You don’t pay much attention to inventory until you realize you are almost out of something or you have too much of it that you haven’t used in months. The best way for a beginner to start with the concept of inventory is not to try to understand the whole inventory system but start with actually observing a small segment of the inventory on a daily basis.
Select a group of items that you consume on a regular basis such as reams of paper, soap for the bathroom, or masking tape for your office or shop. For two weeks, monitor the items manually without using any tools except a notebook and pencil. Each day, at the same time (e.g., at the end of the workday), count the remaining inventory, determine how much you used since the previous day, and note any incoming shipments you may have received. After a week or so, you will start to see a trend. For example, you might determine that you use more of an item on Tuesdays or that you receive shipments on alternate Fridays.
A lot of newbies will order more inventory when they perceive that they are running out without any regard to their average daily usage. This results in ordering more inventory more frequently and at a premium price or having too much inventory on hand that is not being used and tying up working capital and storage space. When you see in your notebook that you have consumed twice as much of an item as you did in the previous week and you ordered more inventory too soon, you realize that you made an error. To adjust, calculate your average daily usage based on your notebook entries from the first week and use that to determine when you need to order more inventory. Perhaps you want to keep a week’s worth of inventory on hand. Simply multiply your average daily usage by seven and use that as your reorder point rather than trying to decide if you have enough inventory on hand.
This simple exercise helps you make better decisions. Do the exercise the same way each day. Only take ten to fifteen minutes to perform the exercise and make your notebook entries. In your notebook, include the date, description of the item, the quantity on hand, the quantity used that day, and any special notes (e.g., why you used more of the item that day). After a week, take a few minutes to review your notebook to see if there is a trend developing. Are you using the same amount of the item each day or are there wild swings in usage? Perhaps you use more of the item at the end of the month because of some other activity you are performing or perhaps you use more of the item during certain times of the year.
The more you understand the trends, the better prepared you will be to manage a full inventory system. If you find the exercise becoming too routine and you don’t feel motivated to continue it, change the exercise slightly. For the second week, add another column in your notebook. Calculate how many days you have left before you need to reorder the item based on the average daily usage from the previous week. If you determine that you need to order the item when you have five days left of inventory, note in your notebook when that condition is met.
Compare that to the actual usage to see if your average daily usage calculation is close or if you need to recalculate it based on more recent usage. This exercise will help you understand the concept of reordering inventory. Take a look at your notebook after ten days and see how much you have learned. Not only have you captured a lot of data, but you also are starting to ask questions about why you are consuming certain items and how you can better manage them. When you start to apply these concepts to a broader range of inventory, you will be better equipped to avoid some of the pitfalls that you experienced in your exercise.