How do I Choose the Best Inventory Process?

An inventory process represents the specific steps or procedures a company uses when moving inventor products through their business operations. Different types of inventory exist in the business environment. Manufacturing and production companies commonly deal with raw materials, work-in-process, and finished goods. Warehouses, distributors and retailers primarily deal in final products ready for sale to individuals and businesses. Although these two groups represent businesses at different ends of the supply chain, inventory processes can be similar between the two groups.

A broad overview of the inventory process is the system a company uses to track inventory on their accounting ledger. Periodic and perpetual inventory systems are the most common found in businesses. Periodic inventory systems do not update a company’s general ledger for each specific movement of inventory. Companies typically start with an opening inventory balance and update the information on a quarterly or annual basis. Some companies may prefer to update their periodic inventory systems on a monthly basis. Perpetual inventory systems update the company’s general ledger after each purchase, sale or adjustment to the company’s inventory account. Although perpetual inventory systems require more work, they do provide a more accurate system for governing individual inventory processes.

Companies should select each individual inventory process according to the type of items in the company. Companies who produce or sell homogeneous products or items in large batches may prefer a simpler inventory process. Companies often receive, store, label, and sell these inventory products without inspecting each individual item. Sampling is a common quality inspection process for homogeneous or batch goods. Companies will assess the inventory’s quality by selecting a random sample to inspect the inventory.

Inventories made up of individual goods or product lines usually require a more detailed inventory process. Companies will spend copious amounts of time managing, labeling, and pricing these goods since the cost of each product is usually different. Business owners and managers often track these items individually to understand which items need replenishment in the company. Businesses with vast inventories of individual products commonly use the perpetual inventory system. This allows them to keep detailed information on their accounting ledger to accurately represent financial information relating to inventory.

Business owners and managers must also consider the amount of work needed to manage inventory. Smaller businesses often struggle to maintain the inventory process because they have fewer employees to complete functions and provide the seller with accurate inventory information. Small businesses should also consider outsourcing inventory processes that may complicate their business operations. Business owners can also avoid the specific details of managing individual inventory processes.