Inventory control is one of the main headaches for companies. How to deal with it?
Inaccurate stock counts have two immediate translations: loss of revenue and a sometimes irreparable gap in customer relations. However, in the face of the challenge, systems are emerging whose methodology is capable of adapting to new market requirements.
We are talking about the cyclical inventory, a system that allows keeping the accounts up to date and prevents operations from being directly affected by possible errors. This tool guarantees the fulfilment of orders and optimal customer service. In addition, it avoids the costs of maintaining inventory that is no longer needed and will probably not be sold.
Avoiding the domino effect
Keeping an accurate count of goods is key for all companies. A careful inventory is essential for sales forecasting and, in particular, to avoid the dreaded stock-outs.
In 2021, compared to pre-pandemic levels, stock-outs increased by 250%. During this period, the figures have led to poor inventory management being one of the main drivers of customer frustration.
At the same time, poor inventory also affects warehouse management, returns and logistics in general.
It affects almost every aspect of the business. As a result, any failure in its management can generate a domino effect over time.
Why cycle inventories?
Also known as cycle counting is a process that replaces annual inventories with smaller inventories taken on an ongoing basis throughout the year. This system is applied during standard business operations, thus alleviating the need for an annual closing.
A revolving inventory allows for periodic accounting of goods and products, which is especially useful for small and medium-sized enterprises by reducing the risk of stock-outs.
It is worth recalling that, since the pandemic began, this has been a major concern for SMEs - 40% of small businesses have experienced delays in their supply chains.
However, despite guaranteeing greater knowledge of the references stored, the real value of this system lies in facilitating the detection of errors and mismatches between the WMS and ERP with the physical warehouse.
1 system, 3 applications
When talking about rolling inventory, it should be borne in mind that there is no single way to implement it. Its versatility is also reflected in the implementation methodology, which can be classified into three broad categories.
Random sampling
If your company has items that are homogeneous or similar in characteristics, by weight, size, value or turnover, this first method is ideal. Through this approach, a random number of items are selected to be inventoried during each cycle.
The benefit, in this case, is that it minimises disruption in the warehouse. This means that it can be done even during business hours.
Control groups
The second method assumes that, based on the establishment of control groups, data are extracted that can then be extrapolated to larger sets.
It allows companies to count the same items over and over again for a short period of time. This is used to detect errors in inventory techniques which, once corrected and implemented, can be applied to larger groups of goods.
ABC System
Another way to manage inventory with the cycle-based methodology is through the ABC system. It operates on the 80/20 rule, commonly known as the Pareto principle.
The belief of this principle is that 80% of the results come from 20% of the products. Based on this, products are divided into A, B and C categories, in order to concentrate efforts on those goods that generate the most profit.
Placing the articles in categories is essential for this method to work. To do this, the line to follow is as follows:
- Group A: high value items (70%) although fewer in number (10%)
- Group B: Moderate in value (20%) and number (20%)
- Group C: Low value (10%) but higher in number (70%)
When all items are categorised, you can start to apply the rotating inventory. In order to maximise your profits, the items in group A, i.e. those that generate the most value, are the ones that should be counted most frequently.
Four added values compared to the annual inventory
1. Improved flow. Batch counting eliminates the need to shut down operations to manage stock. The process becomes integrated into the regular workflow and is completed by staff throughout the year, reducing interruptions.
2. Increased capacity to fill orders. Because this method allows smaller batches to be counted several times a year, inventory variations in the ordering system are reduced. Thus, there are fewer items on backorder. By following this dynamic, for example, five inventories per year of the fastest moving items can be scheduled to meet demand.
3. Accuracy and timeliness. Inaccurate inventories sometimes result in over-ordering to ensure that products are there when they are needed. Safety stocks, a priori, are not a problem. But in excess, these practices increase holding costs and, potentially, the amount of obsolete stock on hand.
4. Reduced failures and theft. Frequent counting allows discrepancies to be discovered and corrected more quickly. This allows theft or errors to be detected and acted upon.
In conclusion, the benefits of this system compared to others of its kind make it an ideal candidate to successfully overcome one of the recurring problems in logistics: the control of goods.
