale of goods. The practice identifies and responds to trends to ensure there’s always enough stock to fulfill customer orders and proper warning of a shortage.

Once sold, inventory becomes revenue. Before it sells, inventory (although reported as an asset on the balance sheet) ties up cash. Therefore, too much stock costs money and reduces cash flow.

One measurement of good inventory management is inventory turnover. An accounting measurement, inventory turnover reflects how often stock is sold in a period. A business does not want more stock than sales. Poor inventory turnover can lead to deadstock, or unsold stock.

Why Is Inventory Management Important?

Inventory management is vital to a company’s health because it helps make sure there is rarely too much or too little stock on hand, limiting the risk of stockouts and inaccurate records.

Public companies must track inventory as a requirement for compliance with Securities and Exchange Commission (SEC) rules and the Sarbanes-Oxley (SOX) Act. Companies must document their management processes to prove compliance.

Benefits of Inventory Management

The two main benefits of inventory management are that it ensures you’re able to fulfill incoming or open orders and raises profits. Inventory management also:

Saves Money: Understanding stock trends means you see how much of and where you have something in stock so you’re better able to use the stock you have. This also allows you to keep less stock at each location (store, warehouse), as you’re able to pull from anywhere to fulfill orders — all of this decreases costs tied up in inventory and decreases the amount of stock that goes unsold before it’s obsolete.

Improves Cash Flow: With proper inventory management, you spend money on inventory that sells, so cash is always moving through the business.

Satisfies Customers: One element of developing loyal customers is ensuring they receive the items they want without waiting.

Inventory Management Challenges

The primary challenges of inventory management are having too much inventory and not being able to sell it, not having enough inventory to fulfill orders, and not understanding what items you have in inventory and where they’re located. Other obstacles include:

Getting Accurate Stock Details: If you don’t have accurate stock details,there’s no way to know when to refill stock or which stock moves well.

Poor Processes: Outdated or manual processes can make work error-prone and slow down operations.

Changing Customer Demand: Customer tastes and needs change constantly. If your system can’t track trends, how will you know when their preferences change and why?

Using Warehouse Space Well: Staff wastes time if like products are hard to locate. Mastering inventory management can help eliminate this challenge.

Learn more about the challenges and benefits of inventory management .

What Is Inventory?

Inventory is the raw materials, components and finished goods a company sells or uses in production. Accounting considers inventory an asset. Accountants use the information about stock levels to record the correct valuations on the balance sheet.

Learn more about inventory in the article “ What Is Inventory ?”.

Inventory vs. Stock

Inventory is often called stock in retail businesses: Managers frequently use the term “stock on hand” to refer to products like apparel and housewares. Across industries, “inventory” more broadly refers to stored sales goods and raw materials and parts used in production.

Some people also say that the word “stock” is used more commonly in the U.K. to refer to inventory. While there is a difference between the two, the terms inventory and stock are often interchangeable. differences and similarities between stock and inventory . -->

What Are the Different Types of Inventory?

There are 12 different types of inventory: raw materials, work-in-progress (WIP), finished goods, decoupling inventory, safety stock, packing materials, cycle inventory, service inventory, transit, theoretical, excess and maintenance, repair and operations (MRO). Some people do not recognize MRO as a type of inventory.

Learn more about the 12 different types of inventory.

Video: What Is Inventory Management?

Inventory Management Process

If you produce on demand, the inventory management process starts when a company receives a customer order and continues until the order ships. Otherwise, the process begins when you forecast your demand and then place POs for the required raw materials or components. Other parts of the process include analyzing sales trends and organizing the storage of products in warehouses.

Learn more from the article on inventory management process .

How Inventory Management Works

The goal of inventory management is to understand stock levels and stock’s location in warehouses. Inventory management software tracks the flow of products from supplier through the production process to the customer. In the warehouse, inventory management tracks stock receipt, picking, packing and shipping.

Inventory Management Techniques and Terms

Some inventory management techniques use formulas and analysis to plan stock. Others rely on procedures. All methods aim to improve accuracy. The techniques a company uses depend on its needs and stock.

Find out which technique works best for your business by reading the guide to inventory management techniques. Here’s a summary of them:

ABC Analysis: This method works by identifying the most and least popular types of stock.

Batch Tracking: This method groups similar items to track expiration dates and trace defective items.

Bulk Shipments: This method considers unpacked materials that suppliers load directly into ships or trucks. It involves buying, storing and shipping inventory in bulk.

Consignment: When practicing consignment inventory management , your business won’t pay its supplier until a given product is sold. That supplier also retains ownership of the inventory until your company sells it.

Cross-Docking: Using this method, you’ll unload items directly from a supplier truck to the delivery truck. Warehousing is essentially eliminated.

Demand Forecasting: This form of predictive analytics helps predict customer demand.

Dropshipping: In the practice of dropshipping , the supplier ships items directly from its warehouse to the customer.

Economic Order Quantity (EOQ): This formula shows exactly how much inventory a company should order to reduce holding and other costs.

FIFO and LIFO: First in, first out (FIFO) means you move the oldest stock first. Last in, first out (LIFO) considers that prices always rise, so the most recently-purchased inventory is the most expensive and thus sold first.

Just-In-Time Inventory (JIT): Companies use this method in an effort to maintain the lowest stock levels possible before a refill.

Lean Manufacturing: This methodology focuses on removing waste or any item that does not provide value to the customer from the manufacturing system.

Materials Requirements Planning (MRP): This system handles planning, scheduling and inventory control for manufacturing.

Minimum Order Quantity: A company that relies on minimum order quantity will order minimum amounts of inventory from wholesalers in each order to keep costs low.

Reorder Point Formula: Businesses use this formula to find the minimum amount of stock they should have before reordering, then manage their inventory accordingly.

Perpetual Inventory Management: This technique entails recording stock sales and usage in real-time. Read “ The Definitive Guide to Perpetual Inventory ” to learn more about this practice.

Safety Stock: An inventory management ethos that prioritizes safety stock will ensure there’s always extra stock set aside in case the company can’t replenish those items.

Six Sigma: This is a data-based method for removing waste from businesses as it relates to inventory.

Lean Six Sigma: This method combines lean management and Six Sigma practices to remove waste and raise efficiency.

Inventory vs. Cycle Counting

“Taking inventory” is the process of physically counting all stock, once a year in most cases. Cycle counting is the practice of counting a selected set of stock more often. Cycle counting serves as an important means of checks and balances to ensure the amount of inventory represented in the inventory management system is what you have on the shelf.

A cycle counting best practice is to count specific SKUs regularly and integrate it into the daily tasks of warehouse staff. Companies may determine different standards for different types of inventory, such as performing a cycle count of top-moving SKUs or higher-value items. Learn more about the benefits of cycle counting .

Demand Planning and Inventory Management

Demand planning is an important part of successful inventory management. It is the process of determining how much of each item you anticipate selling, and when. Once demand is determined, inventory management follows the flow of goods from the supplier through production and ultimately fulfilling customer orders.

Find out more about how demand planning and inventory management work together in the “ Essential Guide to Inventory Planning .”

Inventory Management Formulas

Understanding inventory management formulas is crucial to optimizing stock levels. Multiple inventory and accounting professionals have vetted formulas to make inventory calculations easier. guide to inventory formulas . -->

Inventory Management KPIs

Effective inventory management plays an important role throughout the supply chain. There are many key performance indicators for measuring inventory management success throughout the different organizations in the business. Understand which calculations return the most insight into your business processes is important. To learn more, see inventory management KPIs .

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How Is Inventory Management Different From Other Processes?

People sometimes confuse inventory management with related practices. Inventory management controls all stock within a company. Supply chain management manages the process from supplier to delivering the product to the customer. Warehouse management is a part of inventory control and focuses on stock in a specific location.

Inventory Management vs. Inventory Control

inventory control is a part of the overall inventory management process. Inventory control manages the movement of items within the warehouse.

Learn more about how these practices work together in our article on inventory control vs. inventory management .

Inventory Management vs. Inventory Optimization

Inventory optimization is the process of using inventory in the most efficient way, and as a result minimizing the dollars spent on stock and storing those items.

You can also think about inventory optimization as seeing inventory across all locations and selling channels, being able to use any of it to fulfill customer orders—in doing so, you can hold less stock overall.

Inventory Management vs. Order Management

Inventory management is responsible for ordering and tracking stock as it arrives at the warehouse. Order management is the process of receiving and tracking customer orders. Software often combines both tasks.

Inventory management plays an important role in order management. As orders are received, inventory can be allocated to specific orders, and then the status can be changed in the inventory record to essentially put it “on hold” for that order. Furthermore, when the order management system and inventory system are integrated, the inventory system can recommend which location should fulfill the order, based on where all the items in the order are available—this eliminates multiple shipments for a single order.

Find out more about order management vs. inventory management .

Inventory Management vs. Supply Chain Management

Supply chain management is a process of managing supply relationships outside a company and the flow of stock into and through a company. Inventory management may focus on trends and orders for the company or a part of the company.

Inventory management is essential for a properly running supply chain. Inventory management follows the flow of goods to, through and out of the warehouse. The supply chain includes demand planning, procurement, production, quality, fulfillment, warehousing and customer service—all of which require inventory visibility.

Find out more about inventory management and supply chain management.

Inventory Management vs. Warehouse Management

Warehouse management complements inventory management. Warehouse management organizes stock in a warehouse. Inventory management manages stock and trends for many warehouses or an entire company.

The key to streamlining your warehouse operations is a thoughtfully laid out and meticulously organized facility. When each product has a specific place in the warehouse, it prevents staff from moving about inefficiently and maximizes labor efficiency. But these processes are only as good as the inventory records that drive them.

Learn more about how warehouse management and inventory management work together.

Inventory Management vs. Logistics

Logistics is the practice of controlling processes in a warehouse and in the replenishment and delivery systems. Inventory management maintains stock levels and manages stock location.

Inventory management is a crucial part of how companies manipulate their logistics. The relationship between inventory management and logistics is interdependent. Logistics need inventory management to perform their activities. Good logistics systems improve warehouse and operational activities.

Find out more about this topic by reading “ The Benefits of Integrating Your Inventory Software With Your Accounting and Back-Office Processes .”

Inventory Management vs. ERP

An enterprise resource planning (ERP) system is software that manages business activities such as accounting, purchasing, compliance and supply chain operations. By contrast, inventory management is a part of a modern ERP system, providing insight into stock levels, inventory en route and the status of current inventory—this makes it visible across the organization in real time.

Inventory management helps to properly plan a company’s replenishment orders. ERP systems give companies accurate inventory data, so they have the most current information for their inventory management plan. ERP systems optimize the data so inventory management is successful.

Learn more about the role of an ERP system in inventory management .

Retail Inventory Management

Retail inventory is the stocking of products that you sell to consumers. Use the system to set profitable prices and ensure you have the right amount of stock to meet demand.

Learn more about retail inventory management .

Manufacturing Inventory Management

Manufacturing inventory management is the practice of keeping enough stock on hand so production lines can fulfill orders. The process helps managers see stock levels at a glance and tracks raw materials, parts, work-in-progress and finished goods.

Find out more about manufacturing inventory management.

What Is Multi-Location Inventory Management?

Multi-location inventory management is the process of managing stock across multiple locations, warehouses, and retail stores or across multiple selling channels. With multi-location management, you can watch stock levels in all locations and optimize your inventory to fulfill orders.

Learn more about multi-location inventory management .

What Is an Inventory Management System?

An inventory management system combines varying software packages to track stock levels and stock movements. The solution can integrate with multichannel sales systems or shipping systems.

An inventory management system optimizes inventory levels and ensures product availability across multiple channels. It provides a single, real-time view of items, inventory and orders across all locations and selling channels. This enables businesses to carry less inventory on hand and frees up cash to be used in other parts of the business. An inventory management system helps keep inventory costs low while delivering on customer expectations.

Learn about all inventory management system features and how to pick a solution that’s right for your company.

How to Choose an Inventory Management System?

Choosing an inventory management system is a matter of identifying the features your business needs. Do you need to track stock movements and location within a warehouse, or plan inventory and track trends, or both?

Read “ Choosing the Right Inventory Management System ” for answers to your research questions. When evaluating a system, remember to look for three key features: real-time demand planning functionality , data analysis tools and near- and real-time data reporting. Learn about each by reading “ Three Must-Haves for Your Inventory Management Software Shopping List .”

Already know what you need? Learn how NetSuite can be customized to meet your exact requirements.

Inventory Management FAQs

There are many questions in a broad and complicated topic like inventory management. Here are answers to a few:

What Are the Objectives of Inventory Management?

One objective of inventory management is to keep enough stock to satisfy customers. Another is to invest as little as possible in stock while still earning the most profit.

Why Inventory Management Is Important in the Supply Chain

Inventory management is vital in the supply chain because a company must balance customer demand with storage space and cash limitations. Inventory management provides visibility into the supply chain (procurement, production, fulfillment, etc.) so managers can coordinate lead times for deliveries with production timetables.

How Can Inventory Management Be Improved?

Keeping accurate accounting records and taking regular physical stock counts can improve your inventory management efforts. A system that provides your organization with real-time visibility into inventory can help stakeholders make critical business decisions. You should also be aware of a stock’s condition, especially if you’re dealing with perishables.

How Inventory Management Affects the Working Capital

Real goods in warehouses tie up working capital until they sell. Making the supply chain more efficient keeps you from holding too much stock. Improving inventory management processes helps you prevent storing, picking and shipping errors that reduce sales.

What Are Inventory Management Policies?

Inventory management policies are plans for how to use inventory to make customers happy and reduce costs. Policies outline such things as the stock management method the company uses.

What Are the Types of Inventory Management Systems?

There are several types of inventory management systems that businesses use depending on how they operate. Three examples are manual inventory, periodic inventory and perpetual inventory. Manual methods are the least sophisticated and least accurate, and perpetual systems are the most sophisticated and most accurate.

Manual Inventory System: This involves physically counting items and recording them on paper or in a spreadsheet. Small businesses may use manual systems.

Periodic Inventory System: Periodic inventory systems include manual and periodic counts. Periodic counts record item details as items move in and out of stock. Barcodes simplify stocktaking. A database contains the records of stock levels and locations.

Perpetual Inventory System: Perpetual inventory systems provide real-time stock data, as they rely on active radio frequency identification (RFID) tags that are always on and sending updates on item movements. Passive RFID tags, meanwhile, use a scanner to send stock information to the database.

What Is Service Level in Inventory Management?

A service level for inventory management is how much a company believes it can successfully store a particular stock.In other words, it’s the probability a company will avoid stockouts and support sales.

How Does ERP Help in Inventory Management?

Enterprise resource planning (ERP) is helpful for inventory management because it tracks and provides insights into supply chain operation, accounting and purchasing, consolidating the information and making it visible in one place. ERP and inventory management . -->

What Is Poor Inventory Management?

Poor inventory management is an imbalance between keeping too much and too little stock. The definition of a perfect balance can change as demand changes: Sales change when trends or seasons change. Poor stock management increases costs and thereby reduces profits.

Bring the Benefits of Inventory Management to Your Business With NetSuite

Decision-makers know they need an inventory management system that can grow with them. With automated replenishment and lot tracing and tracking in multiple locations, NetSuite provides cloud-based inventory management solutions that are the perfect fit for businesses of any size. NetSuite offers a suite of native inventory management and control features, including multiple location planning, warehouse and fulfillment management, automated stock replenishment, lot and serial tracking and cycle counting. Learn more about how you can use NetSuite to manage inventory automatically, reduce handling costs and increase cash flow.

What Is Inventory: Types, Examples and Analysis

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10.1 Describe and Demonstrate the Basic Inventory Valuation Methods and Their Cost Flow Assumptions

Accounting for inventory is a critical function of management. Inventory accounting is significantly complicated by the fact that it is an ongoing process of constant change, in part because (1) most companies offer a large variety of products for sale, (2) product purchases occur at irregular times, (3) products are acquired for differing prices, and (4) inventory acquisitions are based on sales projections, which are always uncertain and often sporadic. Merchandising companies must meticulously account for every individual product that they sell, equipping them with essential information, for decisions such as these:

What is the quantity of each product that is available to customers?
When should inventory of each product item be replenished and at what quantity?
How much should the company charge customers for each product to cover all costs plus profit margin?
How much of the inventory cost should be allocated toward the units sold (cost of goods sold) during the period?
How much of the inventory cost should be allocated toward the remaining units (ending inventory) at the end of the period?
Is each product moving robustly or have some individual inventory items’ activity decreased?
Are some inventory items obsolete?

The company’s financial statements report the combined cost of all items sold as an offset to the proceeds from those sales, producing the net number referred to as gross margin (or gross profit). This is presented in the first part of the results of operations for the period on the multi-step income statement. The unsold inventory at period end is an asset to the company and is therefore included in the company’s financial statements, on the balance sheet, as shown in Figure 10.2 . The total cost of all the inventory that remains at period end, reported as merchandise inventory on the balance sheet, plus the total cost of the inventory that was sold or otherwise removed (through shrinkage, theft, or other loss), reported as cost of goods sold on the income statement (see Figure 10.2 ), represent the entirety of the inventory that the company had to work with during the period, or goods available for sale.

Fundamentals of Inventory

Although our discussion will consider inventory issues from the perspective of a retail company, using a resale or merchandising operation, inventory accounting also encompasses recording and reporting of manufacturing operations. In the manufacturing environment, there would be separate inventory calculations for the various process levels of inventory, such as raw materials, work in process, and finished goods. The manufacturer’s finished goods inventory is equivalent to the merchandiser’s inventory account in that it includes finished goods that are available for sale.

In merchandising companies, inventory is a company asset that includes beginning inventory plus purchases , which include all additions to inventory during the period. Every time the company sells products to customers, they dispose of a portion of the company’s inventory asset. Goods available for sale refers to the total cost of all inventory that the company had on hand at any time during the period, including beginning inventory and all inventory purchases. These goods were normally either sold to customers during the period (occasionally lost due to spoilage, theft, damage, or other types of shrinkages) and thus reported as cost of goods sold, an expense account on the income statement, or these goods are still in inventory at the end of the period and reported as ending merchandise inventory, an asset account on the balance sheet. As an example, assume that Harry’s Auto Parts Store sells oil filters. Suppose that at the end of January 31, 2018, they had 50 oil filters on hand at a cost of $7 per unit. This means that at the beginning of February, they had 50 units in inventory at a total cost of $350 (50 × $7). During the month, they purchased 20 filters at a cost of $7, for a total cost of $140 (20 × $7). At the end of the month, there were 18 units left in inventory. Therefore, during the month of February, they sold 52 units. Figure 10.3 illustrates how to calculate the goods available for sale and the cost of goods sold.

Inventory costing is accomplished by one of four specific costing methods: (1) specific identification, (2) first-in, first-out, (3) last-in, first-out, and (4) weighted-average cost methods. All four methods are techniques that allow management to distribute the costs of inventory in a logical and consistent manner, to facilitate matching of costs to offset the related revenue item that is recognized during the period, in accordance with GAAP expense recognition and matching concepts. Note that a company’s cost allocation process represents management’s chosen method for expensing product costs, based strictly on estimates of the flow of inventory costs, which is unrelated to the actual flow of the physical inventory. Use of a cost allocation strategy eliminates the need for often cost-prohibitive individual tracking of costs of each specific inventory item, for which purchase prices may vary greatly. In this chapter, you will be provided with some background concepts and explanations of terms associated with inventory as well as a basic demonstration of each of the four allocation methods, and then further delineation of the application and nuances of the costing methods.

A critical issue for inventory accounting is the frequency for which inventory values are updated. There are two primary methods used to account for inventory balance timing changes: the periodic inventory method and the perpetual inventory method. These two methods were addressed in depth in Merchandising Transactions ).

Periodic Inventory Method

A periodic inventory system updates the inventory balances at the end of the reporting period, typically the end of a month, quarter, or year. At that point, a journal entry is made to adjust the merchandise inventory asset balance to agree with the physical count of inventory, with the corresponding adjustment to the expense account, cost of goods sold. This adjustment shifts the costs of all inventory items that are no longer held by the company to the income statement, where the costs offset the revenue from inventory sales, as reflected by the gross margin. As sales transactions occur throughout the period, the periodic system requires that only the sales entry be recorded because costs will only be updated during end-of-period adjustments when financial statements are prepared. However, any additional goods for sale acquired during the month are recorded as purchases. Following are examples of typical journal entries for periodic transactions. The first is an example entry for an inventory sales transaction when using periodic inventory, and the second records the purchase of additional inventory when using the periodic method. Note: Periodic requires no corresponding cost entry at the time of sale, since the inventory is adjusted only at period end.

A purchase of inventory for sale by a company under the periodic inventory method would necessitate the following journal entry. (This is discussed in more depth in Merchandising Transactions .)

Perpetual Inventory Method

A perpetual inventory system updates the inventory account balance on an ongoing basis, at the time of each individual sale. This is normally accomplished by use of auto-ID technology, such as optical-scan barcode or radio frequency identification (RFIF) labels. As transactions occur, the perpetual system requires that every sale is recorded with two entries, first recording the sales transaction as an increase to Accounts Receivable and a decrease to Sales Revenue, and then recording the cost associated with the sale as an increase to Cost of Goods Sold and a decrease to Merchandise Inventory. The journal entries made at the time of sale immediately shift the costs relating to the goods being sold from the merchandise inventory account on the balance sheet to the cost of goods sold account on the income statement. Little or no adjustment is needed to inventory at period end because changes in the inventory balances are recorded as both the sales and purchase transactions occur. Any necessary adjustments to the ending inventory account balances would typically be caused by one of the types of shrinkage you’ve learned about. These are example entries for an inventory sales transaction when using perpetual inventory updating:

A purchase of inventory for sale by a company under the perpetual inventory method would necessitate the following journal entry. (Greater detail is provided in Merchandising Transactions .)

Continuing Application

As previously discussed, Gearhead Outfitters is a retail chain selling outdoor gear and accessories. As such, the company is faced with many possible questions related to inventory. How much inventory should be carried? What products are the most profitable? Which products have the most sales? Which products are obsolete? What timeframe should the company allow for inventory to be replenished? Which products are the most in demand at each location?

In addition to questions related to type, volume, obsolescence, and lead time, there are many issues related to accounting for inventory and the flow of goods. As one of the biggest assets of the company, the way inventory is tracked can have an effect on profit. Which method of accounting—first-in first-out, last-in first out, specific identification, weighted average— provides the most accurate reflection of inventory and cost of goods sold is important in determining gross profit and net income. The method selected affects profits, taxes, and can even change the opinion of potential lenders concerning the financial strength of the company. In choosing a method of accounting for inventory, management should consider many factors, including the accurate reflection of costs, taxes on profits, decision-making about purchases, and what effect a point-of-sale (POS) system may have on tracking inventory.

Gearhead exists to provide a positive shopping experience for its customers. Offering a clear picture of its goods, and maintaining an appealing, timely supply at competitive prices is one way to keep the shopping experience positive. Thus, accounting for inventory plays an instrumental role in management’s ability to successfully run a company and deliver the company’s promise to customers.

Data for Demonstration of the Four Basic Inventory Valuation Methods

The following dataset will be used to demonstrate the application and analysis of the four methods of inventory accounting .

Company: Spy Who Loves You Corporation

Product: Global Positioning System (GPS) Tracking Device

Description: This product is an economical real-time GPS tracking device, designed for individuals who wish to monitor others’ whereabouts. It is marketed to parents of middle school and high school students as a safety measure. Parents benefit by being apprised of the child’s location, and the student benefits by not having to constantly check in with parents. Demand for the product has spiked during the current fiscal period, while supply is limited, causing the selling price to escalate rapidly.

Specific Identification Method

The specific identification method refers to tracking the actual cost of the item being sold and is generally used only on expensive items that are highly customized (such as tracking detailed costs for each individual car in automobiles sales) or inherently distinctive (such as tracking origin and cost for each unique stone in diamond sales). This method is too cumbersome for goods of large quantity, especially if there are not significant feature differences in the various inventory items of each product type. However, for purposes of this demonstration, assume that the company sold one specific identifiable unit, which was purchased in the second lot of products, at a cost of $27.

Three separate lots of goods are purchased:

First-in, First-out (FIFO) Method

The first-in, first-out method (FIFO) records costs relating to a sale as if the earliest purchased item would be sold first. However, the physical flow of the units sold under both the periodic and perpetual methods would be the same. Due to the mechanics of the determination of costs of goods sold under the perpetual method, based on the timing of additional purchases of inventory during the accounting period, it is possible that the costs of goods sold might be slightly different for an accounting period. Since FIFO assumes that the first items purchased are sold first, the latest acquisitions would be the items that remain in inventory at the end of the period and would constitute ending inventory.

Last-in, First-out (LIFO) Method

The last-in, first out method (LIFO) records costs relating to a sale as if the latest purchased item would be sold first. As a result, the earliest acquisitions would be the items that remain in inventory at the end of the period.

IFRS Connection

For many companies, inventory is a significant portion of the company’s assets. In 2018, the inventory of Walmart , the world’s largest international retailer, was 70% of current assets and 21% of total assets. Because inventory also affects income as it is sold through the cost of goods sold account, inventory plays a significant role in the analysis and evaluation of many companies. Ending inventory affects both the balance sheet and the income statement. As you’ve learned, the ending inventory balance is reflected as a current asset on the balance sheet and the ending inventory balance is used in the calculation of costs of goods sold. Understanding how companies report inventory under US GAAP versus under IFRS is important when comparing companies reporting under the two methods, particularly because of a significant difference between the two methods.

Similarities

When inventory is purchased, it is accounted for at historical cost and then evaluated at each balance sheet date to adjust to the lower of cost or net realizable value.
Both IFRS and US GAAP allow FIFO and weighted-average cost flow assumptions as well as specific identification where appropriate and applicable.

Differences

IFRS does not permit the use of LIFO. This is a major difference between US GAAP and IFRS. The AICPA estimates that roughly 35–40% of all US companies use LIFO, and in some industries, such as oil and gas, the use of LIFO is more prevalent. Because LIFO generates lower taxable income during times of rising prices, it is estimated that eliminating LIFO would generate an estimated $102 billion in tax revenues in the US for the period 2017–2026. In creating IFRS, the IASB chose to eliminate LIFO, arguing that FIFO more closely matches the flow of goods. In the US, FASB believes the choice between LIFO and FIFO is a business model decision that should be left up to each company. In addition, there was significant pressure by some companies and industries to retain LIFO because of the significant tax liability that would arise for many companies from the elimination of LIFO.

Weighted-Average Cost Method

The weighted-average cost method (sometimes referred to as the average cost method ) requires a calculation of the average cost of all units of each particular inventory items. The average is obtained by multiplying the number of units by the cost paid per unit for each lot of goods, then adding the calculated total value of all lots together, and finally dividing the total cost by the total number of units for that product. As a caveat relating to the average cost method, note that a new average cost must be calculated after every change in inventory to reassess the per-unit weighted-average value of the goods. This laborious requirement might make use of the average method cost-prohibitive.

Comparing the various costing methods for the sale of one unit in this simple example reveals a significant difference that the choice of cost allocation method can make. Note that the sales price is not affected by the cost assumptions; only the cost amount varies, depending on which method is chosen. Figure 10.4 depicts the different outcomes that the four methods produced.

Once the methods of costing are determined for the company, that methodology would typically be applied repeatedly over the remainder of the company’s history to accomplish the generally accepted accounting principle of consistency from one period to another. It is possible to change methods if the company finds that a different method more accurately reflects results of operations, but the change requires disclosure in the company’s notes to the financial statements, which alerts financial statement users of the impact of the change in methodology. Also, it is important to realize that although the Internal Revenue Service generally allows differing methods of accounting treatment for tax purposes than for financial statement purposes, an exception exists that prohibits the use of LIFO inventory costing on the company tax return unless LIFO is also used for the financial statement costing calculations.

Ethical Considerations

Auditors look for inventory fraud.

Inventory fraud can be used to book false revenue or to increase the amount of assets to obtain additional lending from a bank or other sources. In the typical chain of accounting events, inventory ultimately becomes an expense item known as cost of goods sold. 1 In a manipulated accounting system, a trail of fraudulent transactions can point to accounting misrepresentation in the sales cycle, which may include

recording fictitious and nonexistent inventory,
manipulation of inventory counts during a facility audit,
recording of sales but no recording of purchases, and/or
fraudulent inventory capitalization,

to list a few. 2 All these elaborate schemes have the same goal: to improperly manipulate inventory values to support the creation of a fraudulent financial statement. Accountants have an ethical, moral, and legal duty to not commit accounting and financial statement fraud. Auditors have a duty to look for such inventory fraud.

Auditors follow the Statement on Auditing Standards (SAS) No. 99 and AU Section 316 Consideration of Fraud in a Financial Statement Audit when auditing a company’s books. Auditors are outside accountants hired to “obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.” 3 Ultimately, an auditor will prepare an audit report based on the testing of the balances in a company’s books, and a review of the company’s accounting system. The auditor is to perform “procedures at locations on a surprise or unannounced basis, for example, observing inventory on unexpected dates or at unexpected locations or counting cash on a surprise basis.” 4 Such testing of a company’s inventory system is used to catch accounting fraud. It is the responsibility of the accountant to present accurate accounting records to the auditor, and for the auditor to create auditing procedures that reasonably ensure that the inventory balances are free of material misstatements in the accounting balances.

Additional Inventory Issues

Various other issues that affect inventory accounting include consignment sales, transportation and ownership issues, inventory estimation tools, and the effects of inflationary versus deflationary cycles on various methods.

Consignment

Consigned goods refer to merchandise inventory that belongs to a third party but which is displayed for sale by the company. These goods are not owned by the company and thus must not be included on the company’s balance sheet nor be used in the company’s inventory calculations. The company’s profit relating to consigned goods is normally limited to a percentage of the sales proceeds at the time of sale.

For example, assume that you sell your office and your current furniture doesn’t match your new building. One way to dispose of the furniture would be to have a consignment shop sell it. The shop would keep a percentage of the sales revenue and pay you the remaining balance. Assume in this example that the shop will keep one-third of the sales proceeds and pay you the remaining two-thirds balance. If the furniture sells for $15,000, you would receive $10,000 and the shop would keep the remaining $5,000 as its sales commission. A key point to remember is that until the inventory, in this case your office furniture, is sold, you still own it, and it is reported as an asset on your balance sheet and not an asset for the consignment shop. After the sale, the buyer is the owner, so the consignment shop is never the property’s owner.

Free on Board (FOB) Shipping and Destination

Transportation costs are commonly assigned to either the buyer or the seller based on the free on board (FOB) terms, as the terms relate to the seller. Transportation costs are part of the responsibilities of the owner of the product, so determining the owner at the shipping point identifies who should pay for the shipping costs. The seller’s responsibility and ownership of the goods ends at the point that is listed after the FOB designation. Thus, FOB shipping point means that the seller transfers title and responsibility to the buyer at the shipping point, so the buyer would owe the shipping costs. The purchased goods would be recorded on the buyer’s balance sheet at this point.

Similarly, FOB destination means the seller transfers title and responsibility to the buyer at the destination, so the seller would owe the shipping costs. Ownership of the product is the trigger that mandates that the asset be included on the company’s balance sheet. In summary, the goods belong to the seller until they transition to the location following the term FOB, making the seller responsible for everything about the goods to that point, including recording purchased goods on the balance sheet . If something happens to damage or destroy the goods before they reach the FOB location, the seller would be required to replace the product or reverse the sales transaction.

Lower-of-Cost-or-Market (LCM)

Reporting inventory values on the balance sheet using the accounting concept of conservatism (which discourages overstatement of net assets and net income) requires inventory to be calculated and adjusted to a value that is the lower of the cost calculated using the company’s chosen valuation method or the market value based on the market or replacement value of the inventory items. Thus, if traditional cost calculations produce inventory values that are overstated, the lower-of-cost-or-market (LCM) concept requires that the balance in the inventory account should be decreased to the more conservative replacement value rather than be overstated on the balance sheet.

Estimating Inventory Costs: Gross Profit Method and Retail Inventory Method

Sometimes companies have a need to estimate inventory values. These estimates could be needed for interim reports, when physical counts are not taken. The need could be result from a natural disaster that destroys part or all of the inventory or from an error that causes inventory counts to be compromised or omitted. Some specific industries (such as select retail businesses) also regularly use these estimation tools to determine cost of goods sold. Although the method is predictable and simple, it is also less accurate since it is based on estimates rather than actual cost figures.

The gross profit method is used to estimate inventory values by applying a standard gross profit percentage to the company’s sales totals when a physical count is not possible. The resulting gross profit can then be subtracted from sales, leaving an estimated cost of goods sold. Then the ending inventory can be calculated by subtracting cost of goods sold from the total goods available for sale. Likewise, the retail inventory method estimates the cost of goods sold, much like the gross profit method does, but uses the retail value of the portions of inventory rather than the cost figures used in the gross profit method.

Inflationary Versus Deflationary Cycles

As prices rise (inflationary times), FIFO ending inventory account balances grow larger even when inventory unit counts are constant, while the income statement reflects lower cost of goods sold than the current prices for those goods, which produces higher profits than if the goods were costed with current inventory prices. Conversely, when prices fall (deflationary times), FIFO ending inventory account balances decrease and the income statement reflects higher cost of goods sold and lower profits than if goods were costed at current inventory prices. The effect of inflationary and deflationary cycles on LIFO inventory valuation are the exact opposite of their effects on FIFO inventory valuation.

Link to Learning

Accounting Coach does a great job in explaining inventory issues (and so many other accounting topics too): Learn more about inventory and cost of goods sold on their website.

Think It Through

First-in, first-out (fifo).

Suppose you are the assistant controller for a retail establishment that is an independent bookseller. The company uses manual, periodic inventory updating, using physical counts at year end, and the FIFO method for inventory costing. How would you approach the subject of whether the company should consider switching to computerized perpetual inventory updating? Can you present a persuasive argument for the benefits of perpetual? Explain.

1 “Inventory Fraud: Knowledge Is Your First Line of Defense.” Weaver. Mar. 27, 2015. https://weaver.com/blog/inventory-fraud-knowledge-your-first-line-defense
2 Wells, Joseph T. “Ghost Goods: How to Spot Phantom Inventory.” Journal of Accountancy . June 1, 2001. https://www.journalofaccountancy.com/issues/2001/jun/ghostgoodshowtospotphantominventory.html
3 American Institute of Certified Public Accountants (AICPA). Consideration of Fraud in a Financial Statement Audit (AU Section 316). https://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00316.pdf
4 American Institute of Certified Public Accountants (AICPA). Consideration of Fraud in a Financial Statement Audit (AU Section 316). https://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00316.pdf

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Module 8: Inventory Valuation Methods

Assignment: inventory valuation methods.

This assignment can be found in Google Docs: Financial Accounting Assignment: Inventory Valuation Methods

To make your own copy to edit:

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InventoryLogIQ
What is ABC Analysis For Inventory Management? Ben...

What is ABC Analysis For Inventory Management? Benefits, Limitations and Best Practices to Effectively Carry Out ABC Analysis in 2022

August 15, 2022

Recent studies show that inventories hold over $1.1 trillion in cash or 7% of the U.S. GDP. This indicates that more money than you could make from sales is sitting in your warehouse.

The majority of businesses today struggle with adequately managing their inventory. After all, when juggling a variety of consumer requests, keeping the ideal inventory quantity can be challenging. However, you can manage your goods effectively with a robust inventory control system.

Inventory management helps companies have the right amount of merchandise on hand. As a result, many sectors, including eCommerce, manufacturing, logistics, retail, and other enterprises that deal with inventory, place it at the top of their priority lists. ABC analysis is one of those several inventory control strategies.

ABC Classification of Inventory

Warehouse and supply chain management, high resource consumption, measure and re-assess, review the categories, abc analysis for inventory management faqs (frequently asked questions), what is abc analysis for inventory management.

Inventory management teams utilise ABC inventory analysis to divide their stock into three groups, A, B, and C, according to the “value” or “importance” of each group to their particular organisation. Managers can direct their attention and resources toward controlling stock which is more important by using the very straightforward ABC analysis. To ensure they carry the ideal levels of the appropriate goods, they may also modify their inventory control procedures for each category.

A system for controlling inventory is utilised in the ABC method of inventory control; this system is used for materials and throughout the distribution management. It is often referred to as SIC or selective inventory control.

In the ABC analysis approach, inventory is split into three groups, A, B, and C, in order of decreasing value. The things in category A are the most valuable, followed by those in class B, which are less valuable than A, and those in category C, which are the least useful.

Management and control of the inventory are essential for a firm. They assist in keeping their expenses in check. The ABC analysis enables management to concentrate on the highest-value things (the A-items) rather than the numerous low-value products (the B-items), which helps the firm regulate inventory. Read our blog on inventory accuracy to understand how to achieve high inventory accuracy for operational efficiency in 2022.

How Does the Pareto Principle Relate to ABC Analysis?

According to the Pareto principle, commonly referred to as the 80/20 rule, 80% of results are brought about by 20% of the inputs.

Vilfredo Pareto, an economist from Italy, saw that just 20% of the pea pods he planted produced the majority of the peas in his garden, which led him to develop the concept that bears his name. More crucially, he discovered that 20% of the population in Italy held 80% of the country’s land, which led him to detect a similar ratio.

Since then, the Pareto principle has altered how economics is researched and how we comprehend how the world’s resources are distributed.

The Pareto Principle, which states that typically 20% of an organization’s inventory accounts for 80% of its value, is the basis of ABC inventory analysis. Using this knowledge, leaders can make well-informed decisions.

The application of Pareto’s Principle to rank and prioritise particular inventories over others is one way it contributes to ABC analysis. By organising your goods into three categories, ABC analysis simplifies inventory analysis and empowers you to make more strategic choices.

The ABC analysis is one of the most popular inventory management techniques. Based on the degree of value any item has within a firm, the ABC analysis divides it into three categories (A, B, and C).

Businesses may better prioritise their inventory, streamline processes, and make informed decisions by classifying their inventory using ABC analysis.

The ABC classification of inventory, as the name implies, divides inventory into three main categories:

Segment A- Goods falling under category A are the most valuable and essential items. About 20% of all products comprise segment A products, which generate 80% of your company’s income. It is regarded as a niche market with few products but high sales.
Segment B – Products in category B are somewhat more expensive than those in segment B. However, it controls 30% of the product market and generates 15% of the income. In addition, although more items are in this category, they are less valuable.
Segment C – Products falling under category C are numerous but less effective at bringing in money. Comparatively to categories A and B, sector C has the highest stock ownership at 50% but only produces 5% of the revenue.

Why Utilize ABC Method of Inventory Control?

Despite having many stock-keeping units (SKUs), most enterprises have not been able to grow or expand their businesses considerably. Businesses must deal with a wide range of additional inventory management difficulties. Lack of stock information, a poor management system, trouble managing personnel, a lack of space, and other issues might be problems.

This issue is resolved through ABC analysis. It can help businesses in inventory optimisation and streamline their inventory management. Let’s examine the 5 benefits of ABC analysis in inventory management.

Analyze Industry’s Demand for a Product

After manufacture, each product passes through four stages: dispatch, growth, development, and decline. After a certain point, the product’s demand in the market starts to decline as it reaches its actual value. You might refer to it as a product’s life expectancy rate. Additionally, a product’s lifespan is determined by the customer’s demands.

ABC analysis aids businesses in determining client wants. Businesses often overestimate the product demand and end up stocking up on excess. ABC analysis ensures that you know what your customers desire so you can ban that dark room from your firm.

Due to this, you will be able to efficiently and successfully manage your inventory. You will only place orders for what your consumers desire, neither more nor fewer than is necessary.

It’s essential to remember that if a product’s demand suddenly increases on the market, the product’s decline will be further postponed.

Enables Supplier Negotiations

Using ABC analysis helps negotiate a reasonable price for a product with a supplier. Watch to discover how.

For instance, if you are negotiating with a supplier for a product in the A category, you are aware that you must make the most significant investment possible since it brings in the most money for your business. You can entice the provider with any additional benefits from your end if they are reluctant to make you a reasonable offer or accept your offer. Perhaps a form of agreement that you will purchase the following shipment of items from the same vendor.

Consequently, you’ll get a reasonable price that suits your needs and save more money on items in the A category, resulting in more advantages.

Enhanced Customer Service

When you don’t know the precise amount of inventory you need, you may overstock on items that won’t even be useful to you. Then, instead of stocking up on things your clients might want, you fill up on useless items.

You may utilise ABC analysis to determine precisely what your consumers desire or are seeking. Consequently, you will be able to meet client needs and grow your business. As a result, you’ll spend less on things you don’t need and concentrate on buying something that will make you money.

Additionally, you will cut down on inventory expenditures that you could be squandering on products that don’t appeal to your target market.

Goods Manufacturing

Manufacturers may enhance their cycle of stock renewal by using ABC analysis. It enables them to make things based on their yearly cost rather than randomly. As we have already explained, what frequently occurs is that we often anticipate demand.

This presumption causes the manufacture of unnecessary commodities stocked in the warehouse where they will sit for the longest. Consequently, your items are ruined while in the warehouse, which is the greatest nightmare any business owner can have.

Manufacturers may use ABC analysis to determine the value of their items so they can produce just those in high demand and less those in low demand.

The ABC analysis inventory control method is used to enhance a company’s stock count cycle. For instance, commodities in Category A of the ABC analysis are tallied every three months, those in Category B are counted every two years, and category C products are only computed once a year. Doing this means you no longer entirely disregard your inventory status or waste too much time monitoring it.

When you have A category items that bring in excellent revenue, you want to regularly check to ensure they are always in stock, if not in plenty.

You frequently refuse to concentrate on the condition/status of your warehouse in terms of stocks when you don’t know what your items are worth or imagine they are worth. This might result in goods running out or stock waste.

These are some of the powerful advantages of ABC analysis that business owners shouldn’t give up.

Limitations of ABC Analysis For Inventory Management.

ABC analysis is not a one-size-fits-all inventory management solution despite its inventory management and maintenance advantages. The usage of an ABC analysis is impacted by the unique consumer demand patterns, classifications, systems, and difficulties each firm faces.

The focus on the financial worth of inventory and the sizeable amount of time and discipline required to use the approach are two drawbacks of ABC analysis. Here are some more difficulties:

Parameter Instability

According to ABC analysis, managers frequently allocate up to 50% of items to a new category every quarter or year. Since organisations sometimes don’t become aware of the changes until there is a demand issue, the necessity to reevaluate might waste time and harm customer happiness.

Limited Pattern Consideration

The traditional ABC approach will not consider elements like new product launches or seasonality. For instance, the lack of a prior customer base may explain a new product’s low sales volume. When demand is changing or unclear, ABC analysis will produce inventory inefficiencies since it provides a relatively static view of demand.

Low Information Extraction

Information from the ABC class might not have all the statistics or detail required to make educated decisions.

An unpleasant outcome of ABC analysis is bikeshedding, which is the practice of giving excessive weight to unimportant matters. Staff members may add their ideas or seek variations since ABC analysis is simple to understand, turning it into a resource-intensive process rather than a time-saving instrument.

Value Blindness

ABC analysis bases a product’s essential judgement on its sales volume or usage frequency, yet some goods may defy this paradigm. A retail display item could, for instance, sell very little yet draw a lot of consumers (who will buy other things) because of its novelty. In the aerospace industry, a particular component for a plane could not be utilised frequently and have low market value, yet it might provide a crucial safety role.

System Incompatibility

ABC inventory analysis does not adhere to widely accepted accounting rules (GAAP) and contradicts conventional costing methods. Running numerous costing systems will increase labour expenses and inefficiencies.

Issues Of Under or Oversupply

There is a chance of running out of Class B or C products since the ABC analysis looks at dollar values rather than the volume that moves through inventories. However, the inverse can also take place. If you repeatedly order low-class things without reviewing them, you can end up with excesses that build up in your inventory.

Just because B and C products aren’t as valuable as Class A ones don’t imply they are worthless. One of the ABC analysis’s shortcomings is that surplus stocks are constantly at risk of deterioration or damage. As a result, routinely uncounted or unmonitored merchandise might be stolen.

Mandatory Standardization

The ABC technique can only be effective if all components are subject to mandatory naming, storing, rating, and monitoring standards.

Arbitrary Categorization

Classifying items relies on the manager’s expert judgement without established parameters or consensus criteria for each group. As a result, this method may be entirely subjective.

Business Restrictions

ABC analysis is not helpful for businesses with an equal yearly consumption value of inventory items by type. For example, a firm that offers identical versions of goods like candies, nails, or socks might be unable to arrange stock according to the Pareto Principle.

Employing more people or purchasing specialised equipment will be necessary for businesses with many inventory products to manage their inventory using ABC classification.

How is the ABC Analysis For Inventory Management Carried Out?

The most straightforward strategy to adopt ABC inventory management is determining if it will work for your company first. By addressing insightful queries, avoid making a lot of assumptions. Make all essential preparations for a smoother execution as soon as you decide to move forward.

5 steps to carry out ABC analysis for inventory management are as follows:

Examine Your Present Setup

To use ABC analysis, you must determine whether your present system can function well under the ABC methodology. For example, you may need to redesign your whole inventory management system if your existing setup does not enable you to give some things more priority than others. This may be costly, time-consuming, and generally annoying.

You must ensure that your inventory cost and consumer demand data are correct before you can begin employing the ABC method for inventory control. This is because cost and demand are crucial factors in defining each item’s utilisation value; without this information, you won’t be able to differentiate between which things to put in category A and which to put in category C.

Determine Values

It’s time to begin determining how each item benefits your company. This is how:

1. Select the time frame for your study. You can only look at sales for the most recent month or quarter. Still, many organisations choose to utilise annual consumption value, which examines the volume and cost of goods sold throughout the previous year.

2. To get the consumption value of each item, multiply the quantity sold by the cost per unit.

Units sold times price per item equals usage value.

3. Add up each product’s unique consumption numbers to get the worth of your overall inventory.

Product utilisation value from item 1 plus item 2 equals total inventory value.

4. Arrange the items (in your Excel spreadsheet or other application) according to the highest utilisation value to the lowest usage value.

5. Divide the product’s inventory value from the overall inventory value, then multiply the result by 100 to determine each item’s cumulative worth. You should now know what portion of the cost of your entire inventory may be allocated to each item.

(Product Inventory Value / Total Inventory Value) x 100 is the cumulative value.

Remember that while most inventory planning allows for manual calculation of these values, any inventory management software that supports ABC analysis ought to be able to calculate these values for you automatically.

Determine The Parameters

The Pareto principle, which essentially states that the bulk of any effect arises from a relatively small share of the causes, forms the foundation of ABC analysis. When applied to ABC analysis, this suggests that the majority of the overall consumption value of your inventory is assigned to A goods. At the same time, B and C items account for a smaller portion of that value.

The specific amount of inventory items and consumption value allotted to each category is up to you. Your values should, however, typically fall between the following ranges:

Items A comprise 10%–20% of your inventory and represent 60%–80% of your yearly consumption value.
B products, which makeup 20%–30% of your inventory and represent 20%–30% of your yearly consumption value
C goods make up 50%–70% of your inventory and 5%–15% of your total sales.

Arrange Inventory Items

You may organise your stock goods into groups based on the criteria you predetermined in advance if you know how much each item in your catalogue contributes to the overall utilisation value of your company.

So, if you were to examine sales volume over the previous year, you would group the things that accounted for the largest share of your yearly consumption value into category A. Until you reach the value threshold for category A (60–80% of your total value annual consumption), you will keep adding things to category A. After that, you would keep adding stuff to category B until you reached 20%–30% of your yearly utilisation value. Finally, the objects that are left would all belong in category C.

After following the steps mentioned above, ABC analysis is formally integrated into your inventory management system. However, it doesn’t end there.

Your items will inevitably evolve. A vendor in the supply chain can decide to transport your products at a higher cost overnight. For some products, your manufacturer could reduce the unit price. The demand may increase or decrease.

Your goods’ proportion of the value of your entire inventory will vary due to these adjustments; therefore, you’ll need to modify your ABC categorization to reflect those changes. However, the last thing you want to do is use an old categorization to classify an item that is currently an A-level item as a C item. Therefore, be careful to review your ABC method periodically.

Suggested Read: When your Business Requires ERP Inventory Management System?

Best Practices and The Most Effective Approach For Applying ABC Inventory Analysis

Applying ABC method of inventory control consistently and reviewing it frequently yields the most outstanding results. The following are some of the best practices to follow while doing ABC analysis in your company:

Categorise Inventory Items in a Simple Way

It is essential to keep your ABC analysis categories straightforward to simplify your inventory management. Your teams should have no trouble identifying which goods fall under a particular category immediately. For instance, popular categorization techniques include using the product’s cost or frequency of sales.

Specify Classification-Based Labour Levels

A labour level, or the number of hours spent working on a particular inventory class, should be allocated to each categorization. Naturally, higher labour levels should be assigned to a classification if it has a more excellent value or influence on the company.

Review Each Class Separately

Each categorization should be evaluated following the guidelines established by the original ABC analysis. This entails a unique set of KPIs, performance evaluations, and a strategy for reordering or offloading any excess inventory. You may learn more here about inventory management KPIs

The initial ABC study considered several product categories and the company’s current state. It’s crucial to review the existing categories and, if required, reclassify when inventories and markets change. Consider sales changes by product and class, new industry rivals, and consumer trends.

A company may effectively assess the worth of its products by using an ABC analysis. Large volumes of inventory may be managed with this straightforward method, which also determines how many resources should be devoted to each categorization to maximise profits.

The inventory management procedure may be made even more efficient by using specialised software. For example, a platform for inventory management may gather vital product data, monitor specific product levels in real-time, and boost order processing effectiveness.

Inventory LogIQ is one of advanced inventory planning, and management tools for small, medium and enterprise eCommerce businesses. It enables businesses to leverage hard data and rich insights to streamline the inventory planning operations. A brainchild of WareIQ, which is backed by leading global investors includingY Combinator, Funders Club, Flexport, Pioneer Fund, Soma Capital, and Emles Venture Partner, Inventory LogIQ has intelligent inventory planning capabilities that allow you to manage any change in the market, experience a new & better way of managing your inventory operations.

The value of inventory items is calculated using the inventory management approach of ABC analysis based on their significance to the company. Inventory managers classify things according to how ABC prioritises them based on demand, cost, and risk data

Inventory management teams divide stock items into three categories depending on their “value” or “importance” to their organisation using the ABC inventory analysis (also known as ABC inventory classification) approach.

The goal of ABC Analysis is to assist organisations in deciding how to allocate resources to maximise outcomes. Items that belong to the same category should be analysed using ABC analysis (inventory, customers, documents, etc.)

Supercharge your fulfilment with InventoryLogIQ now, contact our team.

Inventory Cycle Count: A Detailed Guide Including Definition, Methods, Advantages and Processes in 2023

If you are an eCommerce seller, inventory becomes your biggest asset to invest in. Having inventory cycle counts is important because it can prevent losing out on sales and revenue. Inventory disparities are a problem that can be resolved relatively quickly. Every firm should strive to run accurate inventory cycle counts. For warehouse and returns management, general logistics and sales forecasting to be successful, accurate inventory counts are essential. Accurate cycle counting has an impact on almost every part of your company and its effects can last for years. It is a crucial component of inventory management procedures used by many firms since it ultimately ensures that consumers can obtain what they want when they want it while minimizing the costs associated with maintaining goods on hand. Today, we will learn about the method of controlling inventory through inventory cycle counts, what inventory cycle counting is, how it can improve your inventory accuracy to avoid stockouts and the best practices for implementing it. What is an Inventory Cycle Count? An inventory cycle count, also called cycle counting, is an inventory counting method that decreases the need for conventional audits by rotating product counts in a cyclical schedule. For large warehouses with a huge number of several distinct product types, inventory cycle counting is the preferred method. Cycle counting helps businesses operate effective, cost-friendly and time-saving inventory counts. Inventory cycle counts are commonly referred for inventory cycle audits. Different Methods of Inventory Cycle Counting ABC Cycle Counting This approach is used for inventory counts that are based on the Pareto Principle when counting more expensive, faster-moving items. According to ABC cycle counting, 20% of the parts in a warehouse correspond to 80% of the sales. These are the "A" items (the "B" items make up 30% of the inventory and 15% of the sales and so on.). Your most valuable assets or fastest-moving SKUs might be "A" goods. Software for inventory control can classify the counts as A, B or C goods. Consider counting your "A" items more frequently while counting your "B" and "C" goods less frequently. You can use additional indicators like transactions and production figures to start ABC cycle counting. You can determine which products significantly affect your company's overall inventory cost using a variety of measures. Read to learn about what is ABC Analysis. Usage-Based Cycle Counting Any time an item is transferred (part of inventory transfer), whether it is through a manufacturer, distributor or eventually to the client, there is a chance that the inventory will vary. The most frequently accessed products are given priority in usage-based cycle counting to curtail that. Access could refer to being physically handled in any form, including being processed into or out of a warehouse. Hybrid Cycle Counting The usage-based and ABC counting techniques are combined in the hybrid cycle counting method to give the most frequently accessed, high-value items priority. When the ABC categories get too big, this approach is required. Managers can prioritize the A-category products with the most traffic by further segmenting their ABC categories. These items' inventory volatility hurts the company's bottom line the most. As a result, it makes sense that leaders would want to concentrate on precise counts within this area. Control Group Cycle Counting Control group cycle counting is based on the idea of establishing a control group and then using the information to expand to bigger sets. Companies will count the same products repeatedly over a short period of time using this practice. This is done in order to identify counting problems, correct them and improve the counting procedure before applying it to a larger group of items. For companies that are new to inventory cycle counts, this strategy may be advantageous. It enables you to practice your cycle counting skills over time until they are suitable for usage on a broader scale. Random Sample Cycle Counting Random sample cycle counting works well for businesses that sell lots of similar goods. This method enables you to choose a random sample of objects for each cycle count. The advantage in this situation is that random sample cycle counting may be done during regular business hours and poses little inconvenience to your warehouse. As the item selection procedure is random in this configuration, certain items may be tallied frequently and others infrequently. A diminished population, a subset of random sample cycle counting, is a different approach. Here, items are counted and then excluded from further inventory cycle counts until everything in the inventory has been counted. Geographic Cycle Counting The geographic counting approach emphasizes counting goods in a specific physical location. This approach, combined with random counts spaced at random intervals, can assist in pinpointing issue areas like theft or damage. Advantages of an Inventory Cycle Count Enhances Productivity Source An inventory cycle count keeps track of your inventory by maintaining inventory accuracy and efficiency in a variety of areas which leads to better productivity and output. The following aspects of your business will benefit the most from conducting an inventory cycle count: Assists in Purchasing Source Performing consistent inventory cycle counts enables you to purchase only what you need to prevent jamming money on overstocked or unsold goods. This will help reduce costs and wastage associated with over-ordering. Helps With Production Source Doing routine inventory cycle counts will help you plan your production to meet your demand and produce the proper quantities at the appropriate time to prevent making products that will occupy storage space. Assists in Sales & Marketing Source Inventory cycle counts can enable you to discuss with your sales team what is and is not selling. It will improve internal business relationships and generate more revenue as a result. Check on extra products and plan promotions to assist in generating sales. Helps in Financing Source An inventory cycle count is necessary for many accounting computations. Cycle counting makes it possible for you to run reports and calculate data with the assurance that there won't need to be any large recalculations throughout tax season. Saves Time and Effort Source Cycle counting is more efficient than lengthy annual inventory counts because it can break up the monotony of protracted inventory audits. Therefore, you generally won't need to close your business or ask your staff to skip work in order to count your inventory. Additionally, regular inventory cycle counts make it simpler to locate misplaced, harmed or stolen goods in a sizable warehouse inventory. Saves Monetary Resources Source An inventory cycle count will also help you save money. To fully count every item in your inventory, annual counts frequently necessitate overtime hours. Setting aside time in daily or weekly chunks to count groupings of goods works out to be more economical. Processes Involved in an Inventory Cycle Count in 2023 Warehouses start inventory cycle counting to avoid the root causes of errors in tabulating inventory. After you complete a full physical inventory check to know and correct any discrepancies, you must use a regular counting program for maintenance. Steps during an inventory cycle count are listed below: Review All Your Documents Starting with an accurate database is important. Review and correct all data entries for inventory transactions to start the inventory cycle count process. Upload the Inventory Cycle Count Report Make a report on the inventory cycle count. Upload the report to your database or software solution if you plan on conducting the count. Start the Inventory Cycle Count The report's inventory locations, summaries and numbers should be reviewed by a counting person, who should then contrast them with what is physically present on the shelves. Investigate and Correct Any Discrepancies Determine any differences discovered during the count and work with the stock manager to resolve them. Search for mistake patterns. Change Processes and Add Policies Whenever necessary, put any inventory counting policies or processes into action. For this, you may need to change some processes in your standard workflow. Update Records Update the inventory record database to reflect the items that are currently on the shelves. Calculate the Accuracy Percentage For this, first match your data with a standard inventory cycle count and other competitors. After getting the inventory cycle count, keep auditing the inventory regularly and get the accuracy percentage each time. Then compare them and identify the best practices. Conclusion: Automate Your Inventory Cycle Counts With InventoryLogIQ Inventory cycle counts are a valuable tool for businesses of all sizes and industries. By regularly counting a portion of their inventory, businesses can maintain accurate inventory records, identify discrepancies, improve operational efficiency and provide better customer service. As such, businesses should consider implementing inventory cycle counts as part of their inventory management strategy to streamline their operations and improve their bottom line. InventoryLogIQ can automate your inventory counting process by utilizing an advanced AI-based OMS to enable automated inventory counts and real-time inventory updates across multiple fulfillment centers and eCommerce platforms. The benefits of outsourcing inventory management to 3PL providers experts like us are better accuracy and more efficiency. This greatly accelerates the process of inventory management while reducing any chance of errors occurring. You can benefit from a shorter order cycle time as a result, which might increase the number of days your inventory can be sold for. It also frees up your time so you can concentrate on the other operations of your eCommerce store. Inventory Cycle Count: FAQs How do you calculate the inventory cycle count?Divide the annual cost of sales by the average inventory level for the year to arrive at the cycle's calculation. As a result, if the company spent 100 days in total last year to produce its products and its average inventory time comprised of 20 days, its inventory cycle would be 5 days. How often should you count inventory?Once a year, a physical inventory count should be done. However, more frequent inspections can be fruitful. You may ensure that your inventory and your records match by periodically verifying your stock. Additionally, you will be able to see any issues with your record-keeping practices. What is the inventory cycle?The time it takes to generate and fulfill an order is known as the inventory cycle time and it is typically expressed in days. It basically gauges how quickly a business can finish the entire manufacturing or assembly process and transforming raw materials or components into a marketable product. Why is cycle count important?In cycle counting, fewer things are inventoried at once which involves inventory assessment with an automated system and maintains reliable data with a lower chance of error. Employees that are aware that inventory levels are appropriately updated frequently will not be tempted to steal. What is the 80/20 rule in inventory?According to the 80/20 rule, only 20% of effort, consumers or other units of the measurement result in 80% of the results. The rule says that businesses make about 80% of their revenue on 20% of their inventory.

March 28, 2023

What is Physical Stock? Meaning, Types, Steps & Best Practices of Physical Inventory Counting Methods in 2023

The highest growth rate the sector has had since 2011 was $5.15 trillion in retail spending in physical locations in 2021. Retailers are retaining more inventory than ever before to meet demand. It's understandable why the number of warehouses in the US has been steadily rising since 2013. Despite the exponential rise in warehouse storage and inventory levels, evidence indicates that merchants aren't doing a great job controlling their goods. Only 8% of smaller companies keep track of their inventory. Pen and paper are used manually by another 14% of people. This article will explain the advantages of maintaining a physical inventory count for your retail shop as well as how to go about doing it. The tangible goods that retail establishments, manufacturing facilities, and warehouses stock are essential. Companies should do physical inventory counts of their products to maintain appropriate and correct inventory levels. Physical inventory counts can monitor stock levels, confirm current numbers, and spot internal problems or theft. In this article, we define physical stock, list various inventory counting techniques, and outline the procedures for doing accurate inventory counts. What is a Physical Inventory Count? Physical inventory counts are a method used in inventory management to track every physical item a company has. Cycle counting often referred to as periodic counting or yearly counting, are two ways to do physical inventory counts. A corporation can find out if there is any loss or shrinkage that they can account for in their financial records by performing a physical inventory. Physical inventory counts take place in a variety of companies, although they are most frequent at manufacturing plants, distribution centres, and retail outlets. Suggested Read: What is a Periodic Inventory System? 4 Major Purposes of Conducting Physical Inventory Count The physical inventory count serves a variety of functions, which includes: Ensuring Accurate Stock Levels Physical inventory levels frequently differ from what digital records indicate. For instance, inventory levels might change in a production setting if a worker takes a replacement item but fails to register it. Employees may unintentionally enter inaccurate inventory into the system when working in retail. Additionally, there have been incidents of stealing, theft, damage, or incorrectly recorded returns, giveaways, or ruined goods. The physical inventory levels go out of sync with the records when this occurs. The resolution of a physical count can explain these differences. Keeping Track of Theft, Damaged Goods or Internal Problems A corporation can monitor for internal and external theft, damaged items, or internal problems by doing physical inventory counts. Theft, often known as shrinkage in the context of inventory, may make it difficult for firms to stay profitable. Employees must also take proper care of damaged inventory by reporting the damage to a manager or supervisor so that inventory levels may be adjusted and the product can be returned to the manufacturer for a warranty replacement or credit. The need for staff training on inventory protocol, shipping and receiving policies, or manufacturing best practices is just one internal issue that inventory counts might highlight. Reporting Wages and Income Accurate revenue statements and other financial papers may be produced by businesses with the use of adequate inventory levels for reporting. For instance, making actual earnings and precise balance sheet statements depend on maintaining an accurate inventory. The board of directors, top management, and investors of an organization utilize this data to make choices regarding the course of the business. The accuracy of revenue, wages, and inventories is so crucial. Creating a Precise Budget Inventory counts are also used by businesses to assess how much has been sold and how much stock is still available. When determining which things are the most popular, this might give helpful information regarding the inventory turnover rate or how frequently the item sells. As a result, this can assist businesses in developing a precise inventory budget. They may choose which items and how many of each to have on hand. To prepare for the upcoming year's purchases, a retail business can, for instance, do an inventory count on seasonal items. 6 Main Types of Physical Inventory Count Methods The main types of physical inventory counting procedures include: Point-of-Sale or Electronic Counting Electronic counting scans and tracks goods digitally using specialized computer tracking software. For instance, many businesses utilize point-of-sale (POS) systems, which enable staff to scan things as consumers buy them. The application automatically subtracts the quantity from the inventory as soon as the buyer purchases the item, and the team monitors it through the POS system. The warehouse receiver adds new products to the system when the shop gets them using the same technology to increase stock. POS systems frequently communicate with other types of software, such as enterprise resource planning, accounting, or merchandising software. The firm employees may, for instance, conduct a physical inventory count to ensure that the physical and digital numbers match. Although this technology helps to increase inventory accuracy, the associated fees might raise a company's costs. Employees have time to become familiar with the system and appropriately carry out the operations. Manually Counting Unlike automated counting, manual inventory counting involves staff members writing down the inventory results on paper. The management of a corporation can assign workers as necessary or have a dedicated employee or team perform physical inventory counts. To count, they can go about the shop, warehouse, or storage area to identify the things and add up the amounts using a spreadsheet or printout of the products. By using this technique, a business might avoid paying for the initial expenditures of building an electronic system. It is also helpful in confirming POS system findings. It's crucial to remember that human inventory counting might produce a range of results based on the size of the business, the accuracy, and the care taken by the counters. Periodic Counting Periodic Counting or Cycle counting is a method of physical inventory counting in small increments over the course of a month or year. For instance, to assure accurate data, a retail shop would tally the most popular produce items each Monday morning. Fourth Tuesdays, the specialized section receives a similar treatment, and so on. The corporation will gain from this in a number of ways. First of all, it enables the business to continue operating rather than shutting down to finish an entire physical inventory count. Additionally, since inventory is constantly counted and faults can be found promptly, it enables any inconsistencies to be resolved sooner. This is advantageous for quickly transporting goods or products that the business wishes to monitor. Many companies choose to perform a complete inventory count once a year and the regular cycle counts. Complete Physical Counting Companies frequently do a comprehensive physical inventory once a year. Organizations can utilize their own workers to count, engage temporary help, or pay an inventory counting agency to complete this task. Many organizations arrange shelves, storerooms, and warehouses before finishing a complete inventory to make sure that goods are located correctly and are simple to find. Depending on how things go at the firm, the business may temporarily close or stay open on inventory day. Counters can be given inventory lists or spreadsheets by managers, along with instructions on how to record the number of things sold accurately. At the conclusion of physical inventory counting, all counters give in their sheets to the supervisors, who then compile the findings. Spot Counting Spot counting, arbitrary counting or ad-hoc counting is a type of physical inventory counting method that is frequently started by the user and is not planned, making it useful in unusual circumstances. Let's say you counted a zone, but a few days later, the system malfunctioned because of someone or some procedure. Instead of waiting for the next cycle count, you can construct a new, empty order and begin adding counted items to it. Of course, your system must be able to compare the quantity that was tallied to the data stored in the program. Arbitrary counting is sometimes referred to as blind counting since it typically takes place in unplanned, tiny store/warehouse zones or locations. Tag Counting The personnel of the store or warehouse should physically tag each item prior to tag counting. The worker must complete the required slots on the tag with the item ID, counted amount, and other pertinent information during physical inventory counting. Some labels have two sides, allowing an additional worker to check the data and, if necessary, fill in the adjustment on the second side. These tags are gathered and added to the system as journals when the counting procedure is complete. The primary distinction between tag counting and all other counting techniques is that tag counting does not involve a direct comparison to system data. As opposed to just producing a counting order and comparing it to the tag counting list, it is more like creating a rough draught list of your goods and quantities, refining it (e.g., updating with sales that have occurred during the counting), and then comparing it to the final list. How to Conduct a Physical Inventory Count in 12 Easy Steps A successful retail business is built on effective inventory management. Customers will always find what they're looking for in a well-stocked backroom, and your workers will always have what they need to do their jobs. In the best-case scenario, organized stock supports your everyday operations so that personnel may concentrate on customers. At worst, you're left with a logistical nightmare of missing items and lost sales. Your staff will need to count meticulously, track, and process products on a regular basis to keep your inventory operating correctly. Are they driven to complete the assignment as inventory season approaches, or would they prefer to skulk off? The given steps for counting physical inventory can help you manage stress if you run a retail firm. Let's take a look: Check the Date It can be a big deal if you have to manually count your physical inventory every month, every three months, or at the conclusion of a reporting period. It may be necessary to take stock outside of regular business hours because it is a laborious operation. Give your team plenty of warning so they can plan accordingly around their commitments, and be sure to schedule workers correctly, so nobody takes on an opening shift. Post a sign in your store or on your social media accounts informing clients if you need to close your store during regular business hours. The secret is to plan. Assign Your Counters Physical inventory counting needs expertise. Before you allocate your counters, make the position a learning opportunity for both inexperienced and experienced workers by letting them train one another and providing checks and balances along the way. Make a written protocol and include information on how you'll establish a precise cut-off point for stock movement for an accurate count. Count teams typically consist of two individuals - one who counts and the other who records. To make sure that everyone will be accessible on the specified day and time, provide your team with their schedules as far in advance as you can. Notify All Storage Facilities Make sure to inform relevant third parties that they should likewise undertake a physical count of inventory on the given date, whether your organization has merchandise in outside storage or on consignment. To ensure that they are not counted, make careful to separate any recently acquired products. Deliveries to the warehouse should be delayed if at all feasible to prevent variations from occurring during the count. Before starting the count, you'll want everything to be free of clutter. Examine Your Stock A few days ahead of time, check your inventory to make sure everything is in order. Search for objects with missing or partial component numbers and those that are in a state that might complicate the procedure. Adjust your inventory as needed to make it ready for the physical count. Make a Proper Warehouse Plan Make sure your staff has a map of your floor, backroom, and storage so they know where to go when they need to. A map can let you allocate personnel to their stations more efficiently, whether you need to take photographs or sketch up a plan. Create a tracking sheet for each sector and assign a different number to each display, rack, and shelf. Visualizing your inventory area will reduce confusion and make it easier for your personnel to get started. Make Your Own Category You may count and group comparable objects together with the aid of categories. The categories for a retail setting may be footwear, tops, bottoms, outerwear, and accessories. Depending on your industry, these groups can be further divided based on color or gender. The counting procedure will be more smoothly executed if a systematic system is created. You'll run into certain things that don't have a designated spot in your store when you're arranging your physical count. It would be best if you made a decision on how to handle objects without a clear home. They can be transferred or returned from other places. Start the Pre-Count Make sure everything is tagged correctly and labeled before the count starts. After all the things have been tallied, failure to deal with stray objects can lead to problems and anger. Start early by counting some of the items. Put the objects that were counted in sealed boxes when the pre-count is done. The goods will need to be recounted if, on the day of the physical count, you discover broken seals on packets that have already been counted. Set Frequent Reminders Give your staff a review of what they learned in training before the big day. Walk your staff around the shop if you've relocated any stations or merchandise to prevent confusion. Distribute instructions that break down the counting procedure into simple stages. Despite the fact that there shouldn't be any things without labels or pricing, emphasize the significance of gathering such items in a specific location so they may be handled last. Explain the Procedure Lead by example and demonstrate to your staff the correct way to do a physical inventory count. Give them a sample of a completed form, then have them go over their initial try to ensure the form was filled out correctly. Assign the count teams to various areas of the shop using the map. To prevent double-counting, mark the regions on the map that have been counted. Get Set and Go Counting You may pair off your teams and start physical inventory counting now. The second person completes the count tag using the sample data below after the first person has finished counting: LocationItem informationportion numberQuantityMeasurement unit The team attaches the original count tag to the inventory item, keeps a copy, and turns the tags into the person in charge. The person in charge will verify that all titles have been completed entirely and none are missing. Recheck Your Possessions Perform spot checks in sections to see whether the items were appropriately counted. Take advantage of the chance to verify each section doubly if this stock audit finds a mistake. It will be worthwhile to double-check the counts that have previously been made. To assure the correctness of the inputs, a data entry team should additionally include two members. Complete the Reporting To add up your computations, record your physical inventory counts on a spreadsheet. Your inventory reports will enable you to find any discrepancies between the physical and book counts so that you can develop a strategy to eliminate them. To find potential patterns, compile physical count inventory records over a specified time period. Is there, for instance, a particular low-count spot in your store? Are there any procedures you might strengthen to prevent the loss of goods? Your business should be impacted by your reports and results in all areas, from financing to visual merchandising. 5 Benefits of Physical Stock Counting in 2023 To maintain accurate and up-to-date inventory records, physical inventory counts are a crucial component. Better sales and purchase estimates may be made thanks to correct inventory records, which also guarantee that you always have the proper quantity of stock on hand. Your consumers will benefit from having a physical inventory taken. Precise physical inventory counts are essential for the reasons listed below: Provides an Accurate Insight Into Inventory Levels You will have a far better knowledge of how much merchandise you will need to have on hand to satisfy consumer needs when you effectively manage your inventory. You won't have to worry about running out of supplies all the time, thanks to this. By being aware of your inventory levels, you may prevent clients from making orders for items that are not currently in stock. Without having to worry about keeping too many goods on hand, shortages will be less of an issue. Improves Demand Predictions An essential component of inventory management is demand forecasting. It occurs when you foresee a product's level of demand, the rate at which it will sell out, and the time at which that SKU has to be restocked. A physical inventory check can enhance buying and forecasting of inventories. For example, retailers that see demand forecasting reports that suggest which products to replenish based on their profitability and restock rate can do so in a way that allows them to do so based on both the popularity and profitability of the items. Suggested Read: What is Inventory Forecasting? Enhances Sell-Through Rate of Slow-Moving Inventory An actual inventory count does more than avoid stockouts. Retailers also reduce the chance of keeping out-of-date stock at the total price for an extended period of time. Retailers should have access to inventory grading data that group items according to their cost per unit, selling price, number of sold units, and overall income over time. Merchants should proactively think about re-merchandising items in-store, advertising them to generate interest, or offering a special discount to encourage sales for those that aren't selling as intended. In order to recover your initial investment and create a place for more in-demand goods that either sell at a larger volume, have better profit, or both, it is helpful to move through failing inventory. Reduces Inventory Shrinkage Inventory loss is a frequent and annoying issue for merchants. When your actual stock is less than the amount listed in your inventory management software, this occurs. Theft by employees and shoplifting are the two main reasons for stock shrinkage. A weekly partial inventory count, for instance, can assist retailers in identifying discrepancies between a store's actual inventory and the inventory levels recorded in its point-of-sale system with a smaller sample size of inventory that is easier to count (one particular product category, for example), giving them enough time to determine what caused the shrinkage and reconcile it. Prevents Overstocking and Understocking Lack of physical inventory tracking can lead to carrying too much (or not enough) goods, which could lead to budgetary concerns if not maintained under control. Overstocking, often known as the gap between available inventory and demand, has resulted in markdowns totaling more than $300 billion. Discounting at scale leads to lost income because of lower-than-expected margins on each transaction, despite the fact that it has valuable use cases. You can allocate enough money to inventory to satisfy demand without overstocking or understocking by maintaining an accurate inventory ledger and using the information from your POS system to understand better how well-liked the products you carry are with customers. 7 Best Practices to Implement for Counting Physical Stock in 2023 Make a Map of Your Shop, Warehouse or Stockroom Source Make a map of the locations where your inventory is kept, whether it be on your shop floor, in a stockroom, or in a warehouse, as part of your preparations. Label each product category's location and the person in charge of counting it on the map. This will aid store employees in getting their bearings and assist the manager you assigned to maintain track of who is in charge of what. Give each employee a list of the SKUs they will count in their assigned region as well. This may be a helpful tool when they scan product barcodes and enter their count into the POS system. Use Box and Shelf Labels Source Label shelves and boxes according to the things they hold and make sure the contents of each are located where they should be according to a map of your store. The shop map you made in the previous step should be reflected in these labels. Prior to the inventory count, it will be easier to stay organized and save time when it comes time to account for the miscellaneous things if boxes and shelves are proactively labeled and products are placed in their proper locations. Clean the Locations Where You are Counting Source Make sure there is enough space for employees to count large quantities of items in each location designated for stock-taking. Get rid of any boxes or inventory items that are unnecessary. Any freestanding furniture, such as mannequins or display cases, should be moved to one side. Use Barcode Readers Source While it is possible to hand count the objects, teams are more prone to make mistakes. For quicker and more accurate counting, choose barcode scanners. Store employees scan the barcode on the product's tag, and the inventory levels connected with that product's SKU are automatically entered into the POS system as opposed to each product having to be manually counted and recorded in a spreadsheet or on paper. Mis-counts are unlikely unless the store employee scans the exact same item twice. Barcode scanners are necessary for teams charged with counting enormous volumes of merchandise. Set a Time When Counting Will Be Handy Source Setting a deadline for your inventory count is worthwhile. Depending on how many things you carry, performing a physical count can take one business a whole day and another just a few. In either case, giving oneself too much time is preferable to not enough. Additionally, some retailers choose to conduct nighttime inventory counts, appointing a team of staff to enter the premises during off-hours. Just bear in mind that in many areas, paying employees more for midnight labor than for a shift during regular business hours is the norm. Train and Inform Staff Members Source Before beginning a comprehensive physical inventory count, take the time to teach and instruct your store personnel on how to perform it. To count inventory and record outcomes, every member of your team should be able to operate a barcode scanner and your POS system. Spend some time outlining the typical difficulties they may encounter. What happens if a tag is missing, a product is defective, or a label is mislabeled? To ensure that staff members know what to do in each instance, share the solution and the procedure you've put in place. Utilize Technology for Physical Inventory Count Source Pen and paper counting takes more time than electronic counting. It's simple to make a mistake when counting, leading to erroneous inventory data. Additionally, a physical stock count across many retail locations will generate more data that will require much more time to process and understand than if everything were recorded using inventory management software. Inventor management technology provides solutions to these issues. Inventory reconciliation is sped up, and merchants have a single source of truth for both their financials and inventory when they scan products since the point-of-sale system will automatically register inventory levels for that SKU. Suggested Read: Supply Chain Forecasting Conclusion: Improve Your Physical Inventory Counts With InventoryLogIQ In conclusion, it is crucial to perform routine physical inventory counts even if you have an inventory management system in case-specific procedures are not operating as effectively as they should. Inventory counts assist you in reducing unexpected shortages and identifying which internal processes need to be changed to enhance your business operations as a whole. One of the top providers of inventory and data-collecting services is InventoryLogIQ. We offer physical inventory counting, merchandise planning and space optimization services to the majority of large retailers across the nation using our custom OMS and professional team. The integrated, one-handed inventory count terminal and warehouse management solutions are the technological advancements from which InventoryLogIQ continues to hold an excellent reputation in the market. This will not only handle your complete inventory but also make doing an inventory count simple by offering a section just for counting your inventory and notifying you right away if there are any shortages or exceeding stock. Physical Stock: FAQs Why is the physical inventory count performed?The Inventory account balance is updated to reflect the actual amount of accessible inventory using the physical count. To ascertain whether there have been any theft, loss, damage, or inaccuracies in inventory, a physical count is performed. How frequently should physical inventory counts take place?At the very least once a year, a physical inventory count should be done, however more regular inspections might be helpful. You may ensure that your inventory and your records match by frequently verifying your stock. Additionally, you'll be able to see any issues with your record-keeping practices. How is physical inventory managed?Wireless inventory scanners make it simple to scan a product wherever it is stored using barcodes to distinguish between each SKU type. You can simply monitor things by SKU, know how much is in stock, and identify every SKU in a warehouse by adding a barcode to your product tags or packaging.

March 24, 2023

Perpetual Inventory System Guide: Definition, Methods, Factors Considered, Benefits & How is Perpetual Inventory Different From Periodic Inventory Systems in 2023

For any sustainable and successful business, a sound inventory system is required to track goods throughout the supply chain cycle. From purchasing raw materials to producing the goods and, finally, selling the product, proper inventory management is key. It’s an effective system that keeps records of purchased materials, sales inventory and also stock-on-hand details of your business entity. The fundamental structure of inventory management includes inventory purchase (ready-to-sell goods that are procured and delivered to the point of sale or warehouse), storage of inventory (inventory that is stored until needed) and goods and materials that are at different stages of the fulfillment network. There are two types of inventory, as stated below: Periodic Inventory Perpetual Inventory While both these accounting methods are similar (businesses use them to track the number of products, stock availability, etc.), they have several inherent differences. What is a Perpetual Inventory System? A perpetual inventory system allows businesses to keep a real-time account or stock of inventory on hand. The widespread usage of computers and technology has made this system very effective. Businesses worldwide have found that this system is highly user-friendly and has fostered the ease of conducting various processes, eliminating redundancies and complexities of the traditional inventory system. Barcodes, Radio Frequency Identification Scanners (RFID) and point of sales systems supported by perpetual inventory systems quickly input inventory information of all business transactions on a real-time basis. Perpetual Inventory Systems are popular in modern business. They are often found in large businesses across multiple industries, such as jewelers, electronic stores and global enterprises such as restaurant chains, clothing stores, etc. Perpetual inventory systems track the details of product sales instantly through point-of-sale systems (PoS). However, perpetual inventory does not keep track of physical stock/products. Inventory reports can be accessed online at any time, making it easier to manage inventory levels and the cash needed to purchase additional inventory. Updates are automatically created when you receive or sell inventory. Your inventory accounts immediately reflect data about purchases, return of goods and stock data. 6 Main Differences Between Perpetual Inventory and Periodic Inventory Systems A perpetual inventory system constantly updates the purchase and sales records constantly, which provides a real-time reflection into what is staying or leaving the warehouse. A periodic inventory system only records updates to inventory and costs of sales at scheduled times throughout the year, not on a constant basis. While a perpetual inventory system can record and monitor the movement of the stock non-stop, a periodic inventory system can update inventory records at intervals, which happens after the stock is physically accounted for. The 6 main differences are listed in the table below: [table id=1 /] Advantages of Perpetual Inventory There are multiple advantages of perpetual inventory, which gives companies the ability to operate more effectively. They are listed below: Provides Updates in Real-Time Perpetual inventory maintains live records of inventory as soon as it is bought or obtained by the company. This enables the retailer to always be aware of when stocks are running low, which items are popular, when items were bought etc., so they can plan accordingly and be ahead of the curve. Manages Inventory in Multiple Warehouses Gone are the days when companies had to maintain multiple spreadsheets or files and manually add and remove items from the list. Perpetual inventory systems consolidate all your inventory records which is stored across multiple warehouses in one place. This will help make processes more efficient and will surely mitigate any errors or delays. Keeps Users Informed Through Forecasting Using perpetual inventory, retailers have a better idea of their customers' purchasing patterns based on the inventory sold. They will have a better idea of which products are in demand, during which season and which price point is doing the best. They will also get an idea of which products aren’t doing well and are just accumulating space in the warehouse. This understanding will help the business forecast demand and supply in the future. Suggested Read: What is Inventory Forecasting? Assists in Accounting Procedures Inventory is a key aspect of every accounting process as it gauges the value of the assets that firms have on hand. Since perpetual inventory systems constantly track and provide updates on inventory levels, it becomes much easier and faster to access this information. Disadvantages of Perpetual Inventory Can be Expensive Perpetual inventory is generally regarded as not being a pocket-friendly solution because of all the technology and software that is needed to enable it. Adding new inventory lists can also be chargeable, in addition to needing to train employees on how to use them. Overall, it may not be the best option for small businesses that do not need to calculate inventory for multiple different warehouses. Does Not Consider Expired and Mishandled Goods Since perpetual inventory systems utilize data from sales and purchases to maintain records of inventory, it sometimes leaves out items that have been purchased but may have expired or have broken due to mishandling. Since manual counts are not performed, the management will continue to count those items unless someone has physically noticed the incident. This opens the door for unwanted errors and discrepancies in the inventory count. 5 Operations of a Perpetual Inventory System Point-of-Sale System A point-of-sale or point-of-purchase in a perpetual inventory system is the place where the customer walks up to your checkout counter after they pick up a product or service at a store or business entity. A point-of-sale is the combination of hardware units and software applications that enable your business to make those sales to customers. Cost of Goods Sold Updates Cost of goods sold (COGS) refers to the direct costs of the production of goods sold by a company. This includes the cost of the materials procured and labor hired to create the goods. Indirect expenses like distribution costs and sales force costs are excluded in COGS. Reorder Point Automation A reorder point system alerts you about when to place an order, so you won't run out of stock and tells you when to place a requisition to replenish your stocks. The reorder automation point automatically calculates your stock based on supply chain forecasting that is based on past consumption data (historical data) to forecast future requirements. Purchase Order Automation Purchase Order Automation Systems streamline your purchase orders to increase efficiency by tallying with the corresponding invoice and requisition purchase requests automatically. Warehouse Management Software Typically, any warehouse management system (WMS) is designed to monitor the entire inventory in hand. It can also manage supply chain operations right from the manufacturing or distribution center and can coordinate with different parts of the supply chain to get tasks done. 6 Things to Consider Before Choosing An Inventory System Requirements Source You first need to assess your requirements and make a decision based on that. A small business would require a very different inventory management system than a multinational company. You would need to be aware of how much inventory you would need to manage, the nature of the inventory, the value of the items, etc. Expenses Source Because of the fact that certain inventory management systems are so dependent on technology, such as the perpetual inventory system, prices can easily skyrocket, which would be pointless if you don’t need all those features in the first place. Choose a system that fits your budget so that you can invest in other facets of your business. Configuration Options Source If your business deals with multiple types of inventory, scattered across different warehouses, it would be important to make a note of the customizability of the system so that you can get the most out of it. It would not be of any help if you are not able to manage your inventory as efficiently as possible due to constraints in your inventory management software. Ease of Use Source It is important for businesses, especially smaller ones, to factor in ease of use when they are opting for an inventory management system. If the system is too complicated and requires a sharp learning curve, it could take days for your employees to get accustomed to it. Choose a system that has all the features you are looking for but that is also well-designed and user-friendly. Integration Ability Source Inventory is the key component of any eCommerce business. It pays off to have an inventory management system that can play nice with other software tools and systems involved in other business activities. There shouldn’t be a bottleneck in any section of the business and you can do your best to make sure your inventory management system can integrate well with other applications. Flexibility Source Flexibility is a very important factor to consider while choosing an inventory management system since it’ll be handling such a key aspect of your business. You need to find out things like if it is compatible with devices of all screen sizes, what software platform it uses and if it can integrate with other systems. Once you understand this, it’ll make your decision much easier. Support Source After-sales support is a key factor when choosing an inventory management system, especially if you have shelled out a decent amount. You would want to have access to facilities such as tutorials and customer support in case something goes wrong and you need some assistance. Companies that care about their customers even after the sale is made often provide the best services. The 3 Main Methods of a Perpetual Inventory System FIFO Perpetual Inventory Method FIFO is a cost flow tracking system under which the first unit of inventory acquired is considered to be the first unit consumed or sold. The perpetual FIFO inventory method determines the cost of your oldest inventory and multiplies that cost by the total amount of inventory sold. LIFO Perpetual Inventory Method This method is a cost flow assumption that businesses use to evaluate their stocks wherein the last items placed in inventory are the first items sold. To Summarise, the last costs available at the time of the sale are the first to be removed from the Inventory account and debited to the Cost of Goods Sold account. Weight Averaging Cost Perpetual Inventory Method The weighted average cost method is a means of tracking inventory that assigns a cost to each unit based on the average cost of all units that are available for sale during a specified time period. The weighted average cost per unit is arrived at by adding the total cost of all units available for sale divided by the total number of units available. Perpetual Inventory Benefits for eCommerce Businesses in 2023 Shortens the Time Needed for Accounting Procedures During the preparation of financial books, usually at the end of the year, the value of the closing stock needs to be known. With a perpetual inventory system, this information is always on-hand as it reflects any changes to the inventory in real-time, which helps to speed up accounting procedures. Requires Less Investment in Materials Since perpetual inventory systems keep track of every purchase and sale of inventory, whether it is raw materials, finished goods or work-in-progress inventory or products, businesses can get a clear idea of the what amounts they are spending on what materials and it can help them optimize the quantities that are needed and thus, reduce inventory costs. Helps in Restocking A business will be able to know if inventory of a certain product is running low and will be able to reorder items before it runs out completely. This aids in the continuous fulfillment of customer orders and keeps the business running smoothly and effectively. Optimizes the Use of Resources Since perpetual inventory gives us a clear idea of what the expenses and incomes of the business are and where they are entering and exiting from, the business can optimize every process that involves working capital, whether it is labor working on a particular task, the purchase of materials, the transport of goods, etc. Helps Provide a Clear Picture Perpetual inventory systems update inventory levels in real-time. This means that you will always have an idea of which products are doing well and which aren’t. In addition, you’ll get access to more granular data such as seasonal demand for products, what causes spikes and dips in demand and much more. Conclusion: How InventoryLogIQ Can Help You Monitor Your Perpetual Inventory A perpetual inventory system provides more accurate information because ongoing recording and prompt verification of inventory are done. Perpetual inventory also enables financial statements to be prepared quickly and accurately. A Perpetual inventory system is best suited for big enterprises, while a periodic inventory system is suitable for small businesses. Perpetual inventory is the preferred method for tracking inventory with accurate results on an ongoing basis. If you need help with acquiring a perpetual inventory system for your business and any other inventory-related requirements, InventoryLogIQ can be a good option for you. InventoryLogIQ has a custom OMS that aids in providing real-time updates of your inventory levels across multiple warehouses. In addition, our platform can integrate with most big eCommerce marketplaces to ensure that all your inventory management and order fulfillment happens in one centralized location. We also give you deep insights into the inner workings of your inventory and order-related data so that you can plan ahead. Perpetual Inventory System: FAQs What is a perpetual inventory system?It is a program designed to estimate your inventory without any disruptions. A perpetual inventory system relies on electronic records rather than physical ones. It generally starts from the baseline with a physical count and details get updated as and when purchases are made and shipments come inward or move outwards. Why is it important to have a perpetual inventory system?A perpetual inventory system instantly tracks sales and inventory levels for individual items, which helps to prevent stock-outs. Perpetual inventory systems monitor the availability of stock at all times and alerts you whenever a product is out of stock or is getting depleted. Why is a perpetual inventory system most suited for eCommerce businesses?With a high degree of record accuracy, inventory reordering can be conducted with confidence and it ensures stable delivery timelines for your customers. The perpetual inventory system tracks every inventory transaction in real-time; the resulting inventory records are highly accurate and reliable. This may improve customer satisfaction and bolster sales. It also gives business owners a more accurate understanding of customer preferences and centralizes the inventory management system for multiple locations. What are the advantages of the perpetual inventory system over the periodic inventory system? A Perpetual inventory system captures and tracks updates to inventory and costs of sales throughout the year. A perpetual inventory system is designed to update and record the inventory account automatically whenever a sale or purchase takes place. Each sale or purchase that happens immediately upon sale or purchase is recognized. A periodic inventory system updates the inventory account at certain scheduled times or at the end of an operating cycle. The update and recognition could occur at the end of the month, quarter or year. There is a gap between the sale or purchase of inventory and when the inventory activity is recognized. A faster inventory system enables companies to react faster to the supply and demand of the market. What kind of business is ideally suited for a perpetual inventory system?Typically a large enterprise with large amounts of inventory, sales volumes and multiple retail outlets need perpetual inventory systems. The scope for marginal errors with the periodic system is higher when compared to the perpetual system because it is based on a physical counting system. Many leading eCommerce enterprises use a perpetual inventory system for tracking stocks at their stores and warehouses such as Amazon, Walmart, Marks & Spencer and others.

March 23, 2023

Illustration showing how inventory management tracks inventory

Inventory management, a critical element of the supply chain, is tracking inventory from manufacturers to warehouses and from these facilities to the point of sale. Inventory management aims to have the right products in the right place at the right time.

Inventory management requires inventory visibility, knowing when to order, how much to order and where to store stock. Multichannel order fulfillment operations typically have inventory spread across many places throughout the supply chain. Businesses need an accurate view of inventory to guarantee fulfillment of customer orders, reduce shipment turnaround times and minimize stockouts, oversells and markdowns.

Take a look at the trends shaping the world of sustainable business and the insights that can help drive transformation.

The basic steps of inventory management include:

Purchasing inventory: Ready-to-sell goods are purchased and delivered to the warehouse or directly to the point of sale.
Storing inventory: Inventory is stored until needed. Goods or materials are transferred across your fulfillment network until ready for shipment.
Profiting from inventory: The amount of product for sale is controlled. Finished goods are pulled to fulfill orders. Products are shipped to customers.

Inventory can be a company’s most important asset. Inventory management is where all the elements of the supply chain converge. Too little inventory when and where it's needed can create unhappy customers. But a large inventory has its own liabilities, the cost to store and insure it, and the risk of spoilage, theft and damage. Companies with complex supply chains and manufacturing processes must find the right balance between having too much inventory on hand or not enough.

Periodic inventory management The periodic inventory system is a method of inventory valuation for financial reporting purposes in which a physical inventory count is performed at specific intervals. This accounting method takes inventory at the beginning of a period, adds new inventory purchases during the period and deducts ending inventory to derive the cost of goods sold (COGS).

Bar code inventory management Businesses use bar code inventory management systems to assign a number to each product they sell. They can associate several data points to the number, including the supplier, product dimensions, weight and even variable data, such as how many are in stock.

RFID inventory management RFID, or radio frequency identification, is a system that wirelessly transmits the identity of a product in the form of a unique serial number. It tracks items and provides detailed product information. The warehouse management system based on RFID can improve efficiency, increase inventory visibility and ensure the rapid self-recording of receiving and delivery.

Know exactly where inventory is across the supply chain.

Customize pricing, send quotes, track orders and manage returns.

Move the product to where it's most valuable.

Evaluate patterns in processes to forecast future demand and sales.

Create and manage purchase orders.

Automate shipping to reduce errors such as late deliveries or delivering incorrect packages.

Spreadsheets, hand-counted stock levels and manual order placement have largely been replaced by advanced inventory tracking software. An inventory management system can simplify the process of ordering, storing and using inventory by automating end-to-end production, business management, demand forecasting and accounting.

Globalization, technology and empowered consumers are changing the way businesses manage inventory. Supply chain operators will use technologies that provide significant insights into how supply chain performance can be improved. They’ll anticipate anomalies in logistics costs and performance before they occur and have insights into where automation can deliver significant scale advantages.

In the future, these technologies will continue to transform inventory management:

Intelligent, self-correcting AI will make inventory monitoring more accurate and reduce material waste.

Data from IoT sensors will provide insight into inventory location and status.

Disparate parties will be connected through a unified and immutable record of all transactions.

Supply chains will master inventory visibility with improved demand forecasting and automation.

Unprecedented computational power will solve previously unsolvable problems.

Optimize your business operations to enhance customer shopping experiences and prevent inventory stockout and overselling. Gain the real-time inventory visibility you need to manage profitable and scalable omnichannel experiences.

Enhance shopper experiences from discovery to delivery. Preserve brand trust by providing shoppers with greater certainty, choice and transparency across their buying journey.

Accelerate transformation by simplifying technology integrations to deliver omnichannel order fulfillment processes such as real-time inventory and warehouse management, curbside pickup, buy online pickup in store (BOPIS) and ship from store (SFS).

Apply the power of AI to digital supply chain transformation. Improve supply network resiliency and sustainability, increase agility and accelerate time-to-value through actionable insights, smarter workflows and intelligent automation.

Uncover a clearer, more accurate view of your inventory and make informed decisions that help improve margins, increase service levels and minimize unplanned downtime.

The modern digital consumer is increasingly demanding and will abandon retailers that do not meet their expectations.

Today’s customers expect retailers to provide early, accurate and reliable order and delivery promises to shoppers. What happens if retailers don’t meet these promises?

A resilient supply chain must be able to see what is happening (visibility), quickly analyze those events/data (intelligence) and respond appropriately (agility).

IBM Sterling Order Management helps you deliver the perfect order with a complete omnichannel order fulfillment solution built for sustainability. Merge all your sales channels onto one fulfillment platform that helps you accurately track inventory levels, coordinate third-party logistics, organize customer orders, shipping options and returns management, all while reducing shipping costs.

Asset Inventory Management: Tools and Processes Explained

If someone asked you for a list of your company’s assets, how difficult would it be to provide it? What about the exact location, condition, and utilization of each asset?

Organizations with a large number of physical assets can answer those questions only if they have the right asset inventory management system and process in place. Setting that up plays an important role in lowering your asset management cost and improving overall business productivity.

To get there, you first need to understand what asset inventory management entails and which tools you can use to streamline and optimize the process.

The difference between asset management and inventory management

Asset inventory management is, in a sense, a lovechild of asset management and inventory management . So, to understand asset inventory management, we first need to explain the overarching concepts.

Here are necessary definitions to help us frame the discussion.

What is an asset?

Assets are resources that a company uses to run its business: produce items or deliver a service.

Most commonly, the word asset is used to refer to physical assets like machinery, vehicles, fixtures, computer equipment, furniture, and similar.

In a broader sense of the word, an asset can also mean intellectual property (like patents) and digital assets (like important documents, webinars, videos, whitepapers…).

What is inventory?

The word inventory refers to a broad category of materials and items that are used to build a product, as well as for finished goods the company plans to sell. There many different types of inventory , the main categories being:

Raw materials and components (items that will be a part of the final product)
WIP (work-in-progress) inventory (semi-finished products; intermediate goods)
Finished goods (items the company plans to sell)
Maintenance, repair, and operations (MRO) inventory (supplies needed to perform maintenance work)

What is asset management?

Asset management refers to the set of tools and practices that are used to track, maintain, and repair company assets. It covers the whole asset lifecycle, from procurement to disposal.

The main goals of asset management are:

Keeping track of the company’s assets
Keeping assets in peek operational condition to reduce the chance for unexpected breakdowns and extend asset lifespan
To streamline all maintenance work (be it reactive or proactive)

Good asset management will always lead to improved asset performance, fewer safety incidents, improved business productivity, and most importantly, lower operating costs .

What is inventory management?

Inventory management encompasses tools and practices used to manage your inventory. It includes actions like buying, storing, and tracking inventory. It also keeps an eye on the inventory stock and production demand in an effort to make accurate inventory forecasts for upcoming months.

Poor inventory management practices lead to overstocking and under stocking, lost items, problems with vendors and suppliers, and different productivity issues , all of which can negatively affect your bottom line.

An important subsection of inventory management is spare parts inventory management . It is used to forecast, purchase, store, and track MRO inventory. MRO items have a special section because they are the only type of inventory that doesn’t end up being part of the final product . Instead, those are items used to maintain and repair company assets (consumables like adhesives and welding rods, janitorial supplies, office supplies, replacement parts for different assets…).

The purpose of asset inventory management

As its name suggests, asset inventory is concerned with having an up-to-date inventory of your company’s assets.

Create a central repository of all assets the company wants to track
Track the physical location of the company’s assets (especially important for assets that are used at different locations like transportation and construction equipment)
Track the utilization of assets (time of asset in use vs idle time )
Track asset performance
Track the condition of the asset (often done by looking at the maintenance history of the asset in question)
Track the asset through its lifecycle (so accounting can properly depreciate fixed assets over time and so that managers can plan for upgrades or disposal and purchasing of replacement assets)

Naturally, you can’t apply all of these elements to every single asset. You are not going to measure the performance of your furniture or track if your building ventilation system walked over to a different location.

It is up to the organization to decide which metrics they want to track for different assets.

The role of asset tracking in asset inventory management

Asset tracking utilizes electronic tags to track an asset’s current location, user, condition, and storage location.

There are multiple ways to track assets:

Scannable barcode labels
Bluetooth Low Energy (BLE)

Each asset needs to have a unique asset ID so we do not leave any room for interpretation and confusion when having multiple assets of the same type. For similar reasons, it is a good idea to have a central repository of your assets with accompanying asset logs.

Those logs are particularly useful to track the movement of assets that use barcode labels. They record when was the asset moved last time and who moved it (who is the current user of the asset). In other words, you can track chain-of-custody for items that are often moved around.

More advanced tracking methods like GPS track the asset location in real-time. Nonetheless, asset logs are still very helpful as they track maintenance history and cost associated with each asset.

Having an asset tracking system in place significantly reduces the chance that an important item gets stolen or misplaced. Moreover, the data system generates can be used to calculate asset depreciation (and for other financial purposes).

The benefits of using an asset inventory management system

Implementing an asset inventory management system (sometimes abbreviated as AIM) helps you build a central repository of your assets. The ability to do that is beneficial in more ways than one.

1) Improved productivity

Knowing the location of every asset, its condition, and how much it is utilized, can boost productivity on many different levels.

By knowing where the asset is, employees do not need to waste time tracking down its location.

By knowing its condition, you eliminate the chance that an employee will waste time preparing for a certain process, only to find out that the asset is broken, partially functional, or shut down for maintenance work.

By tracking asset utilization and performance, the organization can plan for upgrades or the purchase of new assets in a way that matches their needs. Moreover, it helps the company keep an optimal level of asset inventory.

2) Lower operational costs

Assets are necessary for performing business activities. If an asset ends up stolen or misplaced, the company has to purchase replacements, increasing its operational costs. Up-to-date asset inventory combined with asset tracking prevents that from happening.

Additionally, having a digital asset inventory management system removes the need for manual data entry, eliminates administrative work, and lessens the need for tedious asset inventory checks. The end result is lower labor and operational costs.

3) The ability to estimate asset value

Assets that are regularly used lose their value over time. This is why accounting depreciates assets .

If you want to accurately depreciate asset value, you need to know the original asset value for the organization, at which stage of the lifecycle it is now, and how much it is being used. This will give you a good idea of how fast the asset will deteriorate. All of this data can be found in an AIM system if its database is kept up-to-date.

The records can be cross-referenced with the company’s EAM/CMMS system for even greater insight. After all, detailed asset logs and maintenance history is the best way to find out the condition of the asset and estimate its remaining useful life.

At some point, an asset will become a burden. In other words, the value it brings to the organization will be lower than the amount of resources you have to spend to keep it operational. Asset inventory management helps you realize when you’ve crossed that point – and helps you plan for new asset purchases.

4) Less hassle coordinating maintenance work

Scheduling maintenance work for broken assets is much simpler than scheduling routine maintenance work . It is for one simple reason – broken assets are not in use.

When a maintenance supervisor needs to schedule planned downtime for assets that are operational, they can’t do that on a whim. It doesn’t matter if we are talking about reinstalling windows on an office PC or shutting down the conveyor belt for a monthly inspection. They have to know when the assets will be free to not disrupt operational activities or mess with the production schedule. For complex assets and machinery on the plant floor, predictive maintenance technology can help plan maintenance activities in advance.

Knowing “when” to schedule maintenance is important, but so is “where”. Many assets are used by different people at different locations. Vehicles and computer equipment are the first that come to mind. Maintenance technicians need to know the location of the asset they are supposed to work on.

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5) Informing future purchases

Having a pulse on your asset inventory is essential for optimizing your procurement process and for planning new purchases.

For example, let’s say you have 20 laptops available for your workforce. If asset utilization is tracked properly, you know that 15 laptops are used regularly and 3 are used occasionally. If you hire a new employee, you know right away that there is no need to purchase additional computer equipment.

Similarly, you might have a bunch of assets of the same type, but from different vendors. This is an opportunity to compare asset performance and maintenance costs. Knowing which vendor offers better value is useful information to have before your next purchase.

What to look for in an asset inventory management software

To answer this question, you first need to understand your asset management needs.

How many assets do you have? Do you want to track and manage industrial assets, office equipment, or both? Do you want to focus on asset inventory tracking or do you need software that can also help you schedule routine maintenance and manage maintenance tickets ?

Discuss which asset management problems do you want to solve with the software (lost items, frequent equipment breakdowns, high operational costs…). With that, it is going to be much easier to make a list of your must-have features.

Keep in mind that asset inventory management doesn’t really come as a standalone solution. It is often a part of larger asset management solutions like CMMS or EAM or facilities management software. These solutions can be roughly divided into three groups. The first group offers robust asset maintenance and asset tracking features. The second group is focused on asset tracking and offers barebone asset maintenance features. The third group is focused on asset maintenance and offers limited asset tracking features. A detailed review of available features should precede any buying decisions.

Here are some general software characteristics you should look for:

Cloud-based solution so you only need an internet connection to access the database which can be updated in real-time
Mobile-enabled solution so you can use the system on any mobile device
Solution with appropriate asset tracking capabilities (barcodes, GPS, or RFID, depending on the needs of your organization)
Tool with appropriate integration capabilities (in case you need to connect it with your ERP software, financial software, etc.)
Solution with appropriate asset management functionality (maintenance history, ticketing system, work order management , based on your maintenance needs)
Solution that is configurable (so that you can decide things you want and do not want to track and have the ability to create customizable fields, KPIs, and reports)

It is really important that your asset management software is intuitive and easy to use. Many solutions will match your feature requirements on paper, but not in practice. It is really important to try them out first and see how the features are implemented. If the software is buggy, slow, or hard to figure out, it’s not worth the trouble.

This is why we always suggest businesses to make a shortlist of potential solutions, talk with vendors about available features, and take a free trial for a hands-on test. We have a whole guide on how to choose the right asset management software for your organization if you’re interested in learning more about the proper selection process.

When reviewing asset management solutions, always take a closer look at their pricing plans. They often have limitations on the number of users and/or assets you can add to the database. If you need to enter an unusually large number of assets or users, a lot of software vendors will be open to creating a custom monthly/yearly plan.

Using Limble CMMS to track and manage your assets

Limble CMMS offers many prime features you would find in enterprise asset management software . As such, Limble can be used to answer many of your asset inventory management needs.

Let’s take a quick look at features you might find very useful.

1) Centralized asset card Having all asset information in one place is very important if you want to stay organized. A centralized asset card is the best way to find any info about your asset. You can view all asset information you defined (make, model, manuals, warranty, location…), detailed maintenance history, and reports.

Additionally, Limble users can use barcodes for easy asset identification . It is often used by maintenance technicians in the field to quickly access asset logs. They can just scan the barcode with the mobile device and Limble will automatically open the asset card for that particular asset.

3) Unlimited custom fields Different businesses use different assets and have different tracking needs. Limble allows you to create an unlimited number of custom fields and track only what you want to track. Location, make, model, manuals, pictures, mileage, hours run, meter readings, and any other information that is important to your company.

4) Organizing assets into a parent-child hierarchy When you have a bunch of assets spread around different locations, it can be very useful to organize those assets in a parent-to-child hierarchy. This provides a neat visual overview of your assets and how they are organized inside your facility. Moreover, it helps you generate custom reports like “show me all assets that are children of asset X”.

I was looking for proper asset management software with locations, assets, sub-assets, components and not just a maintenance management software. I stumbled upon Limble and honestly I was pleasantly shocked. I like everything… I love the interface… I love the ease of use… I love being able to see my full factory in one place. A small yet very valuable thing which Limble does and which I did not find in any other software is that you can choose the generality of statistics that you want. If I want statistics on Asset level 1 I can get that. If I want statistics on Asset level 5 I can get it with just one click. – Mohammad Hassaan Akram, Factory & Maintenance Manager, Unilever

If this sounds like something you’re searching for, don’t hesitate to:

SCHEDULE A DEMO : Contact us and someone on our team will give you a walkthrough and get you familiar with all of the major features.
TRY SIMULATED SELF DEMO : Clicking on this button will refresh your browser tab and load a simulated test environment where you check how Limble works at your own pace.
or START A FREE TRIAL : You can sign-up for a free 30-day trial to evaluate if Limble CMMS is a good fit for your organization.

Best practices for managing asset inventory

Before we wrap this up, we should discuss best practices you can apply at any organization to stay on top of your asset inventory .

Implementing software won’t’ be one of the points. It should be clear by now that this is the best way to manage large and expensive asset inventory.

Start with clean data

To build a strong asset management strategy, we need a stable foundation based on accurate data.

The first step should be making a list of all assets you want to track and which metrics you want to track for each type of asset. After that, the asset list and respective asset details can be imported into your software of choice.

If you’re already using a digital system to track assets, the first step can be to make an asset audit and ensure that the database is accurate and up-to-date.

The goal of both scenarios is to clean up your data:

Ensuring you do not have missing items and duplicate entries
Defining data entry standards (naming conventions, compulsory fields, appropriate data formats…)

Set up clear operating procedures

Your database will not be accurate for long if people do not follow set operating procedures when interacting with your assets. There should be clear guidelines defined for things like:

Procedures and policies for new asset acquisitions
How to update asset inventory database (adding new assets or archiving those that were lost/disposed of)
Procedure for taking the asset out of storage
Procedure for returning the asset back to storage
How to leave comments/notifications and update asset logs (if your asset inventory management system allows that in the first place)
Procedure for updating the system when an asset changes its current user (exchanges hands)

Many of those will be very simple procedures, but it is important that EVERYBODY follows them. Part of that effort is to provide the necessary training. Even if it is from something basic like how to handle a barcode scanner.

There will always be border scenarios that aren’t covered by standard operating procedures. You should have a known person in charge people can contact to solve specific problems.

Set up automated reports and periodic audits

If you’re using asset management/asset tracking software, use the available reports. Most modern solutions give you the ability to set up automated reports to track important metrics and KPIs . If there is a problem, check asset logs for additional details.

To ensure the database is accurate and up-to-date, set up periodic auditing. If there are significant discrepancies, try to pinpoint the cause of the problem. If needed, update operating procedures and communicate the changes to all relevant parties.

Follow best inventory and asset management practices

Being good at inventory management requires the understanding of basic inventory principles like lead times, safety stock, reorder points, turnover rate, and similar. Learning best practices for managing inventory can inform your asset inventory management strategy.

Knowing where your assets are and how they are utilized is great, but it doesn’t mean much if they’re constantly breaking down and are not able to fulfill their purpose. After all, one of the goals of asset inventory management is to make sure that assets are ready and available when workers need them.

Applying best asset management practices ( like preventive maintenance ) prolongs asset lifespan and reduces the number of operational issues. This leads to lower asset turnover, more automated workflows, and lower operational costs. Ultimately, it results in a smoother asset inventory management process.

Staying on top of asset inventory gets exponentially harder as the number of assets grows. Enterprises have no other option but to implement asset management and asset tracking solutions to control their assets and their inventory.

If you want to learn more about Limble CMMS and how it can help manage your asset inventory, let us know what you’re looking for and we’ll be glad to share more details with you.

Pls provide asset inventory strategies for non stick, non profit educational institutions thanks

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Overseas Assignment Inventory

Overseas assignment inventory can be used to:.

Assess potential candidates for international assignments
Integrate a cultural adaptability assessment tool into a candidate selection process
Further develop expatriates through inclusion in intercultural training programs or coaching

Performance Programs is a distributor as well as a research partner with the publisher. We also establish local norms and conduct ongoing validation studies of the OAI.

Candidate Assessment Service:

Client certification workshop:, candidate self-assessment express:, assignee development (with oai debrief), at performance programs we are all about assessments.

Creating a Database Model for an Inventory Management System

Lisandro is a Database Architect from Rosario, Argentina. With almost 20 years of experience in Oracle and SQL Server, among other database engines, he currently works as Sr. Data Engineer on OZ Digital Consulting. He is also a member of both the Oracle ACE program and the Argentina Oracle User Group. In his free time, he enjoys watching his soccer team (Rosario Central) with his two sons.

database design
example ER diagram

In this article, we’ll use the Vertabelo online data modeler to design a data model for an inventory management system.

Do you need to create and implement a database for an inventory management system? In this article, we’ll walk you through a generic inventory management system database model. No two organizations are the same; they all have their unique requirements and needs. So, this database design may require adjustments or modifications based on your own organization requirements, preferred inventory counting method, and your local legal or industry regulations.

To build our entity-relationship diagram, we’ll use the Vertabelo online data modeling tool. Vertabelo allows database architects and developers to design and implement a database model, starting with a conceptual or logical data model and converting it into a physical model. It will also automatically create all the required SQL scripts to implement your design in a physical database. If you want to learn more about ER diagrams, read What Is an ER Diagram? and What Are Conceptual, Logical, and Physical Data Models? .

Inventory Management System Requirements

The most important feature of any inventory management system is to provide up-to-date information about inventory levels. This allows organizations to reduce costs (by minimizing overstocking) while maintaining customer satisfaction by ensuring prompt deliveries and reducing out of stock situations. For organizations with multiple stores , a good inventory management system allows for central control, making it easier to manage and optimize stock levels at all locations .

To achieve this, the system must track both existing inventory levels and all operations that affect them, like purchase orders sent to providers and customers’ delivery orders. This will become clear as we go on. Let’s review the different entities involved, their attributes, and their relationships. We’ll start by creating and filling a logical data model. You can learn how easy it is to create a database model on Vertabelo in Create an Online Data Model in 4 Steps .

Creating an Empty Model

Creating a new logical data model in Vertabelo can be done in three simple steps:

data model for inventory management system

Adding Inventory Management System Entities

Next, let’s add the entities in our system. Entities are added by clicking on the “Add new entity” button in the model toolbar:

A database model for inventory management system should have the following entities:

Products are the starting point for designing our system. Each industry or business line will have different product attributes (e.g. clothes have material, size, and color, while cars have color, trim level, engine type, etc.). In this article, we’ll focus on those attributes required to create our database model rather than specific attributes required for sales or other activities.

We can group product attributes into two subsets: generic attributes and storage attributes. Let’s start with the generic attributes for the Product entity:

ProductID : This will be a unique ID number and the primary identifier (later the surrogate primary key ) of the entity. We will use an INTEGER If you want to learn more about primary identifiers and additional identifiers (which become unique keys), read the article What Is a Primary Key? .
ProductCode : Besides the ProductID , products are usually identified by an internal code (also called an SKU or Stock Keeping Unit). This code consists of letters and numbers that identify characteristics about each product, such as manufacturer, brand, style, color, and size. This is also an additional identifier. We will use a VARCHAR(100) datatype for this attribute.
Barcode : This external product code (also known as the UPC or Universal Product Code) is standardized for universal use by any company. We will use a VARCHAR(100) datatype.
ProductName : The product’s n We will use a VARCHAR(100) datatype.
ProductDescription : A more detailed description of the product. We will use a VARCHAR(2000) datatype.
ProductCategory : The product’s category. We will use a VARCHAR(100) datatype.
ReorderQuantity : Some products cannot be ordered by units; you need to purchase them in packages or We will use the INTEGER datatype.

Note : ProductCategory could (and should) be normalized (stored in a separate entity). To keep the model simple, we are using a denormalized version. To learn about normalization in database models, take a look at the article Normalization in Relational Databases .

Let’s finish the review with the storage attributes for the Product entity; these determine how to store the products. Some examples are:

PackedWeight : Product’s weight, including packaging. This may be required to define storage location. We will use the DECIMAL(10,2)
PackedHeight : Product’s height, including packaging. This may be required to define storage location. We will use the DECIMAL(10,2)
PackedWidth : Product’s width, including packaging. This may be required to define storage location. We will use the DECIMAL(10,2)
PackedDepth : Product’s depth, including packaging. This may be required to define storage location. We will use the DECIMAL(10,2)
Refrigerated : Indicates if the product requires refrigeration. We will use a BOOLEAN

This entity has the information related to places where inventory is located. Many organizations have several locations, and each location includes one or more warehouses with different features. Location attributes are:

LocationID : This will be a unique ID number and the primary identifier (later the surrogate primary key) of the entity. We will use an INTEGER datatype.
LocationName : The name of the location. We will use a VARCHAR(100) datatype.
LocationAddress : The full address of the location. We will use a VARCHAR(200) datatype.

Note : Location addresses could (and should) be normalized into several attributes (e.g. Address, City, PostalCode) and tables (PostalCodes, Cities, States, and Countries). To keep the model simple, we are using a denormalized version.

This entity represents the actual storage area inside a Location . It has the following basic attributes:

WarehouseID : This will be a unique ID number and primary identifier (later the surrogate primary key) of the entity. We will use an INTEGER datatype.
WarehouseName : The name of the w We will use a VARCHAR(100) datatype.
IsRefrigerated : This attribute indicates if the warehouse has refrigeration. We will use a BOOLEAN data type.

Note #1 : Each Warehouse is related to a Location . We will see how to create those relationships later in this article.

Note #2 : Additional attributes (like the dimensions and capacity of each warehouse) may be added if required.

This entity represents the relationship between products and warehouses. Each product may exist in several Warehouses, and each warehouse may contain many different products. Besides the relationship, we need to store additional data (like the quantity of that product available), so we are going to create an entity that represents this relationship. The basic attributes are:

InventoryID : This will be a unique ID number and the primary identifier (later the surrogate primary key) of the entity. We will use an INTEGER datatype.
QuantityAvailable : The quantity on hand for that We will use an INTEGER datatype.
MinimumStockLevel : The minimum number of units required to ensure no shortages occur at this warehouse. We will use an INTEGER
MaximumStockLevel : The maximum number of units desired in stock, i.e. to avoid overstocking. We will use an INTEGER
ReorderPoint : When the number of product units reaches this level, a purchase order must be generated. This threshold is somewhere between the minimum and maximum levels and should take into account the time between sending a purchase order and the new products’ arrival to avoid getting under the MinimumStockLevel . We will use an INTEGER

Note #1 : Each Inventory is related to a Warehouse and a Product . We will see how to create those relationships later in this article.

Note #2 : MinimumStockLevel , MaximumStockLevel , and ReorderPoint can be defined at the Product or Warehouse level (as we decided here), depending on requirements.

Note #3 : Depending on the size of the warehouses and the diversity of their products, additional information for locating the product in the warehouse may be required (like sector, row, shelf, etc.).

Organizations purchase products from providers, so we need to store some basic information about these providers. We will focus only on those attributes required for inventory management:

ProviderID : This will be a unique ID number and the primary identifier (later the surrogate primary key) of the entity. We will use an INTEGER datatype.
ProviderName : The provider’s We will use a VARCHAR(100) datatype.
ProviderAddress : The provider’s full We will use a VARCHAR(200) datatype.

Note : Provider addresses could (and should) be normalized into several attributes, as we explained for location addresses.

Order & OrderDetail

When companies purchase products from a provider, they include information about the places (warehouses) where the products will be stored and quantities that need to be delivered. This information is stored in the following two entities.

OrderID : This will be a unique ID number and the primary identifier (later the surrogate primary key) of the entity. We will use an INTEGER datatype.
OrderDate : This is the date when the order was generated.

OrderDetail

OrderDetailID : This will be a unique ID number and the primary identifier (later the surrogate primary key) of the entity. We will use an INTEGER datatype.
OrderQuantity : The amount of a specific product ordered for a specific w We will use an INTEGER datatype.
ExpectedDate : The date when the products should arrive at the w We will use a DATE datatype.
ActualDate : The date when the products were received by the w We will use a DATE datatype.

Note #1 : Each Order is related to a Provider and may include several OrderDetail s. Each of them represents the expected quantity of a Product in a Warehouse . We will see how to create those relationships later in this article.

Note #2 : We are focusing only on inventory information. We are not considering other details like price, taxes, etc.

Organizations sell products to their customers, so we need to store some basic information about customers. As with Provider , we will focus only on those attributes required for inventory management:

CustomerID : This will be a unique ID number and the primary identifier (later the surrogate primary key) of the entity. We will use an INTEGER datatype.
CustomerName : The customer’s We will use a VARCHAR(100) datatype.
CustomerAddress : The customer’s full address. We will use a VARCHAR(200) datatype. As with other addresses we’ve presented, this could (and should) be normalized into several attributes.

Delivery & DeliveryDetail

Once we sell products to a customer, the inventory management system generates a delivery request. It may include different products from different warehouses, depending on products’ availability and warehouses’ proximity to the customer’s address. This information is stored in the following two entities.

DeliveryID : This will be a unique ID number and the primary identifier (later the surrogate primary key) of the entity. We will use an INTEGER datatype.
SalesDate : This is the date when the sale was made and the delivery request was generated.

DeliveryDetail

DeliveryDetailID : This will be a unique ID number and the primary identifier (later the surrogate primary key) of the entity. We will use an INTEGER datatype.
DeliveryQuantity : The amount of a specific product to be delivered from a specific w We will use an INTEGER datatype.
ExpectedDate : This is the date when the products should arrive at the customer’s address. We will use a DATE datatype.
ActualDate : This is the date when the products were delivered. We will use a DATE datatype.

Note #1 : Each Delivery request is related to a Customer and may include several DeliveryDetail s. Each of them represents the expected quantity of a Product to be sent from each Warehouse . We will see how to create those relationships later in this article.

There are situations when some products need to be transferred from one warehouse to another. This kind of operation is registered as a Transfer with the following attributes:

TransferID : This will be a unique ID number and the primary identifier (later the surrogate primary key) of the entity. We will use an INTEGER datatype.
TransferQuantity : How much of a specific Product has been transferred from one warehouse to another w We will use an INTEGER datatype.
SentDate : This is the date when the products left the source w We will use a DATE datatype.
ReceivedDate : This is the date when the products arrived at the target w We will use a DATE datatype. This attribute will accept NULLs, since this piece of information is not available at the moment the transfer is generated.

And now we have finished defining all the entities involved, as shown in the following diagram:

Relationships Between Entities

Defining the entities is just a part of creating a data model; it is not complete until we identify how those entities are related. Let’s analyze the relationships one by one:

Provider – Order

Each Order in our system is assigned to a Provider , but not all providers may have orders. We need to establish a 1:N (one-to-many) relationship between the two tables, with N being 0, 1, or more.

To achieve this in Vertabelo, we need to select the Add 1:N Relationship button:

Then we click on the Provider entity, and – keeping the mouse button pressed – move the mouse over the Order entity and release the button. The two entities are now related:

If we click on the relationship (the line in the diagram) we can see the Relationship Properties panel on the right side of the screen. This is where we can define the type (one-to-one (1:1), one-to-many(1:N)) and cardinality of the relationship , as shown below:

Selecting “Mandatory” on the Provider side means that each Order must have a Provider assigned.

Order – OrderDetail

This is a classic 1:N relationship between two entities, with N being 1 or more since there cannot be orders without at least one OrderDetail .

Customer – Delivery

Each Delivery in our system is assigned to a Customer , but not all customers may have deliveries. We need to establish a 1:N relationship between the two tables where N is 0, 1, or more.

Delivery – DeliveryDetail

Another example of a classic 1:N relationship. Each Delivery must have at least one DeliveryDetail , and each detail belongs to one and only one Delivery .

Location – Warehouse

Each Location can have one or more Warehouse s, so we need to define this as a 1:N relationship. Both sides are mandatory, since it is illogical to have a Location without a Warehouse and vice versa.

Product – OrderDetail

This is a 1:N relationship, where each OrderDetail must have an associated Product and each Product may be included in 0, 1, or many Orders .

Product – DeliveryDetail

This is a 1:N relationship, where each DeliveryDetail must have an associated Product and each Product may be included in 0, 1, or many DeliveryDetail s.

Warehouse – OrderDetail

Another 1:N relationship, where each OrderDetail is associated with a Warehouse and each Warehouse can have 0, 1, or many OrderDetail s.

Warehouse – DeliveryDetail

Another 1:N relationship, where each DeliveryDetail is associated with a Warehouse , and each Warehouse can have 0, 1, or many DeliveryDetail s.

Product – Inventory

This is a 1:N relationship, since each Product may have stock in 0, 1 or many warehouses, represented here as Inventory . We need to remember that Inventory is an intermediate entity created to resolve a many-to-many relationship between Products and Warehouses .

Warehouse – Inventory.

This is a 1:N relationship, since each Warehouse may store 0, 1, or many products (represented here as Inventory ).

Product – Transfer

This is another 1:N relationship, since each Product may appear in 0, 1, or many transfers, and each Transfer consists of one and only one Product .

Warehouse – Transfer

This is a tricky relationship, since there are actually two relationships between these two entities. Each Transfer is related to:

A “source” Warehouse . This is the warehouse where the products were originally
A “destination” Warehouse . This is the warehouse where the products are being transferred.

In this case, we need to create two 1:N relationships between the entities.

Our Final Model

Now that we have completed all the relationships, we have the final database model for an Inventory Management System:

Database Design Next Steps

In this article, we created an ER diagram for an inventory management system. Using Vertabelo, we can easily transform it to a physical model (which includes database-specific information) and then automatically generate the DDL script to build the database. You can learn about these two processes in the following articles:

How to Generate a Physical Diagram from a Logical Diagram in Vertabelo
How to Generate a SQL DDL Script in Vertabelo

If you have found this article useful but need to create a data model for other business requirements, check out here to Find Database Schema Examples or search for other solutions across all the example ER diagram walkthroughs available in this blog!

Assignment on Inventory

Introduction

Inventory usually includes goods that are being made (in the process of being produced) and goods that are finished and ready for sale. So far, we have talked about businesses that provide services. However, there are other types of businesses one of which is a merchandising company. Merchandising companies create a supply of goods that are delivered to customers. This supply is called inventory .

Inventory is a current asset on a company’s balance sheet. Inventory includes goods for resale, raw materials, spare parts, etc.

Merchandise inventory is goods that are held for resale by a merchandising company.

Inventory for resale is accounted for in the Merchandise Inventory account. This is an asset account shown in the assets section of the balance sheet.

Inventory costs. Product and period costs

All costs related to acquiring goods and making them ready for sale are accumulated in the Merchandise Inventory account. Such costs are associated with products and often called product costs .

Product costs are costs required to produce inventory and make it ready for sale. Such costs are directly associated with inventory production.

Product costs are expensed in the period of inventory sale regardless of when the goods were purchased or produced by the company.

There are a few types of expenditures that cannot be directly traced to a specific product. Such costs include (but not limited to) advertising, administrative salaries, insurance, etc. Such costs are called selling and administrative expenses .

Selling and administrative expenses are expenses of selling and administrative nature that are not directly traceable to a specific product. Examples are advertising, administrative salaries and insurance, among others.

Because selling and administrative expenditures are expensed in the period in which they are incurred, they are labeled period costs .

Period costs are costs associated with a specific period and not a specific product. Period costs include selling and administrative expenses.

Cost of goods available for sale and cost of goods sold

Total inventory cost for a given accounting period is calculated by adding the beginning inventory account balance to the amount of inventory acquired during the period. The result of adding these two numbers is called cost of goods available for sale .

Cost of goods available for sale is the cost of goods acquired during a period plus the cost of goods on hand at the beginning of the period. This cost represents all inventories available for sale during the period.

The cost of goods available for sale is allocated between the Merchandise Inventory account and an expense account called Cost of Goods Sold . At a period end, inventory that has not been sold during the period is shown as an asset on the balance sheet (Merchandise Inventory) and inventory that has been sold is shown as an expense on the income statement (Cost of Goods Sold).

Cost of goods sold (COGS) is the difference between the cost of goods available for sale and the cost of goods on hand at period end. This cost represents the cost of goods sold by the company during the period.

Gross margin is the difference between the sales revenue (i.e., revenue generated from sales) and the cost of goods sold. Gross margin shows what profit the company made after cost of goods sold, but before any other expenses (selling and administrative, etc.).

Operating income is the difference between the gross margin and selling and administrative expenses.

Perpetual and periodic inventory systems

There are two inventory accounting systems – perpetual and periodic.

Perpetual inventory system means that the inventory account is adjusted perpetually. The inventory account is affected each time inventory is sold or purchased.

Periodic inventory system adjusts the inventory account only at the end of an accounting period. Purchases and sales do not affect the inventory account during the accounting period, but do affect at the period end.

Although both systems have different approaches to inventory accounting, they provide the same results. The amount of cost of goods sold and the amount of sales will be the same regardless which method the company applies.

Illustration #1 of accounting for inventory (period 1)

In our example, we will follow the rules of the perpetual inventory system. Under the perpetual inventory system sales and purchases of inventory are recorded directly to the Merchandise Inventory account when they take place. The accounting events below refer to a book store called Dav’s Books that was opened in 20X6 fiscal year:

The owner contributed $3,000 of inventory and $9,000 cash to the business.
$4,000 cash was paid to purchase additional inventory.
$200 cash was paid for the inventory transportation (see Event No. 2) from the vendor to the bookstore.
Inventory that cost $2,000 was sold for $5,500 cash.
Transportation expenses of $300 to deliver sold goods (see Event No. 4) were incurred and paid with cash.
$400 of selling expenses were incurred and paid with cash.

Analysis of capital contribution transaction

Event No. 1. The owner made a combined capital contribution that consisted of cash and inventory. Cash ($9,000), Inventory ($3,000), and Contributed Capital (totally, $12,000) increase. This is an asset source transaction:

Illustration : Effect of capital contribution

Analysis of inventory acquisition transaction.

Event No. 2. The Merchandise Inventory account increased when the inventory purchase was made for $4,000 cash. Inventory increases and Cash decreases. This is an asset exchange transaction:

Illustration : Effect of inventory acquisition

analysis of transportation-in costs.

Event No. 3. Recall that all expenses incurred to deliver goods and make them ready for sale are treated as part of inventory costs and recorded in the Merchandise Inventory account. So, the transportation costs related to the delivery of inventory from the vendor to the bookstore are recorded in the Merchandise Inventory account. This transportation expense is called transportation-in.

Transportation-in expenditures are cost incurred to delivery inventory from the vendor (supplier) to the company. Transportation-in costs are treated as part of the inventory costs (product costs).

The transaction acts to increase Merchandise Inventory and to decrease cash. This is an asset exchange transaction:

Illustration: Effect of transportation-in costs

analysis of the inventory sale transaction.

Event No. 4.This event is composed of two parts. The first one (4a in the table below) is recognition of sales revenue. Cash and Retained Earnings increase by $5,500. Transaction 4a is an asset source transaction. The second part (4b) is designed to record the cost of goods sold. Remember that goods are expensed only at the point of sale (under perpetual system). Accordingly, $2,000 should be removed from the Merchandise Inventory account and placed to the expense account called Cost of Goods Sold. Transaction 4b is an asset use transaction.

Illustration : Effects of inventory sale

Analysis of transportation-out expenses.

Event No. 5. The cash payment made by the bookstore to deliver goods to the customer is called transportation-out:

Transportation-out expenditures are expenses incurred to deliver products from the company to the customer. Transportation-out expenditures are treated as period costs and expensed in the period of incurrence.

The company records transportation-out expenditures as an operating expense. This is an asset use transaction:

Illustration: Effect of transportation-out expenses

analysis of selling expenses transaction.

Event No. 6. The $400 cash payment for selling expense has the same effect as operating expenses do. Cash and Retained Earnings decrease. This is an asset use transaction:

Illustration : Effect of selling expenses

Journal entries and t-accounts for illustration #1 of accounting for inventory.

Let us prepare the general journal and post all transactions to T-accounts.

Illustration :General journal for illustration #1

Note the last entry that is called a closing journal entry. We zeroed the nominal accounts (revenue and expense accounts) for use in the next accounting period. The closing entry is combined because we include both revenue and expense accounts into it.

Illustration: Summary of T-accounts for illustration #1

Illustration #2 of accounting for inventory (period 2).

Let us go on with the illustration and expand Dav’s Books operations to the next (20X7) accounting period. The following transactions took place:

On May 14, the company purchased $5,000 of goods (inventory) on account. The seller delivered the goods at their expense.
Some goods delivered to Dav’s Books were damaged; thus, Dav’s Books returned $300 of them to the seller (May 16).
On September 18, the company made cash payment on the balance of the accounts payable. In addition, the bookstore would receive a 2% cash discount from the seller if Dav’s Books made the payment in two weeks. As the payment was made within two weeks, Dav’s Books took advantage of the 2% discount.
On June 12, the company sold goods costing $2,000 for $4,000 on account.
Dav’s Books incurred $400 of transportation expenses to deliver the goods to the customers. The expense was paid in cash on June 12.
Due to an error in filling out the purchase order in Event No. 6 and respectively shipping some goods not ordered, the customers sent back and the bookstore accepted a return of $500 of goods. The cost of the goods was $250.
On June 15, the company provided the buyer with a 2% cash discount if the buyer pays within two weeks. The buyer met the requirement (buyer paid within two weeks).
On September 12, the company collected the balance due on accounts receivable.

Effects of transaction for illustration #2 of accounting for inventory

Let us look at each of the transactions, record them in the general journal, transfer the data to T-accounts, and prepare the financial statements. All effects of the transactions on the accounting equation are shown in the table below.

Illustration : Effects of 20X7 events of the accounting equation

analysis of transactions for illustration #2 of accounting for inventory.

Event No. 1. The effect of $5,000 inventory purchase is increases in both assets (Inventory) and liabilities (Accounts Payable). This is an asset source transaction.

Event No. 2. In Event No. 1 the Inventory account was debited. However, the company returned some goods, which resulted in a reverse operation. In this connection, the company needs to reduce both assets (Inventory) and liabilities (Accounts Payable) by the cost of the goods returned. This is an asset use transaction.

Event No. 3a. Dav’s Books got a cash discount. A cash discount means that the seller lets the buyer (in our example, the bookstore) pay less in case of a prompt settlement. So, the bookstore will have a right to pay the amount due reduced by a 2% discount, that is $4,606 ($4,700 x [100% – 2%] = $4,606), and not the initial amount ($5,000 minus $300 of returned goods = $4,700). This event the same effect as the goods return in Event No. 2. Both assets (Inventory) and liabilities (Accounts Payable) decrease by the $94 discount ($4,700-$4,606). This is an asset use transaction.

Event No. 3b. We are familiar with the payment of accounts payable transaction. Cash and Accounts Payable decrease. The accounts payable balance at May 18 was $4,606 ($5,000 – $300 – $94). This is an asset use transaction.

Event No. 4. Sale of the goods is composed of two events which are revenue recognition and expense recognition. The first one acts to increase assets (Accounts Receivable because the company sold on account) and equity (Sales Revenue) by $4,000. The second transaction decreases both equity (Retained Earnings, by increasing Cost of Goods Sold) and assets (Inventory) by the amount of $2,000. Revenue recognition is an asset source transaction and cost of goods sold recognition is an asset use transaction.

Event No. 5. Incurring transportation expense acts to decrease assets (Cash) and equity (Retained Earnings, by increasing Transportation-out) by $400. This represents an asset use transaction.

Event No. 6a & 6b. Getting back some goods sold in Event No.4 has a twofold effect on the company’s accounting records. The first one acts to adjust the revenue recognition. Because some goods were returned, it is necessary to reduce Sales Revenue and Accounts Receivable by $500. The second effect is to adjust the expense recognition. Cost of Goods Sold decreases, and Inventory increases. In this event, the company just makes reverse entries to those from Event No. 4.

Event No. 7. Providing a 2% cash discount to customers has a similar effect on the accounting records as Event No. 6. However, this time the bookstore does not receive any goods back, and, therefore, does not have to adjust expense part of the transaction (Cost of Goods Sold). Therefore, the company only decreases Accounts Receivable and Sales Revenue by $70 ([$4,000 minus $500 of returned goods] x 2%). This is an asset use transaction.

Event No. 8. Collection of cash from accounts receivable is already familiar to us. Cash increases and Accounts Receivable decrease. This is an asset exchange transaction.

Journal entries for illustration #2 of accounting for inventory

Let us see how these transactions look like in the general journal.

Illustration: General journal for illustration #2

T-accounts of transactions for illustration #2 of accounting for inventory.

It is time to transfer the amounts to T-accounts.

Illustration: T-accounts of transaction for illustration #2

Financial statements for illustration #2 of accounting for inventory.

Finally, financial statements prepared for 20X6 and 20X7 are shown below.

Illustration : Financial statements for Dav’s books for 20X6 and 20X7

Multiple-step and single-step income statements.

Note a new format of the Income Statement. This format matches particular revenues with respective expenses. For example, Net Sales and Cost of Goods Sold provide information on the difference between the selling price and the cost of goods sold. Such format of the income statement is used to prepare information for financial analysis. Income statements of such kind are called multiple-step income statements .

Multiple-step income statement shows numerous steps in determining a net income (or net loss). Each step provides a different measure of a company’s results of operations.

In contrast, a single-step income statement that we had been dealing with before only includes information on total revenues and total expenses.

Single-step income statement shows only one step in determining a net income (or net loss).

Comparison of the periodic and perpetual inventory systems

One important aspect about the periodic inventory system should be mentioned. The periodic inventory system is known to be used more frequently than the perpetual one. The reason is simple. It is easier to make a few period-end adjusting entries than to adjust accounting records every time a sale or purchase is made (for example, grocery store sales are very frequent). Under the periodic system the cost of goods sold is determined at the end of the period. Purchases or sales of inventory do not affect the inventory account during the period. When goods are purchased, the cost is recorded in the Purchases (Inventory Purchases) account. When goods are sold, a reduction in the Inventory account does not take place. Transportation-outs, purchase returns, and allowances are recorded in separate accounts. The cost of goods sold is calculated by subtracting the amount of ending inventory from the total costs of goods available for sale (see the table below). The ending inventory is determined by performing a period end physical count.

The Schedule of Cost of Goods Sold helps in performing the computations:

Illustration: Schedule of cost of goods sold

However, there is one weak point about the periodic system. The point relates to lost, damaged, or stolen merchandise. Because the periodic system determines the cost of goods sold and the ending inventory at the end of the period, it is impossible, during the period, to figure out whether there were any goods stolen, damaged, or lost. It is rather difficult even at the period end because all the goods not available at hand are considered sold.

At the same time, it is quite easy to figure out the damaged, lost, or stolen goods if a company employs the perpetual system. Simple comparison of the physically counted merchandise on hand at the end of the period and the book balance of the Merchandise Inventory account will do the job. If there is a difference between the two, then some goods were damaged, stolen, or lost. In such a case an adjusting entry is needed to record the goods not available any more. The adjusting entry acts to decrease assets and equity. The equity is decreased by increasing an expense account called Inventory Loss (or sometimes directly to Cost of Goods Sold). The assets are decreased by reducing the inventory account.

For example, let us assume a company applies the perpetual inventory system and has the book balance of the Merchandise Inventory account of $1,500. The physical count at the end of the period showed that only $1,300 of goods was on hand. The inventory loss of $200 ($1,500 – $1,300) should be recorded as follows:

Illustration: Effect of recording inventory loss in the horizontal model

The entry in the general journal looks like this:

Illustration: Journal entry to record the inventory loss

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Personality Assessments: 10 Best Inventories, Tests, & Methods

Perhaps they respond differently to news or react differently to your feedback. They voice different opinions and values and, as such, behave differently.

If you respond with a resounding yes, we understand the challenges you face.

As more and more organizations diversify their talent, a new challenge emerges of how to get the best out of employees and teams of all personality configurations.

In this article, we embark on a whistle-stop tour of the science of personality, focusing on personality assessments to measure clients’ and employees’ character plus the benefits of doing so, before rounding off with practical tools for those who want to bolster their professional toolkits.

Before you continue, we thought you might like to download our three Strengths Exercises for free . These detailed, science-based exercises will help your clients or employees realize their unique potential and create a life that feels energizing and authentic.

This Article Contains

What are personality assessments in psychology, 4 methods and types of personality assessments, 7 evidence-based inventories, scales, and tests.

Helpful Tools & Questions

Fascinating Books About Personality Assessments

Resources from positivepsychology.com, a take-home message.

Personality is a tricky concept to define in concrete terms, and this is reflected both in the number of personality theories that exist and the lack of consensus among personality psychologists.

However, for this article, we can think of personality as the totality of one’s behavioral patterns and subjective experiences (Kernberg, 2016).

All individuals have a constellation of traits and experiences that make them unique yet simultaneously suggest that there are some generalizable or distinct qualities inherent in all humans.

In psychology, we are interested in understanding how traits and qualities that people possess cluster together and the extent to which these vary across and within individuals.

Now, it’s all very well and good knowing that personality exists as a concept and that your employees and clients differ in their groupings of traits and subjective experiences, but how can you apply this information to your professional work with them?

This is where measuring and assessing personality comes into play. Like most psychological concepts, researchers want to show that theoretical knowledge can be useful for working life and brought to bear in the real world.

For example, knowing a client’s or employee’s personality can be key to setting them up for success at work and pursuing and achieving work-related goals. But we first need to identify or assess personality before we can help others to reap these benefits.

Personality assessments are used for several reasons.

First, they can provide professionals with an opportunity to identify their strengths and reaffirm their sense of self. It is no coincidence that research on strengths is so popular or that strengths have such a prominent place in the working world. People like to know who they are, and they want to capitalize on the qualities and traits they possess.

Second, personality assessments can provide professionals with a social advantage by helping them to understand how they are perceived by others such as colleagues, managers, and stakeholders — the looking glass self (Cooley, 1902).

In the sections below, we will explore different personality assessments and popular evidence-based scales.

1. Self-report assessments

Self-reports are one of the most widely used formats for psychometric testing. They are as they sound: reports or questionnaires that a client or employee completes themselves (and often scores themselves).

Self-report measures can come in many formats. The most common are Likert scales where individuals are asked to rate numerically (from 1 to 7 for example) the extent to which they feel that each question describes their thoughts, feelings, or behaviors.

These types of assessments are popular because they are easy to distribute and complete, they are often cost effective, and they can provide helpful insights into behavior.

However, they also have downsides to be wary of, including an increase in unconscious biases such as the social desirability bias (i.e., the desire to answer “correctly”). They can also be prone to individuals not paying attention, not answering truthfully, or not fully understanding the questions asked.

Such issues can lead to an inaccurate assessment of personality. Self-reports can be completed in both personal and professional settings and can be particularly helpful in a coaching practice, for example.

However, if you are a professional working with clients in any capacity, it is advised to first try out any self-report measure before suggesting them to clients. In this way, you can gauge for yourself the usefulness and validity of the measure.

2. Behavioral observation

Another useful method of personality assessment is behavioral observation. This method entails someone observing and documenting a person’s behavior.

While this method is more resource heavy in terms of time and requires an observer (preferably one who is experienced and qualified in observing and coding the behavior), it can be useful as a complementary method employed alongside self-reports because it can provide an external corroboration of behavior.

Alternatively, behavioral observation can fail to corroborate self-report scores, raising the question of how reliably an individual has answered their self-report.

3. Interviews

Interviews are used widely from clinical settings to workplaces to determine an individual’s personality. Even a job interview is a test of behavioral patterns and experiences (i.e., personality).

During such interviews, the primary aim is to gather as much information as possible by using probing questions. Responses should be recorded, and there should be a standardized scoring system to determine the outcome of the interview (for example, whether the candidate is suitable for the role).

While interviews can elicit rich data about a client or employee, they are also subject to the unconscious biases of the interviewers and can be open to interpretation if there is no method for scoring or evaluating the interviewee.

4. Projective tests

These types of tests are unusual in that they present individuals with an abstract or vague object, task, or activity and require them to describe what they see. The idea here is that the unfiltered interpretation can provide insight into the person’s psychology and way of thinking.

A well-known example of a projective test is the Rorschach inkblot test. However, there are limitations to projective tests due to their interpretative nature and the lack of a consistent or quantifiable way of coding or scoring individuals’ responses.

Download 3 Free Strengths Exercises (PDF)

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By filling out your name and email address below.

Personality assessments can be used in the workplace during recruitment to gauge whether someone would be a good fit for a job or organization and to help determine job performance, career progression, and development.

Below, we highlight a few commonly used inventories and tests for such career assessments.

1. The Hogan personality inventory (HPI)

The Hogan personality inventory (Hogan & Hogan, 2002) is a self-report personality assessment created by Robert Hogan and Joyce Hogan in the late 1970s.

It was originally based on the California Personality Inventory (Gough, 1975) and also draws upon the five-factor model of personality. The five-factor model of personality suggests there are five key dimensions of personality: openness to experience , conscientiousness, extraversion, agreeableness, and neuroticism (Digman, 1990).

The Hogan assessment comprises 206 items across seven different scales that measure and predict social behavior and social outcomes rather than traits or qualities , as do other popular personality measures.

These seven scales include:

Sociability
Interpersonal sensitivity
Inquisitiveness
Learning approach

The HPI’s primary use is within organizations to help with recruitment and the development of leaders . It is a robust scale with over 40 years of evidence to support it, and the scale itself takes roughly 15–20 minutes to complete (Hogan Assessments, n.d.).

2. DISC test

The DISC test of personality developed by Merenda and Clarke (1965) is a very popular personality self-assessment used primarily within the corporate world. It is based on the emotional and behavioral DISC theory (Marston, 1928), which measures individuals on four dimensions of behavior:

The self-report comprises 24 questions and takes roughly 10 minutes to complete. While the test is simpler and quicker to complete than other popular tests (e.g., the Myers-Briggs Type Indicator), it has been subject to criticism regarding its psychometric properties.

3. Gallup – CliftonStrengths™ Assessment

Unlike the DISC test, the CliftonStrengths™ assessment , employed by Gallup and based on the work of Marcus Buckingham and Don Clifton (2001), is a questionnaire designed specifically to help individuals identify strengths in the workplace and learn how to use them.

The assessment is a self-report Likert scale comprising 177 questions and takes roughly 30 minutes to complete. Once scored, the assessment provides individuals with 34 strength themes organized into four key domains:

Strategic thinking
Influencing
Relationship building

The scale has a solid theoretical and empirical grounding, making it a popular workplace assessment around the world.

4. NEO-PI-R

The NEO-PI-R (Costa & McCrae, 2008) is a highly popular self-report personality assessment based on Allport and Odbert’s (1936) trait theory of personality.

With good reliability, this scale has amassed a large evidence base, making it an appealing inventory for many. The NEO-PI-R assesses an individual’s strengths, talents, and weaknesses and is often used by employers to identify suitable candidates for job openings.

It uses the big five factors of personality (openness, conscientiousness, extraversion, agreeableness, and neuroticism) and also includes an additional six subcategories within the big five, providing a detailed breakdown of each personality dimension.

The scale itself comprises 240 questions that describe different behaviors and takes roughly 30–40 minutes to complete. Interestingly, this inventory can be administered as a self-report or, alternatively, as an observational report, making it a favored assessment among professionals.

5. Eysenck Personality Questionnaire (EPQ)

The EPQ is a personality assessment developed by personality psychologists Hans Eysenck and Sybil Eysenck (1975).

The scale results from successive revisions and improvements of earlier scales: the Maudsley Personality Inventory (Eysenck 1959) and Eysenck Personality Inventory (Eysenck & Eysenck, 1964).

The aim of the EPQ is to measure the three dimensions of personality as espoused by Eysenck’s psychoticism–extraversion–neuroticism theory of personality The scale itself uses a Likert format and was revised and shortened in 1992 to include 48 items (Eysenck & Eysenck, 1992).

This is a generally useful scale; however, some researchers have found that there are reliability issues with the psychoticism subscale, likely because this was a later addition to the scale.

6. Minnesota Multiphasic Personality Inventory (MMPI)

The MMPI (Hathaway & McKinley, 1943) is one of the most widely used personality inventories in the world and uses a true/false format of questioning.

It was initially designed to assess mental health problems in clinical settings during the 1940s and uses 10 clinical subscales to assess different psychological conditions.

The inventory was revised in the 1980s, resulting in the MMPI-2, which comprised 567 questions, and again in 2020, resulting in the MMPI-3, which comprises a streamlined 338 questions.

While the revised MMPI-3 takes a lengthy 35–50 minutes to complete, it remains popular to this day, particularly in clinical settings, and enables the accurate capture of aspects of psychopathy and mental health disturbance. The test has good reliability but must be administered by a professional.

7. 16 Personality Factor Questionnaire (16PF)

The 16PF (Cattell et al., 1970) is another rating scale inventory used primarily in clinical settings to identify psychiatric disorders by measuring “normal” personality traits.

Cattell identified 16 primary personality traits, with five secondary or global traits underneath that map onto the big five factors of personality.

These include such traits as warmth, reasoning, and emotional stability, to name a few. The most recent version of the questionnaire (the fifth edition) comprises 185 multiple-choice questions that ask about routine behaviors on a 10-point scale and takes roughly 35–50 minutes to complete.

The scale is easy to administer and well validated but must be administered by a professional.

Helpful Tools & Questions

We share two informative videos on this topic and then move on to a short collection of questions that can be used for career development.

1. Myers-Briggs Type Indicator (MBTI)

Many of us have heard of the Myers-Briggs Type Indicator (Myers & McCaulley, 1985), and for good reason. It is one of the most popular and widely used personality assessments out there.

A mother and daughter team developed the MBTI in the 1940s during the Second World War. The MBTI comprises 93 questions that aim to measure an individual on four different dimensions of personality:

Introversion/extraversion
Sensing/ intuition
Thinking/feeling
Judging/perceiving

The test provides individuals with a type of personality out of a possible 16 combinations. Whilst this test is a favorite in workplaces, there are serious criticisms leveled at how the scale was developed and the lack of rigorous evidence to support its use.

For more information on the MBTI, you might enjoy the below videos:

We recommend that if you employ MBTI, be mindful of its scientific deficiencies and support your personality testing further by completing an additional validated scale.

10 Career development questions

Tell me about what inspires you. What gets you out of bed in the morning?
Tell me about your vision for your career/life.
What aspects of your role do you love? What aspects do you struggle with?
Tell me about a time where you used your strengths to achieve a positive outcome.
Are there any healthy habits you want to build into your work life?
Describe your perfect working day. What would it look like?
Tell me about your fears.
What do you value most about your job?
What goals are you currently working toward?
How would your work colleagues describe you?

If you are interested in learning more about personality and personality assessments, the following three books are an excellent place to start.

These books were chosen because they give an excellent overview of what personality is and how it can be measured. They also illuminate some issues with personality assessments. They provide a good grounding for any professional looking to implement personality assessments in the workplace.

1. Mindset: Changing the Way You Think to Fulfil Your Potential – Carol Dweck

Enter Dr. Carol Dweck and several decades of psychological research she has conducted on motivation and personality.

The main thesis of the book is to explore the idea that people can have either a fixed or growth mindset (i.e., beliefs we hold about ourselves and the world around us). Adopting a growth mindset can be a critical determinant of outcomes such as performance and academic success.

Find the book on Amazon .

2. The Personality Brokers: The Strange History of Myers-Briggs and the Birth of Personality Testing – Merve Emre

If you are interested in the dark side of psychology assessments, this is the book for you.

This book explores how the Myers-Briggs Type Indicator was developed and discusses the questionable validity of the scale despite its widespread popularity in the corporate world.

While many assessments can be helpful for self-reflecting on your own behavior, The Personality Brokers delve into the murky side of how psychological concepts can be used for monetary gains, even when evidence is lacking or disputed.

3. Psychological Types – Carl Jung

This is an excellent book from one of history’s most influential psychologists: Carl Jung.

The book focuses most on extraversion and introversion as the two key types of personality and also discusses the limitations of categorizing individuals into “types” of personality.

For those interested in the science of personality and who prefer a slightly heavier, academic read, this book is for you.

Interested in supplementing your professional life by exploring personality types? Here at PositivePsychology.com, we have several highly useful resources.

While strengths finding is a distinct and popular topic within positive psychology, we can draw parallels between strengths research and some conceptualizations of personality.

The Maximizing Strengths Masterclass© is designed to help clients reach their potential by looking at their strengths and what energizes them and helping them delve into their authentic selves. As a six-module coaching package, it includes 19 videos, a practitioner handbook, slide presentations, and much more.

17 Career exercises

Designed to help people use their personality and strengths at work, this collection of 17 work and career coaching exercises is grounded in scientific evidence. The exercises help individuals and clients identify areas for career growth and development. Some of these exercises include:

Achievement Story Chart your successes at work, take time to reflect on your achievements, and identify how to use your strengths for growth.
Job Analysis Through a Strengths Lens Identify your strengths and opportunities to use them when encountering challenges at work.
Job Satisfaction Wheel Complete the job satisfaction wheel, which measures your current levels of happiness at work across seven different dimensions.
What Work Means to You Identify how meaningful your work is to you by assessing your motivational orientation toward work (i.e., whether it is something you are called to and that aligns with your sense of self).

If you’re looking for more science-based ways to help others develop their strengths, this collection contains 17 strength-finding tools for practitioners. Use them to help others better understand and harness their strengths in life-enhancing ways.

World’s Largest Positive Psychology Resource

The Positive Psychology Toolkit© is a groundbreaking practitioner resource containing over 500 science-based exercises , activities, interventions, questionnaires, and assessments created by experts using the latest positive psychology research.

Updated monthly. 100% Science-based.

“The best positive psychology resource out there!” — Emiliya Zhivotovskaya , Flourishing Center CEO

When managing people, it is always helpful to have insight into why they behave the way they do. The same applies to assisting someone on their career path. Having an understanding of the qualities that influence behavioral responses can improve relationships, parenting, how people work, and even goal setting.

But there are some caveats to be mindful of:

When using self-reports, take the scores with a pinch of salt, particularly as we all operate with unconscious biases that can skew results.
Remain open minded about our personality traits; if we are resigned to the idea that they are inherited at birth, fixed, and unchanging, we are unlikely to gain any real discernment into our own evolving identity.
Labels can oftentimes be limiting. Trying to condense the myriad aspects of an individual into a neat “personality” category could backfire.

In the right hands, validated personality assessments are valuable tools for guiding clients on the right career path, ensuring a good job fit and building strong teams.

We hope you enjoyed reading this article. Don’t forget to download our three Strengths Exercises for free .

Allport, G. W., & Odbert, H. S. (1936). Trait-names: A psycho-lexical study. Psychological Monographs , 47 (1), i–171.
Buckingham, M., & Clifton, D. O. (2001). Now, discover your strengths . Simon and Schuster.
Cattell, R. B., Eber, H. W., & Tatsuoka, M. M. (1970). Handbook for the Sixteen Personality Factor Questionnaire . Institute for Personality and Ability Testing.
Cooley, C. H. (1902). Human nature and the social order . Transaction.
Costa, P. T., Jr., & McCrae, R. R. (2008). The Revised NEO Personality Inventory (NEO-PI-R) . In G. J. Boyle, G. Matthews, & D. H. Saklofske (Eds.), The SAGE handbook of personality theory and assessment, Vol. 2. Personality measurement and testing (pp. 179–198). SAGE.
Digman, J. M. (1990). Personality structure: Emergence of the five-factor model. Annual Review of Psychology , 41 (1), 417–440.
Eysenck, H. J. (1959). Manual of the Maudsley Personality Inventory . University of London Press.
Eysenck, H. J., & Eysenck, S. B. G. (1964). Manual of the Eysenck Personality Inventory . University of London Press.
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Assignment Inventory
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Key Assignment Inventory Spreadsheet Template
The Key Assignment Inventory Spreadsheet Template is used to track and manage inventory in a systematic manner. It helps in keeping a record of all the key items, such as equipment, supplies, products, etc., including their quantities, locations, and other relevant information.
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Seven Essential Inventory Management Techniques. 1. ABC Analysis. This technique involves categorizing your inventory items based on their value and importance. The most valuable items are labeled as A, the moderately valuable items as B, and the least valuable items as C. Then, you allocate more resources and attention to the A items, less to ...
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This assignment can be found in Google Docs: Financial Accounting Assignment: Inventory Valuation Methods. To make your own copy to edit: If you want a Google Doc: in the file menu of the open document, click "Make a copy.". This will give you your own Google Doc to work from. If you want a PDF or Word file: in the file menu of the open ...
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Step 1: Choose an Inventory Management Method

Step 4: Receive Orders Accurately

Step 6: Organize Your Stockroom or Warehouse

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Specific Identification

Step 2: Organize Product & Vendor Information

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Step 3: Create & Submit Accurate Purchase Orders

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Step 5: Tag & Label Inventory

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Annual Inventory Counts

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Manual vs Automated Counting