What is inventory management in the Philippines? This is a question most people who have only started running their business ask themselves. Managing your inventory is crucial in the life and growth of your business, particularly for those who are in the retail industry. In that regard, asking yourself and the people around you what inventory management is in the Philippines will probably lead to fruitless results.
The best way to learn about inventory management is by going back to the basics, particularly on how and why it is done by some of the most successful business in the Philippines and all over the world. Inventory management is what sets apart the good business from the great ones. It brings a sense of organization and control that doesn’t come easily.
With that being said, here’s a short crash course about inventory management that will surely turn that spark of interest into a flame that will drive your business into further growth and development!
The Basics of Inventory Management
The first thing that you should know is the answer to this question: What is Inventory Management? In the Philippines, a country that is filled with a large collection of industries, businesses, and companies, inventory management is something that isn’t well-known but is very much apparent behind the scenes.
Inventory management is basically the supervision of non-capitalized assets and stock items; specifically, the of the flow of goods from the manufacturers, to the warehouses and from them to the point of getting sold. One primary function of inventory management is to keep track of each product, both old and new, as it enters and leaves a warehouse or selling points in the Philippines that use a point of sale system.
It can also be seen as the process of efficiently overseeing the constant flow of things into and out of an existing inventory. The said process usually involves controlling the transfer of these units in order to prevent the inventory from becoming too high or dwindling to levels that could put the company operations into the red. The best and most effective inventory management does these all while also seeking to control the costs associated with the inventory, both from the perspective of the total value of the goods included and the tax burden gotten by the cumulative value of the inventory.
With that being said, inventory management is not a simple thing to do. You should be prepared to learn a lot about processes, calculations, and forecasts in order to do this effectively.
Aspects of Inventory
To balance the various tasks of inventory management, you should pay attention to a few specific aspects. The first thing you must be aware of is time. It is important to understand how long it takes for a supplier to process orders and execute deliveries. You need to have a solid grasp of the time it takes for your materials, products, and goods to be transferred into and out of the inventory.
Another thing that you should take note of is to calculate your buffer stock. A buffer stock is essentially additional stocks or goods that are beyond the number that is required to maintain your production levels. These extra products or materials will serve as a safety net when you are not expecting excess demand for products or for when one of your equipment needs a certain part or material for repairs.
You should also understand that keeping track of goods is important. Tracking your inventory from when they are manufactured to when they are delivered to store shelves means you have to take note of every little thing that happens in between. It would be enough for basic inventory management to document the delivery times of raw materials and products. However, keeping tabs on the movement of these materials as they go through the various stages of the operation is also important. This concept pertains to work in progress inventory which is used mostly in the manufacturing industry.
Another notable aspect of inventory management in the Philippines and in other parts of the world is keeping precise records of finished goods that are ready for delivery or shipment. This means you have to post the production of newly completed goods to the inventory totals as well as the deducting the recent shipments of goods to buyers. Accurately maintaining the figures on the finished goods makes it possible to quickly release information to sales personnel as to what is available and ready for shipment or delivery at any time.
Seeing the many aspects of inventory management, you would usually begin to question yourself once again, but more precisely now: What is inventory management in the Philippines? And why is it so important?
What Inventory Management in the Philippines Is and Its Significance
Many companies deal with inventory. A lot of industries revolve around their inventory—particularly manufacturing, food, clothing, and the electronics industries. Basically, those who rely on selling any kind of tangible product will have to implement some form of inventory management.
Once you put this into perspective, you’ll see that a large number of the world’s industries have a reason to perform inventory management. In the Philippines, inventory management is what many companies build their operations upon. Competent businesses will take the initiative to track all of their goods straight from manufacturing with full transparency. Then, you’ll have an idea on how much all of it costs, from the materials used, the processes done, and of course the total cost for the products themselves.
Another reason why inventory management is so important is that it provides so much organization to both the manufacturer and the seller. It mostly comes from the depth of tracking and recordkeeping that comes with the basic processes of inventory management. That being said, having an organized way of tracking your inventory is definitely something you’d want to have for your business!
In the Philippines, inventory management is what brings satisfaction to your customers, albeit indirectly. Whenever a customer places an order for your product, you’d need to have it in stock or get it shipped to them. The customer’s experience with your company will depend on how fast the item would be shipped, how accurate the shipment would be, and how easy it would be for them to get the order. With an effective system for your inventory management, you’ll be able to deliver and even surpass the expectations of your customers!
Inventory Management Techniques
It is already established that inventory management revolves around you requesting, receiving and restocking in the most efficient way possible. The processes that ultimately make inventory management work can be classified into a number of techniques that are well known in the field of inventory management. These techniques are all basic processes that enable you can restock your inventory or send your goods as efficiently as possible. The result is similar in all of these techniques; what makes each one of them different is the way you will calculate or decide whether or not to restock your inventory.
With that being said, here are some of the most used and best-performing inventory management techniques that are applied in a multitude of fields!
Just-in-Time (JIT) Method
The Just-in-Time method works well in reducing the inventory that your business has on hand. Compared with the other techniques, the JIT method is considered to be a risky one because you will purchase inventory only a few days before it is needed for distribution so that the items will arrive “just in time” for selling. Basically, it’s making what is needed, when it’s needed.
This tries to establish a “zero inventory” system by manufacturing goods as they are ordered. It operates on a “pull system” where an order comes and initiates a cascade of responses throughout the entire supply chain, acting as a signal to the staff that they need to order inventory or begin producing the required item.
Using this method can bring about the following benefits:
- You’ll be able to minimize the costs of rent an insurance by reducing your inventory
- You’ll prevent yourself from piling up obsolete, outdated, and spoiled inventory.
- You’ll identify production flaws easier because the process is relatively focused.
In this method, your inventory will be sorted into 3 classifications, depending on how well they sell and what their price will be.
- Category A Items are considered as the best-sellers of your business. These items don’t take up a lot of warehouse space or cost.
- Category B Items are items in the middle which are still regularly sold but may cost more than the prior category to hold in warehouses.
- Category C Items are those that make up the majority of your inventory costs while also contributing fairly less to your profits.
- The ABC Analysis Method allows you to reduce the cost of working capital because it identifies which items you should reorder a lot more frequently and which ones don’t need to be restocked as much.
Safety Stock Inventory
This technique revolves around having a small surplus of inventory kept on hand to guard against variability in market demand and lead times. This technique is used mostly as a way to smoothen out operations. Using the Safety Stock Inventory technique will ensure you get protection against unexpected spikes in demand, prevention of stocking out, compensation for inaccurate market forecasts, and a buffer for longer lead times.
This technique is mainly used to prepare for problems that have the chance to seriously harm your business.
Perpetual Inventory Management
A perpetual inventory management system is something similar to a continuous inventory system. This inventory management system tracks all the sold and stocked inventory in real-time—updating the accounting when a sale is made, merchandise is used, or if new stock arrives. All of these data can be accessed through a central operating system by anyone that has the authority to do so.
This inventory management technique completely removes the need and costs for holding inventory! When you have this kind of agreement, you can directly transfer customer orders and shipment details to your manufacturer or wholesaler, and let them ship the goods directly to your customers.
You won’t have any need for goods to be in stock in your location, and you’ll get to save on inventory cost!
Calculating Inventory Value
Another concept that you need to take note of it Inventory Value. Basically, it is the total cost of your inventory that is calculated at the end of every accounting period. You need to understand this in order to fully grasp what Inventory management is. In the Philippines, the rule of thumb is that your balance sheet should show the value of the items to your business in particular.
Different industries see their inventory value from their own perspective. Some would put the value on what they paid for the item. Others would need a more complicated equation. Whatever the case may be, you’ll need to know the value of your inventory that it will definitely be in your balance sheets. It will determine your ending inventory, which will also determine the cost of goods sold and your overall profit.
As a brief reminder, here is the formula for calculating the cost of goods sold:
Beginning inventory + Inventory purchases – Ending inventory = Cost of goods sold
In order for you to account for your inventory value, you can identify specific items in your inventory and add up the purchase cost of each item, but is highly impractical, especially for businesses that have a large number of products. The most efficient way to get your inventory value is through the use of FIFO, LIFO or Weighted Average Valuation Methods.
Also known as the First In, First Out method, it assumes that you use up your oldest items of inventory first. It’s useful as a valuation method when inventory consists of many identical items. With this method, you’ll figure out your costs of sales by referencing them to the items that you purchased the earliest. The inventory Is valued by reference to the newest items which are the ones that are recently bought.
Commonly known as the Last In, First Out method, it is the opposite of FIFO. It determines the cost of sales by taking into account the cost of your newest items. Your inventory is comprised of the cost of the items you purchased at the earliest.
WAC: Weighted Average Cost
The average cost method makes use of the average cost of the items purchased during the accounting period and assigns it to all the unsold inventory and goods sold. It is useful in smoothing out price fluctuations but it can only be used internally.
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