44 Inventory Tracking

These goods are often kept in a warehouse, and may include:

• Raw materials (used to make things. An example might be a tote of canola seed or flax.)
• Work in progress (for example, large vats of oil that have been extracted from the seed, but are waiting to be filtered, or packaged for sale.)
• Finished goods (packaged products for sale.)
• Components (parts used for maintenance and repair)
• Packaging materials (bags and labels used to package the final product.)

Managing inventory in the warehouse is essential to the success of the business for the following reasons:

Leftover Materials

If there are too many items ordered for a production run, these items may become unusable and need to be disposed of.  This was inventory that was purchased, and not used, so it adds to the total cost of producing a product.  Ultimately, the company makes less money, or loses money, on the sale of that product.

Waiting

If there aren’t enough materials to produce an item, the entire production line may need to stop.  This is a waste of money because the company is paying salaries, electricity, and rent for doing nothing.  Also, this can lead to customer dissatisfaction because of delayed delivery.

Too Much Space

If a company isn’t maintaining enough inventory, this means there is extra space in a warehouse.  If this occurs all the time, the company is wasting money operating a warehouse that is too big for its needs.

Too Much Inventory

Having too much inventory can be a more immediate problem if there is not enough space to store it.  Improper storage can cause inventory loss due to damage.  Also, too much money may have been spent buying things that are not needed, which means the money could have been spent on something more important.  If there is too much inventory and not enough turnover (sale of inventory) waste can happen from spoilage.

Forecasting Revenues

It is important for company management or investors to have an idea of how much revenue could be generated in the future.  (This will guide decisions for future growth.)  The only way to know how much revenue the company can generate is to know how much product you can make, and how much there is to sell.