Although your inventory might be quite small and you think your current system works well enough, it's to your benefit to implement a scaled-down version of the same inventory/order fulfillment management tools used by large corporations. Whether you plan to handle your order fulfillment or outsource it, it helps to know what the experts do.

The benefits of managing inventory by the standard methods include:

  • Scalability. Instead of hampering growth, inventory management can grow with your company. It will not need to be restructured to handle additional products.
  • A widely accepted format. Once your volume justifies outsourcing order fulfillment, the transition to a fulfillment house will be far easier if your system adheres to standards other than one that only you understand.
  • It might work better. These procedures have been worked out through many decades. You can avoid costly mistakes and the pain of trial-and-error by using proven procedures.

A well-organized inventory will make the pick-and-pack process easier, faster, and more efficient. Picking is the act of gathering items from the warehouse for each order by following the order's pick list. Packing is placing the items into shipping containers and creating the packing slip.

Perfect Pick and Pack

The pick list is unique to each order and should include an SKU, short for stock keeping unit, the product's internal ID number, and bin location of each item.

The packing list is created for each order after it has been picked and packed for shipping. It should contain SKUs and bin locations of each item. The back of the packing slip can serve as a return slip for the customer's use. Each packing slip should be assigned a unique reference number for easy tracking by the warehouse, the customer service department, and the accounting staff, as well as by the customer.

Start by assigning a stock keeping unit to each item. Think of the SKU as the numerical identifier of each item. This number can be any length you choose, but it should relate to key characteristics of the item. Choose two- or three-digit color or style codes. These are usually placed at end of the SKU that you use consistently with all your merchandise; that is, all clothing items that are pink will have the same color code such as 34. So a child's pink sweater SKU might read something like CH-3547-34 and a woman's T-shirt in the same shade of pink would be assigned an SKU of WM-5567-34.

Assign bin locations to each item. In a warehouse, the bin is the specific location a single SKU can be found. You should have a separate bin location for each SKU, but an SKU can have more than one location. If, for example, an item can be ordered separately or as a set, there might be one bin location for the individual item and another bin location for the packaged set of items.

Avoid Shortages and Overstocks

One of the major pitfalls online retailers encounter is not being able to stop customers from placing orders for sold-out items. Imagine having to figure out how many customers are expecting an item that just isn't available. Even worse, credit cards might be debited and days or more might pass before the affected customers could be informed.So, how do you prevent over-ordering when two customers order the last of an item at the same time? Or some unpredictable event leaves you promising the last item to two customers?

Keeping separate inventory counts is one of the secrets of effectively managing inventory. These inventory counts monitor available inventory and the on-hand inventory. Also important is setting a critical inventory level for each item.

Available inventory is that which can be sold immediately. It is the count your shoppers' see on your Web site when they check whether an item is in stock. This count is changed at the warehouse when an order is picked. Available inventory always will show a smaller number of items of a particular SKU than the on-hand inventory.

On-hand inventory is the total of a particular SKU that is still on the shelf in the warehouse or your stockroom, or being processed. It consists of the available inventory plus the critical inventory. The warehouse does not have access to your on-hand inventory. On-hand inventory is the count used by the accounting department. It is reduced when payment is processed.

Critical inventory level is a number you choose to have as a safety margin. Once the count of a particular SKU on the shelf gets down to this number, no more orders are accepted for that item. That way there is still inventory for the orders that have come in but were not yet picked. When you reach critical inventory level, you should have a system in place that prevents additional orders from being placed for an item on that list.

When your system alerts you that an item has reached critical inventory, it's wise to send someone to the warehouse to do a physical count and confirm the inventory is low.

Here's how the inventory counts relate to each other: On-hand inventory equals available inventory plus critical inventory level.

Closing an Order

The final stage of ordering is closing the order. This occurs in accounting when payment is processed. After the item has been picked, accounting processes payment. Once payment has been processed, the order is closed and the shipping department or the warehouse is notified. When you close an order, you subtract the items from the on-hand inventory.

The two inventory counts follow each other closely, but are subtracted at different stages during the inventory management process. Available inventory is depleted when the item is picked. On-hand inventory is depleted when payment is processed and the item is ready to be shipped.

Develop an Aging Order Report

This is a critically important component of order fulfillment. The regularly scheduled aging order report tells you what items have been picked but not shipped. If an item is picked but not shipped after a set time, investigation is needed to expedite the order. This is referred to as an item being pulled but not closed. Once the item has been picked and packed, the accounting department is notified. The item is subtracted from available inventory. Once accounting acknowledges receipt of payment, the warehouse is notified that the item is ready to be shipped and subtracted from the on-hand inventory. Because closing occurs in the accounting department, that is where the aging order report is created.

To make sure you always have sufficient inventory to sell on demand, you need to make sure the available and on-hand inventories are current. This involves physically counting inventory and comparing the results with your records of available and on-hand inventory.

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