Most of your clients with inventory use some shape or form of inventory management software.
Inventory Management Software
Xero and Shopify come with inventory management software – a simple one, but one nevertheless. How far can they take you?
In this episode Jeri Wambeek of WAO Connect will walk you through the different levels and set ups of inventory management software.
Here is what we learned but please listen in as Jeri explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Inventory Management Software
Whenever you buy or sell products, you need some form of inventory management. Especially if your business is product-based as opposed to service-based.
When you only have one or two products, managing inventory is relatively easy. You probably started with a handful of inventory in a garage or office.
The issue grows exponentially as you grow the number of your 1 – staff, 2 – product lines and 3 – warehouses as well as 4 – sales platforms.
As you increase any of these factors, you need a system to deal with the growing volume of data.
The core of any inventory management is what stock you have right now. There are four ways of handling your current stock levels.
1 – No Recording and No Tracking
You expense all stock upon payment. So your balance sheet shows no inventory or only a fixed amount. You can do this as long as your inventory is relatively constant, ie what goes out, comes back in through new shipments.
You keep track of inventory in your head, with pen and paper or with a spreadsheet.
2 – Tracking But No Recording
You expense all stock upon payment as before but you do track your inventory. You just don’t have it flowing through to your accounting software.
So for example you use Shopify to track your inventory by SKU but have no bridge between Shopify and Xero, so in Xero you just record the actual payments as they come.
3 – Recording But No Tracking
You do a stock take at certain times and record the inventory based on that stocktake. So you don’t track your inventory as it comes and goes, but you periodically update the value of your inventory in your balance sheet.
4 – Recording and Tracking
You track your inventory as it comes and goes. In Xero and Shopify you can only track by SKU. If you want Xero and Shopify to talk to each other, you need a data bridge.
There are three ways to track your inventory.
1 – By SKU
You track inventory by SKU (Stock Keeping Units) as it comes and goes. So let’s say you sell red pens, blue pens and green pens, so you would have three SKUs.
Xero and Shopify can only track by SKU.
2 – By Serial Number
You track inventory by serial number. So if you had ten pens of each colour, then you would have thirty serial numbers. Xero and Shopify can’t do this. You need specialised software that can handle this.
3 – By Batch
The food and pharmaceutical industries are examples of industries that usually need to track by batch, so they know exactly what went into which product. Xero and Shopify can’t do this.
In this episode Jeri Wambeek mentions a fourth way to track, which we have skipped here, since only relevant for very few industries.
Beyond Current Stock
If you want to manage your inventory beyond current stock, you need to look at more sophistacated software, ideally an app that will link into your accounting software. Which app is right for you depends on your set up.
You might need the software to track or handle,
- Inventory in different warehouses,
- Inventory by batch or serial number,
- Staff members’ handling of stock,
- Fulfillment pipeline,
- Expected demand,
- Days in stock (how long until you run out of stock),
- Lead times (how long until new stock arrives),
- Varying suppliers,
- Inbound stock (where is it right now),
- Shipments to customers (where is it right now).
3PL stands for 3rd Party Logistics. A third party stores your products and fulfills your orders as they come in. Fulfillment includes picking, packaging, shipment and tracking.
For this the 3PL service charges you a storage fee and a fulfillment fee. These fees depend on the size of space you take up, the size and weight of your products, frequency and size of your fulfillment and any additional requirements like cooling of perishable goods or security of valuable items.
3PL is more cost effective for low inventory levels when you start in a market. As you grow, there comes a point where your own warehouse starts being more cost effective.
Many Australian businesses – big and small – have a local warehouse, but also 3PL in other locations.
Air v Ship
How much heavy lifting your inventory management software needs to do depends on whether you use air or ship to get the products into your warehouse.
Air makes your inventory management very easy. You just quickly fly in what you need. But it comes at a high cost.
Ship on the other hand is much cheaper, but requires a lot more inventory management. It can take months until a shipment arrives, so you need to plan months ahead.
Xero and Shopify
Xero is an accounting software. Shopify is a sales platform. Both have an inventory management software attached. But neither started out as an inventory management software and it shows.
Neither Xero nor Shopify can handle more than one warehouse location or staff member, inconsistent pipelines (varying suppliers), multiple price tiers or manufacturing and assembling.
They can’t track your fulfillment pipeline, so whether an item has been picked, tracked or already shipped.
And they also can’t manage unavailability and split shipments – be it purchases coming in or sales going out. To just name the main limitations.
However, for a small business which doesn’t need any of the above, Xero and Shopify are great inventory solutions.
Beyond Xero and Shopify
There are hundreds of specialised inventory management softwares in the market. There is no ‘One size fits all’. Each system suits different businesses for different reasons in different industries. They all have strengths and weaknesses.
WAO Connect has developed a checklist for product-selling businesses which we found very helpful. Just go to www.waoconnect.com
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 03 May 2021