SME INVENTORY MANAGEMENT TECHNIQUES | Audit. Tax. Advisory

Inventory Management for SMEs

Small and Medium Enterprises (SME) are the backbone of the Kenyan economy contributing up to 40% of its Gross Domestic Product (GDP); Inventory management techniques are equally are the heart of most businesses and they fall under different categories i.e.

  • Raw Materials,
  • Work in Progress (WIP)
  • Finished Goods
  • Packaging
  • Repair and Operating Supplies

The inventory category forms a significant proportion of held cash. Inventory management for such enterprises should be looked into using every opportunity available to manage costs without compromising quality and having a negative reputation in the competitive market. The current persistent irregularities in the global supply chain have made businesses waste time in procuring process resulting to delayed delivery of orders and increased costs; Moreover, Inefficient inventory management often leads to overstocking or understocking of goods which has resulted to losses, stock holding cost when demand falls and damage to enterprise identity as well as future sales respectively. There is need for businesses to formulate ways to mitigate risk in supply chain and adopt technology to streamline processes and internal controls for effective cost reduction, continual revenue generation, customer satisfaction and increased profits.

Common Inventory Management Techniques for SMEs

The traditional method of tracking inventory is time-consuming and businesses from time to time have to readjust inventory depending on sales and current market demand. Various inventory management techniques that can be adopted by businesses include: –

Just In Time (JIT) Method

This method requires the company to keep only as much inventory as is required during the manufacturing process. When the old inventory stock is nearly depleted, the company orders additional inventory. This is a risky inventory management method because a minor delay in ordering new inventory can result in a stock-out as a result, this method requires careful planning in order for new orders to be placed on time.

Material Requirements Planning (MRP) Method

The manufacturers order inventory after considering the sales forecast. The MRP system integrates data from various areas of the business that have inventory. The manager would carefully place the order for new inventory with the material suppliers based on the data and market demand.

Economic Order Quantity (EOQ)

The technique focuses on determining how much inventory the company should order at any given time and when the order should be placed. When the inventory reaches the reordering level, the store manager will reorder it. The EOQ model reduces the ordering and carrying costs incurred when placing an order. The EOQ model allows the organization to place the appropriate amount of inventory.

Minimum Safety Stock

Minimum Stock (Safety Stock) requirements specify the smallest quantity of a specific product in a warehouse and are added to the total replenishment recommendation.

Drop shipping

The business receives customer’s order and their supplier ships the products to the customer directly.

Importance of Inventory Management Techniques

Inventory management is a system that manages inventory in the most efficient and simplest way possible from ordering, storing, using, and selling in order to save money for the enterprises;

  • It helps businesses to forecast the optimal stock to order and at what time by setting minimum or maximum levels
  • Meet expected increase in demand
  • Improved customer retention and engagement
  • Improved warehouse productivity
  • Improved data visibility

Inventory is tracked from the initial purchase stage up to when a sale is made. it all begins with maintaining accurate source documents.

How we can help

We offer inventory management solutions to Small and Medium Enterprises (SMEs) using Xero cloud-based accounting software. Xero easily tracks inventory at all times and can be accessed remotely from a desktop, tablet or even mobile phone, all they need is an internet connection.

  • Xero manages risks by setting alerts when there are stockouts or when items fall below the re-order level hence reducing lead time, as a result, balanced inventory will be maintained,
  • Has a Job costing module that tracks the profitability of the project
  • The updated data will enable SMEs to make crucial decisions by use of analytical tools that give reports on fast-moving items, slow-moving items, obsolete and expired products

Why Xero

Xero manages risks by setting alerts when there are stockouts or when items fall below the re-order level hence reducing lead time, as a result, a balanced inventory will be maintained. Xero has a Job costing module that tracks the profitability of each project. The updated data will enable SMEs to make crucial decisions by use of analytical tools that give reports on fast-moving items, slow-moving items, and obsolete and expired products.

  1. Bills of materials (BOMs) that converts raw materials into finished products;
  2. Inventory tracking that enables Lot / Batch and WIP tracking
  3. Material requirement planning for Economic Order Quantity (EOQ)

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