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How to Manage Multiple Inventory Warehouses

How To Manage Multiple Inventory Warehouses

Many wholesale and distribution companies have multiple warehouses. These warehouses are managed by an inventory control manager. One of the skills of a good inventory control manager is to balance inventory levels between each of the warehouses.   If one warehouse runs short on a product, we can transfer inventory from another warehouse or create a purchase order and submit that to a preferred vendor.

Since warehouse’s inventories are mainly depleted by sales we need to track units sales of inventory to help determine optimal inventory levels. When on-hand inventories fall to minimum levels we need to reorder more so we do not run out.  These minimum levels are also known as inventory reorder points.

A very basic way of figuring out your reorder point for a product is to look at its inventory sales. Let’s focus on one product (widget model 101): If you are selling an average of 215 units per month and you order inventory once a week that means your inventory reorder point would be 50. We calculate the reorder point as follows:

Calculate Inventory Sales Average

215 units sold / 4.3 weeks = 50.

The reason we divide by 4.3 weeks is because we order once a week and there are approximately 4.3 weeks in a month and our calculation is based on average monthly sales. So in theory these 50 units would satisfy inventory sales for a week which gives us a chance to order more product.

However this is an over simplified scenario which may not fit the real word. So we need to expand on this. In this calculation there is no buffer included to accommodate sales fluctuations.  Also it does not allow time for the product to get shipped to our warehouse.  So to include lead time in our calculation we should modify the order frequency to include it.  In our example we gave 1 week as part of our calculation for the time needed to order our inventory. Now if we want to also allow 1 week for the shipment of inventory to our warehouse.  Adding these two values together we arrive at our order frequency- two weeks. In other word the question we are asking ourselves is:

How much inventory do I need to have on hand in order to satisfy sales for 2 weeks?

The answer is one week because ordering is done once a week and we need another week to allow the inventory to be shipped from the vendor and received at our location. In other words we need to allow for lead time. So now we take another week’s worth of average unit sales (50) and add it to our reorder point of 50 from our calculation above and this equals 100.

50 units to cover time between ordering
+ 50 units to account for product lead time
= 100 units on hand as the reorder point

If you have warehouse transfers, then these transfer quantities should become part of the sales number in our formula. But to avoid confusion let’s replaces the term “sales” with the term “usage”. In fact anything that depletes inventory should be part of the “inventory usage”. This could include spoilage, waste, etc.  The bottom line here is we are trying to predict how many units we will go through during the time in which we will be without any new product.

Now that we have established a calculation for the reorder point, let me point out two other additional factors you need to consider.  We may have open Sales Orders for customer and open Purchase Orders for vendors. If we look only at the Inventory Units On-Hand we will get into trouble. Even though we may have 110 units of inventory in the warehouse, if we may have a customer Sales Order for 20 units which is going to ship tomorrow. Hence we should not include those 20 units when we do our calculation. To manage this we look at our Available Units On-Hand which is the “Units On-Hand” minus the “Units On Sales Order”. This number is actually what should be used if you are checking to see if you have inventory in stock for a customer’s product inquiry, i.e. “Do you have 12 Widgets you can ship out to me?”.

Similarly, when you reorder product from a Vendor you want to include the Units On Purchase Orders into the calculation. We call that “Available Soon” and it is calculated as Available Units + Units on Purchase Order.   If we don’t do this and we already have 20 units on an existing Purchase Order then we can end up with too much inventory on-hand. So instead of using Units On-Hand to trigger your reorder point you would use inventory “Available Soon” as shown below:

Units On Hand – Units on Sales Orders + Units On Purchase Orders = Units Available Soon

This reorder point should be applied on a per warehouse basis. However we also need to include inventory transfers between warehouses as part of the inventory usage. This is only for inventory transfers out of a warehouse. Inventory transfers coming in are already triggered by the reorder point (if replenishment is satisfied from another warehouse) so they are not part of the reorder point calculation.  Meaning, when a reorder point is reached you can replenish inventory from either a vendor or from another warehouse providing you have inventory there.

It is not difficult to calculate this for an individual product but to do that with lots of product you need a good inventory control software system. Furthermore as sales fluctuate and product popularity changes your sales may change so the inventory reorder point should be updated regularly.  Thankfully there are plenty of great software programs that can do this for you. If you are a small to midsize company, Access Your Biz accounting software is a good program which will calculate your reordering for you. If you are a very large company with many invoice transactions you may want to consider a more enterprise wide software like Microsoft Dynamics. You can find more information about these two products on their respective web-sites:
www.AccessYourBiz.Com
www.Microsoft.Com