Practice Management Small Business

Today’s Cross-Functional Inventory Environment

Written by Tim Grant

Today, we are witnessing a shift in how businesses manage inventory. While departments used to focus solely on their own responsibilities, now it takes a cross-functional team effort to coordinate the movement of goods. Previously, only the purchasing agent spoke with suppliers about product requirements and specifications. Now, engineers reach out directly. The accounting departments were only concerned about the financials of the company, but are now involved in the purchasing and operational decisions. The shipping and receiving function now needs to work with the rest of the warehouse crew and production to get raw materials in quickly to the right location — and products out to customers — with the coordination of shippers.

These changes are a product of the larger transformation in business environments, or the way in which companies manage their resources. This has changed profoundly over the last 30 years. What used to be a centralized, hierarchical structure has evolved (some would say, “devolved”) into teams with shared responsibilities and collective accomplishments. Businesses worldwide stress the needs and benefits of collaboration and “team-building.” The results can lead to better outcomes for both the companies and the individuals involved.

Changing Roles in Inventory

Here are some examples of how roles have changed in regard to inventory in distribution and manufacturing processes:

Shipping/Receiving

The lowly receiving clerk function of many years ago has turned into a scanner-packing data ninja impacting the supply chain for production and the customer service area of sales. Shippers’ trucks now run on tight schedules, so receivers need to unload, scan, quality-control and “put away” to designated locations quickly to meet production and customer demands. Accuracy is important because an error can mean the holdup of a production line, or a delivery to a customer.

Impacts:

  • Production: In an assembly or batch production environment, knowing when raw materials have been received may be the trigger for the start of the production run.
  • Operations: Effective warehouse management depends on the raw or finished goods material being in the right location (warehouse, bin) as designated in the software. Searching for items that are on hand adds unproductive labor cost to operational overhead.
  • Sales: The sales department relies on the finished products being in the hands of their customers by expected dates. Delays or confusion in the shipping area leads to additional labor cost and customer dissatisfaction. Coordinating with carriers to ensure timely delivery involves increased technology and communication.

Procurement/Purchasing

These functions are sometimes separate, sometimes performed by the same person, but the collective role cannot be underestimated for the outcome of the business. Procurement is about finding the right suppliers and sources of product or raw material. Purchasing is setting in motion the delivery of those raw materials (in manufacturing) or complete goods to the right distribution center at the right time. This involves timing of deliveries, effective communication, and the financial resources to make it all happen.

Impacts:

  • Production: Timely raw good deliveries are critical for batch runs.
  • Accounting: Funds must be available and coordinated to meet supplier demands.
  • Operations: Having too much or not enough inventory affects carrying costs.
  • Sales: Inadequate purchasing affects customer fulfillment and satisfaction.

Operations/Warehouse Management

metamorphosis in the sector of businesses managing inventory

Managing a warehouse is like being the host at a party.  You need to make sure you have everything on hand to satisfy everyone, while people come and go constantly. The person who does the “put away” of the goods received will probably not be the person who does the “picking” for the customer orders, so a well-organized warehouse is a must. Operations will be concerned about rotating stock in cases of lot and serial number control, managing access to shelves and bins, responding to production or shipping staging area requests, and the safety of workers.

Impacts:

  • Shipping/Receiving: This department coordinates for placement and space limitations of arriving goods. Also, once pickers have assembled customer orders, they prepare the orders for outgoing shipment.
  • Production: Manufacturers need the raw materials queued up in staging area in preparation for batch runs. Operations usually coordinates picking of these items and placement for production.
  • Sales: Ensuring timely disbursement of products, as well as the correct packaging and appearance of the product, ultimately impacts customer satisfaction.

Production

At the heart of a manufacturing company is where the finished goods are produced. This may involve a job shop, batch, assembly, or continuous flow processes. People here rely heavily on the procurement and purchasing agents to have the raw materials in stock, and the operations crew to stage the materials for the production line. Plant managers are under the gun to coordinate materials and available labor to manufacture the consumer or business-to-business (B2B) goods necessary.

Impacts:

  • Sales: Customer demand drives the production facility. Breakdowns in equipment or shortages of labor delay deliveries, and ultimately customer satisfaction. The relationship between sales and production should always be close, yet leave room for adjustment. Sales wants to make customers happy, but production must balance a lot of resources to meet demand.
  • Shipping/Receiving: Production stays in touch with the receiving personnel as items arrive, and when “special” orders are needed. They must also work together when custom project orders are coming to completion for delivery to the customer.
  • Accounting: Any changes to production schedules or materials required can impact the financials. Plant or material managers must voice needed changes to the accounting personnel.

Sales

At the forefront of every business owner’s mind floats the constant obsession to meet or expand sales to customers. And while the sales function does drive the business, it takes methodical and honest planning to achieve sales goals. This involves looking at current demand and anticipating future orders based on expected demand. Sales people must then translate expectations into specified product requirements in the future. If the budget is set too low, customers are left without products. Plan too high and the warehouse bulges with too much stock — and laborers mill around waiting for work.

Impacts:

  • Production: Material and labor schedules are based on expected demand. Some of the most significant fixed costs are tied up with production, so using the resources at their peak performance adds to the company’s value. Idle time drives it in the opposite direction.
  • Operations/Warehouse: Similar to the production environment, the warehouse expenses and resources will be utilized based on the expectations from sales. Too much stock or not enough adds to carrying costs, or expediting costs related to shortages of inventory.

Accounting

Authorizing funds for inventory purchases is this department’s primary role regarding inventory. Inventory is usually the largest asset class on a distribution company’s Balance Sheet. Purchasing determines the needs through forecasting and requisitions, but accounting must pay the bills when they come due. Being a part of the financial planning for this aspect of the material management allows finance to balance the needs of production with what is possible for the company. Unrestrained purchases can put a financial bind on the company’s ability to get funding. Two functions the accounting department serves are:

  1. Comparing shipping documents for items received against purchase orders and supplier invoices; and
  2. Overseeing successful completion of the (usually) end-of-year physical inventory count. Accounting is also responsible for tracking the outstanding accounts payables and receivables around inventory.

Impacts:

  • Operations approves the budget for materials requested for a period.
  • Shipping/Receiving receives shipping documents to compare against bills.
  • Purchasing approves funding for purchase requisitions.

Management — Sales & Operations Planning

Cross-Functional Inventory Environment

All members of leadership need to be aware of the operational and financial impacts of inventory control. This usually takes the form of reports, including Sales by Item, Inventory Turns, and Margin reports. It also involves reviewing the overall layout of the warehouse and how the different functional areas are working together as a team.

How do you get the different areas to work together? A long utilized tool in management for controlling the inventory levels is the “Sales & Operations Planning” meeting, or S&OP. The primary members of the meeting are:

  • Production and/or warehouse manager, in the case of a distribution company;
  • Sales department; and
  • A member of accounting.

Staff from these departments start compiling data for their area weeks in advance. Sales determines the projected sales volume, production analyses their current capabilities in terms of manpower and equipment, and finance determines funds availability.

At the S&OP meeting, the sales manager usually leads with the expected or projected sales for the qualifying period, usually the next month or quarter. Production will attempt to match capabilities with the sales projection, and accounting will advise if funds are available to support the operation for that period.

Once the goals have been agreed upon, the company executives sign off on the plan, and actions are put in place in each department to meet the stated goals. The result of this collaboration is that each department knows what to expect for the short-term future, and can plan for the materials and people needed to accomplish it. It also holds everyone accountable to meet their stated goals, and not waffle on unspecific promises.

Inventory management is a process, not a task. While many people have a role in the supply chain, they must all work in unison for the successful completion of the process.  Management needs to understand this in order to get total control of the inventory/supply chain process and to make it work within their company.

About the author

Tim Grant

Tim Grant, MBA, is the President of Business Solution Providers in San Francisco, California. BSP specializes in third-party inventory and manufacturing software products that integrate with QuickBooks. The company provides Needs Assessments to businesses looking for an inventory or manufacturing software solution. Once a choice is made, the BSP team can provide setup, training and implementation services to sync the company’s goals with the capabilities of software.

Tim has practiced public and private accounting for over twenty years in the service and manufacturing industries. He is an advanced-certified QuickBooks Pro Advisor, and a member of the Institute of Management Accountants, the National Advisor Network and The Sleeter Group.

Leave a Comment