Inventory management

Summary

This script explores the importance of inventory management across various industries, emphasizing the need for balance between having sufficient stock and minimizing costs. It highlights the role of trust among departments like sourcing, manufacturing, and warehousing in achieving inventory management excellence, and underscores the impact of inventory on financial statements.

Takeaways

• 📦 **Inventory Management Definition**: It's about having the right inventory, at the right time, in the right place, with a focus on recordkeeping and the flow of goods.
• 🔄 **Involvement Across Departments**: All departments, including sourcing, manufacturing, warehousing, marketing, sales, finance, accounting, and legal, have a stake in inventory management.
• 🛒 **Bulk Buying Strategy**: The sourcing department often prefers to buy in bulk to get volume discounts, affecting inventory levels.
• 🏭 **Efficiency in Manufacturing**: Manufacturing prefers long production runs for efficiency and cost-effectiveness, which can lead to higher inventory.
• 📏 **Warehouse Space Constraints**: Warehousing is concerned about space and the physical presence of inventory, highlighting the challenge of storage capacity.
• 💰 **Financial Impact**: Inventory management is crucial for cash flow management and avoiding obsolescence, which can lead to financial losses.
• 📋 **Legal Considerations**: Contracts may specify delivery requirements and penalties, emphasizing the importance of inventory availability for legal compliance.
• 🗳️ **Inventory Decision-Making**: There's often a conflict between departments favoring more inventory for various reasons and those advocating for less to save on costs.
• 🔢 **Financial Dominance**: The finance department's preference for lower inventory often prevails due to its significant impact on financial decisions and outcomes.
• 💼 **Financial Statements Connection**: Inventory appears on the balance sheet as an asset and affects the income statement and cash flow statement, influencing company financials.
• 🔗 **Trust as the Foundation**: Trust among departments is essential for inventory management excellence, allowing for optimized inventory levels and reduced costs.
• 🛠️ **Investment in Systems and Processes**: To achieve excellence in inventory management, companies must invest in systems, processes, data, and human actions, which typically yield significant returns.
• 🌐 **Learning Through Observation**: Gaining practical insights by observing inventory management in action at companies with complex supply chains can provide valuable learning experiences.

Q & A

What is the fundamental concept of inventory management?

The fundamental concept of inventory management is to have the right inventory, at the right time, in the right place, which includes both recordkeeping and the flow of goods from suppliers to customers.

Why is inventory management important for different departments within a company?

Inventory management is important for different departments because it impacts sourcing, manufacturing, warehousing, marketing, sales, finance, accounting, and legal aspects of a company, each with its own perspective and stakes in maintaining optimal inventory levels.

What does the sourcing department typically propose regarding inventory?

The sourcing department typically proposes buying in bulk from suppliers to get maximum volume discounts, which can affect inventory levels.

What is the manufacturing department's view on production runs?

The manufacturing department prefers to make big production runs of the same product before changing over to produce another product for maximum efficiency and lowest cost per unit.

Why might warehousing be resistant to holding more inventory?

Warehousing might be resistant to holding more inventory due to space limitations, as warehouses can fill up quickly, similar to storage space in a house.

How does marketing and sales view inventory in relation to customer orders?

Marketing and sales view inventory as essential to have plenty available when a customer order comes in to meet demand and ensure customer satisfaction.

What are the financial and accounting department's main priorities in inventory management?

The financial and accounting department's main priorities in inventory management are to manage cash flow and avoid inventory obsolescence, which can impact the company's financial health.

Why would the legal department have an opinion on inventory management?

The legal department may have an opinion on inventory management due to contractual obligations, such as the need to deliver critical spare parts within a specified time frame to avoid financial penalties.

How does inventory show up in a company's financial statements?

Inventory shows up as one of the assets on a company's balance sheet. It affects the balance between assets and liabilities, and can influence cash flow and profitability.

What is the role of trust in achieving inventory management excellence?

Trust is the basis for inventory management excellence as it connects all departments and ensures that commitments are delivered upon, allowing for optimized inventory levels and efficient operations.

Why is it important for a company to invest in systems and processes for inventory management?

Investing in systems and processes for inventory management is important because it helps to build trust, reduce errors, optimize operations, and ultimately leads to significant payoffs in terms of cost savings and operational efficiency.

Outlines

00:00

📦 The Essence of Inventory Management

This paragraph delves into the fundamental aspects of inventory management, which is crucial for various businesses from manufacturing to retail. It emphasizes the goal of having the right amount of inventory at the right place and time, and touches upon the dual nature of inventory management involving record-keeping and the flow of goods. The paragraph also highlights the perspectives of different company departments on inventory, from sourcing and manufacturing to warehousing, marketing, sales, finance, accounting, and legal, each with their unique priorities and concerns. The narrative humorously explores the 'vote' on inventory levels, showcasing the tension between the desire for more inventory for various strategic reasons and the financial department's preference for less to manage cash flow and avoid obsolescence. It concludes with the significance of financial goals in shaping a company's operational behavior, particularly in relation to inventory.

05:02

💰 Financial Implications and Trust in Inventory Management

The second paragraph focuses on the financial implications of inventory management, explaining how inventory levels impact a company's balance sheet, income statement, and cash flow statement. It clarifies that an increase in inventory can lead to a decrease in cash flow and vice versa, and how overstocking can lead to issues like obsolescence and low-margin sales. The paragraph then transitions into the concept of trust as the foundation for excellent inventory management, providing examples of how trust between different departments, such as manufacturing and sourcing, or marketing/sales and manufacturing, can optimize inventory levels by reducing the need for safety stock. It also discusses the importance of system accuracy in maintaining trust among finance, accounting, marketing, sales, and warehousing for both financial reconciliation and customer satisfaction. The summary concludes by emphasizing that trust is earned through consistent delivery on commitments and that investments in systems and processes are key to achieving inventory management excellence, suggesting that observing inventory management in action in a complex supply chain environment can provide valuable insights.

Keywords

💡Inventory Management

Inventory management is the process of overseeing and controlling the flow of goods from suppliers to manufacturers, warehouses, points of sale, and ultimately to customers. It is crucial in ensuring that a company has the right amount of inventory at the right time and place. In the video, it is highlighted as an activity that involves various departments and is central to the company's operations, affecting financial goals and operational efficiency.

💡Right Inventory

The term 'right inventory' refers to having the correct types and quantities of goods available when needed. This concept is fundamental to inventory management, as it balances the need for sufficient stock to meet demand without overstocking, which can lead to obsolescence and financial losses. The video emphasizes the importance of aligning inventory levels with customer orders and production needs.

💡Recordkeeping

Recordkeeping in the context of inventory management involves maintaining accurate records of the inventory levels and transactions. This is essential for verifying that the physical inventory matches what the system reports, which helps in preventing discrepancies and ensuring operational efficiency. The video script mentions the importance of recordkeeping in maintaining trust and accuracy in inventory data.

💡Flow of Goods

The flow of goods describes the movement of products from their point of origin (suppliers) through various stages of production and distribution, ultimately reaching the end customers. Efficient management of this flow is critical for reducing costs and improving customer satisfaction. The video discusses how inventory management impacts the flow of goods and the need for coordination between different departments.

💡Bulk Purchasing

Bulk purchasing is the practice of buying large quantities of goods at once, often to take advantage of volume discounts. While it can reduce per-unit costs, it also increases the risk of overstocking and inventory obsolescence. The video script illustrates how sourcing departments might advocate for bulk purchasing, but this needs to be balanced with other considerations like warehouse space and inventory turnover.

💡Inventory Obsolescence

Inventory obsolescence refers to the situation where inventory becomes outdated, no longer in demand, or unusable, leading to potential financial losses. This concept is important in inventory management as it highlights the risks associated with holding too much inventory. The video mentions how finance and accounting departments prioritize avoiding obsolescence as a key aspect of inventory management.

💡Cash Flow Management

Cash flow management involves monitoring and controlling the inflow and outflow of cash in a business. Inventory levels can significantly impact cash flow, as holding more inventory can tie up capital that could otherwise be used for other purposes. The video emphasizes the financial implications of inventory management, particularly how it affects cash flow and the need for careful cash flow management.

💡Legal Considerations

Legal considerations in inventory management pertain to contractual obligations that may require a company to maintain certain inventory levels or deliver specific items within a tight timeframe. The video script highlights an example where a legal contract stipulates the need for rapid delivery of spare parts, underscoring the importance of inventory management in fulfilling legal obligations and avoiding penalties.

💡Just-in-Time (JIT)

Just-in-time (JIT) is a production strategy that aims to minimize inventory by receiving raw materials and components only as they are needed for production. This approach can reduce storage costs and improve efficiency but requires high levels of coordination and trust between suppliers and manufacturers. The video discusses how trust in sourcing and manufacturing can enable JIT practices and optimize inventory management.

💡Safety Stock

Safety stock is extra inventory held to buffer against potential supply chain disruptions or fluctuations in demand. It is used to ensure that a company can meet customer orders even when there are unexpected delays or changes in demand. The video script mentions that a lack of trust in supply chain reliability might lead to an incentive to build safety stock, which can increase inventory costs.

💡Trust

Trust is a critical element in inventory management, as it facilitates cooperation and coordination between different departments and stakeholders. High trust levels can enable more efficient inventory practices, such as JIT, by reducing the need for safety stocks. The video emphasizes that trust is earned through reliable performance and is essential for achieving inventory management excellence.

Highlights

Inventory management is a crucial process for various industries including manufacturing, retail, and logistics.

The definition of inventory management involves having the right inventory at the right time and place.

Inventory management includes recordkeeping and the flow of goods from suppliers to customers.

Different departments within a company have varying interests in inventory levels, such as sourcing, manufacturing, and warehousing.

Marketing and sales prefer to have plenty of inventory to meet customer demand.

Finance and accounting prioritize managing cash flow and avoiding inventory obsolescence.

Legal considerations can influence inventory management, such as contractual obligations for spare parts delivery.

The balance between having more or less inventory is often influenced by financial goals.

Inventory is considered an asset on a company's balance sheet, impacting financial decisions.

Inventory levels can affect the income statement indirectly through cost of goods sold and revenue.

Cash flow is directly impacted by inventory levels, with higher inventory leading to lower cash flow.

Trust among departments is essential for inventory management excellence.

Just-in-time delivery and predictable lead times can reduce raw material inventory levels.

Trust between marketing/sales and manufacturing can optimize finished goods inventory levels.

Accounting and warehousing need to trust inventory records for accurate financial reporting and customer service.

Building trust involves delivering on commitments and investing in systems and processes.

Investments in inventory management systems and processes often yield significant returns.

Visiting companies with complex supply chains can provide insights into effective inventory management.

Transcripts

Inventory management.

What is inventory management, and what is the basis for inventory management excellence?

Inventory management…. Everybody does it!

Well, almost everybody!

Manufacturing companies do it. Retailers do it.

Webshops do it. Restaurants do it.

Fast moving customer goods companies do it.

And freight/logistics companies do it.

What is the definition of inventory management?

Having the right inventory, at the right time, in the right place.

There is an element of recordkeeping in here:

is what our system says is there, really physically there?

The other element is the flow of goods: from suppliers to manufacturers to warehouses to

points of sale to customers.

Everyone in the company has a stake in inventory management.

If you ask the sourcing department, they will probably propose to buy in bulk from suppliers

to get maximum volume discounts.

If you ask manufacturing, they will want to make big production runs of the same product,

before changing over to produce another product,

for maximum efficiency, and lowest cost per unit.

If you ask warehousing, they will tell you they don’t have space for all this stuff.

After all, a warehouse has similar properties as storage space in your house:

somehow it magically fills up!

Sourcing, manufacturing and warehousing might be the departments physically handling the

inventory, but there are others that have their own opinion about inventory management:

marketing and sales, finance and accounting, and legal.

What? Even the legal department has an opinion about inventory management?

You bet!

Let me walk you through their viewpoints.

Marketing and sales will argue that we need to have plenty of inventory available when

the order from the customer comes in.

Finance and accounting will say that the biggest priorities for inventory management are to

manage cash flow, and avoid inventory obsolescence.

Obsolescence is a fancy word for inventory that is outdated and no longer used, and may

have to be written off as a loss.

And lastly, legal has gone through the fine print of the contract with a customer, and

found that there is a paragraph specifying that in case of a factory outage on the side

of the customer, certain critical spare parts need to be delivered to them within one day.

If these parts are not delivered on time, there is a severe financial penalty which

the company would obviously like to avoid.

To decide on what is the right inventory, at the right time, in the right place, let’s

ask a question to each department: would you like more or less inventory?

Sourcing, manufacturing, marketing and sales, and legal, each having their own reasons,

say “More”.

Only warehousing, and finance and accounting, say “Less”.

I hereby proclaim that the outcome of the vote is 4 in favor of “More”, and 2 in

favor of “Less”.

But wait! We have someone that might change their mind.

Warehousing will vote “More” as well if they get to build a bigger warehouse!

I hereby proclaim that the outcome of the vote is 5 in favor of “More”, and 1 in

favor of “Less”.

But wait! It turns out that the finance vote

has more weight than that of anybody else, 10X as a

matter of fact, tilting the balance in favor of less inventory by 10 to 5 votes!

Why is the viewpoint of finance, to keep inventory as low as possible, so dominant in most companies?

Financial goals and results often drive a lot of the operational behavior in a company,

so let’s see how inventory shows up in the financial statements.

Here it is!

On the balance sheet, the overview of what a company owns and what a company owes.

Inventory is one of the assets on a company’s balance sheet.

The balance sheet always balances, so if you want inventory to increase, then either some

other category on the same side of the balance sheet (like cash, for example) has to decrease,

or one or more items on the liabilities and equity side of the balance sheet has to increase.

The options to choose from are clear and logical: do we want the excess inventory to eat into

our cash balance, do we negotiate longer payment terms with our suppliers to increase accounts

payable, or do we raise capital through borrowings or equity?

Inventory also affects the income statement, or profit and loss statement.

But wait, the word inventory is not mentioned here, is it?

Well…. Revenue is the number of units sold times the selling price, and cost of goods sold

is the number of units sold times the cost per unit, so you can say that the sale of

inventory to customers affects the income statement.

Here’s where finance agrees with marketing and sales: if you are out of stock while there

is customer demand, you can’t earn revenue and margin on the products you weren’t able

to supply, so you are limiting Gross Profit growth!

Here’s where finance agrees with warehousing: if you are overstocked, you might run into

inventory obsolescence, which hits the Cost Of Goods Sold line.

Or you might pursue low-margin clearance sales where the price per unit is hardly any higher

than the cost per unit.

Inventory also affects the cash flow statement,

right here in the line Cash From Operating Activities or CFOA.

The logic is very simple.

If inventory goes up, then CFOA goes down.

If inventory goes down, then CFOA goes up.

Basically the same story that we saw on the balance sheet: inventory up, cash down.

Inventory down, cash up.

What is the basis for inventory management excellence?

There is one word that needs to connect all departments: trust.

Let’s zoom into three specific examples.

If manufacturing trusts sourcing to deliver raw materials just-in-time, with predictable

lead-times, then raw material inventory levels can be low,

and inventory management can be optimized.

If manufacturing does not trust sourcing, then there is an incentive to build raw material

safety stock.

Same thing with trust between marketing and sales on one side,

and manufacturing on the other side.

If marketing and sales trust manufacturing to produce on time and on spec, then finished

goods inventory levels can be low, and inventory management can be optimized.

If marketing and sales does not trust manufacturing,

then there is an incentive to build finished goods safety stock.

A different type of trust is built between finance and accounting, as well as marketing

and sales, on one side, and warehousing on the other side.

The main question around trust in this case:

is what our system says is there, really physically there?

Both for account reconciliation purposes in finance, as well as product availability for

the customer!

Trust is the basis for inventory management excellence.

How is that trust built, and what is the payoff?

Trust is earned by delivering on commitments.

If trust is high, inventory levels can be low.

To build trust, investments need to be made!

To achieve inventory management excellence,

a company MUST invest in systems as well as processes.

Data and information, as well as the right human actions.

In most cases, those investments pay off big time!

You can learn a lot from reading books or watching videos on inventory management, but

the only way to truly make it come alive is to see inventory management in action.

Go visit a company with a complex supply chain, that is well known for its inventory management:

an e-commerce retailer, or a car manufacturer.

You’ll be amazed by what you’ll see and learn!