Chapter Four: Warehousing and Inventorying for Small Businesses – Business Studies Form Two
Introduction
Effective inventory management and warehousing are crucial for small business operations. In this chapter, you will learn about the concept of warehousing, the concept of inventorying, documents for inventory and warehouse management, and methods for inventory management. The competences developed will enable you to manage warehouses and your small business’ inventory.
Think
Business without a storage facility.
Activity 1
Imagine you are operating a small shop in front of your home. You usually check your stock once a week. When you checked last week, you had 200 pencils, 50 erasers, 100 markers, and 100 notebooks. Your neighbour’s friend calls you and asks for 90 pencils, 20 erasers, and 25 notebooks.
You tell him it will be ready shortly. When you hang up, your mother’s co-worker calls and asks for 5 pencils and 15 notebooks. You also tell her it will be ready shortly. As you prepare the orders, you realise you only have 100 pencils, 20 erasers, 50 makers, and 30 notebooks.
(a) What went wrong?
(b) What will you do to satisfy both customers?
The concept of warehousing
Warehousing is derived from two words: “Ware”, which means products, and “house”, which means a building. Warehousing is a set of activities that involves receiving, storing and preparing goods for shipment or distribution to traders and customers. Based on the context, these activities occur in a warehouse, godown or storeroom.
AÂ warehouse is a building that stores products (such as raw materials, semi-finished and finished goods) for future use or sale.
Any business may require a place to store its stock to ensure good stock levels and enhance efficient operations and customer satisfaction. For example, an owner of a small business like a grocery store selling various goods such as tomatoes, onions, bottled drinks, fruits and vegetables may require shelves mostly made of wood or metal installed along the walls to place products. For storage of perishable goods like milk and yoghurt, a refrigerator or cooler for the products may be needed, and storage of large quantities such as sacks or plastic containers of sugar, beans, or rice may require a separate room.
The concept of warehousing is crucial for small business owners. Warehousing ensures that goods are sufficient to prevent customer disappointments and properly prevent products from spoilage or damage. It also functions to properly manage perishable goods to maintain food safety and prevent health risks. Finally, it ensures smooth stock tracking to avoid overstocking or stockouts.
Types of warehouses
Warehouses may be classified into six types depending on their ownership and functions. These types are private warehouses, public warehouses, bonded warehouses, distribution centres, climate-controlled warehouses, and smart warehouses.
1. Private warehouse
Private warehouses are owned and managed by individuals or companies to store their goods. A small business can build, lease, or purchase a warehouse to store goods at a selected location. A private warehouse is a good option for small businesses, as they need time to sort out their market strategy before goods can be sold out.
2. Public warehouse
Public warehouses are owned by the government, individuals, or companies, but they are open to any public member to store their products in return for a storage fee or charge. Any small business owner or manager can rent a space in a public warehouse to store products. This warehouse type is useful for small businesses without a warehouse or needing extra space temporarily.
3. Bonded warehouse
Bonded warehouses are owned, managed and controlled by private individuals, joint stock companies or the government for storing imported goods in safe custody while waiting for customs clearance. In bonded warehouses, importers cannot move out their goods until the customs duties are fully paid. The goods stored are tied up in a bond because the owner signs a bond contract with the customs authorities.
4. Distribution centre
Distribution centres are large centralised warehouses that primarily receive goods directly from factories and suppliers, regroup them into orders, and swiftly ship them to customers. The main focus of distribution centres is on the movement of goods rather than storage. If fast delivery is crucial for a small business, a distribution centre can help get products to customers quickly.
5. Climate-controlled warehouse
These are warehouses for goods usually affected by weather conditions. They store goods that must be managed at a specific temperature or humidity. The climate-controlled warehouse is ideal for small businesses that deal with perishable goods such as fresh vegetables, flowers, fruits, drugs and chemicals, and frozen seafood and meat products.
6. Smart warehouse
Globalisation and the current era of automation make smart warehousing a new development. Smart warehouses use Artificial Intelligence (AI) in storage and operations. Under smart warehouses, most processes are fully automated: packing, sorting, and transporting goods to customers. Smart warehouses require minimal supervision as technological algorithms mainly control them.
Exercise 1
Imagine you operate a small business selling school supplies. As your business grows, you start receiving more orders from within and outside the country and need a place to store your inventories. Why is having a warehouse essential for your business growth?
Warehouse management
Warehouse management is supervising, controlling, and evaluating various activities in a warehouse to ensure an efficient and reliable supply of stock and, thus, satisfy the customer’s demand. The following are warehouse management practices:
1. Arrangement of the goods in a warehouse
A warehouse should have enough space to arrange goods according to their types or use. Moreover, the goods should be placed efficiently, allowing easy movement of people or machines in the warehouse.
2. Cleaning a warehouse
This includes cleaning different warehouse areas, such as rooms, floors, walls, ceilings, furniture, shelves, and containers in and out. This ensures that goods are stored in a clean and safe environment and that the warehouse has a pleasant appearance.
3. Regulation of the atmospheric conditions
Ensure that the warehouse has a conducive condition which allows free and controlled flow of air and sunlight. Depending on the type of goods stored, the warehouse caretakers should ensure that goods are kept in a place with no excessive heat, humidity, sunlight or wind.
4. Use of modern facilities
A warehouse needs facilities that smoothen operations such as stock counting and handling. For instance, in large warehouses where heavy materials and mixed goods are kept, mechanised handling, such as using a forklift, may be used to simplify the lifting of the goods. However, computerised systems may also record the received goods after physical verification.
5. Physical inventory counting
Regularly counting materials in the warehouse will ensure quality records on ledgers, which are relevant to maintaining physical stock. This will also enable the warehouse management to ensure that materials are well preserved while the spoiled ones are sorted out on time.
6. Regular equipment checks
Regular safety and equipment checks are crucial to ensure everything is in good shape. Equipment like machinery and vehicles used in the warehouse need regular checks for repairs and maintenance to operate efficiently.
7. Enforce safety regulations
Rules are designed to protect employees from body injuries and prevent the loss of warehouse goods and other properties. Warehouse workers must wear protective equipment like boots, heavy gloves, hard hats, safety goggles, and steel-toed boots. Safety or warning signs are mandatory. Everyone who enters the warehouse should observe safety precautions without exception.
8. Training warehouse staff
It is essential to train staff to make them aware of the current safety and operation requirements of laws and regulations to increase their work efficiency. A warehouse manager should prepare a training schedule for every staff member, when necessary, and ensure the employees uphold it.
Activity 2
Visit any nearby warehouse and investigate what type of warehouse it is as well as activities conducted, then;
(a) write down the information you have gathered.
(b) compare the information you have gathered with what you have learned.
(c) identify new things you have learned from your visit.
Merits of warehousing
The significance of warehousing relies on the storage process of goods that helps to bridge the gap between producers and consumers of goods in a market. Other merits of warehousing are discussed as follows:
1. Availability of raw materials for production
Warehouses facilitate storing raw materials, enabling manufacturing industries to continuously produce without running out of stock. Moreover, the relevance of warehousing is observed in the manufacturing industries that utilise seasonal raw materials. Without a warehouse, many would cease their operations to wait for a season where raw materials are readily available. Therefore, warehouses enable the constant availability of raw materials throughout the year.
2. Regular flow of goods
A warehouse enables efficient product distribution in the market. For instance, agricultural products are produced seasonally; thus, after harvests, they are stored in a warehouse to be distributed in different areas when needed, especially in those areas with shortages. Therefore, a warehouse ensures a reliable supply of a particular product over time.
3. Price stabilisation
Warehouses ensure stable market prices, as stored products can be supplied during low production or supply. They minimise price fluctuation to a great extent because a constant supply of products avoids over- and under-supply in the market, which helps in regulating prices. Warehousing thus ensures the constant supply of products at more or less uniform prices.
4. It reduces the risks of loss
Storing products in a warehouse minimises the risk of loss resulting from theft, unfavourable weather conditions, or product damage. This is because warehouses usually put strong measures in place to ensure the safety of the stored goods. The measures include installing security systems, security alarms, security cameras, and security guards, properly handling products stored, and hiring skilled personnel to handle the products.
5. It enables the preparation of goods for sale
A warehouse enables the preparation of goods for sale. Various activities like inspection, grading, sorting, branding, packaging and labelling of the products tend to be pursued in the warehouses.
6. Easy access to finance
When people store goods in a warehouse, they receive a legal document called a warehouse keeper’s warrant. The warehouse keeper’s warrant can be collateral for securing a loan from a bank or other financial institutions like microfinance and the Savings and Credit Cooperative Societies (SACCOS).
7. Helps to store seasonal products
Goods produced throughout the year but whose demand depends on weather conditions are stored in warehouses. For example, sweaters, jackets, raincoats, and gumboots demanded during cold and rainy seasons can be kept in a warehouse during summer and hot seasons.
Demerits of warehousing
A warehouse is an essential part of the logistics and supply chain management, providing a central location for storing and distributing products. However, it should be understood that storage has potential losses. Understanding these disadvantages is very important for making the right decisions about using warehouse equipment effectively to reduce potential defects. The following are some of the demerits of warehousing:
1. Warehouses require a substantial initial capital investment
Because the initial costs are incredibly high, small-scale businesses and companies with limited capital may be unable to construct and operate them. They can only depend on public warehouses to store their products and incur storage charges.
2. Additional administrative costs
When operating a warehouse, a business incurs administrative costs such as salaries and wages of the warehouse caretakers and utility (water and electricity) bills. In small enterprises, such costs may be high enough to reduce their profits.
3. Loss of goods or property
Since a warehouse stores large quantities of goods, in the event of problems like fire, theft, and leakage, it leads to enormous losses for the business. In this case, a warehouse must have a particular arrangement of products based on their nature to avoid damage that causes additional costs to a business.
4. Expiration of stored products
Due to large quantities of products stored in warehouses, some products may reach their expiration date while they are still in warehouses or before being dispatched to customers. Expired goods are unhealthy and can no longer be sold, thus causing loss to a business.
5. Some products lose their quality after being stored for a long time
Some products may lose their qualities in terms of weight, taste or scent when stored for a long time. It also leads to a fall in the value of such products.
The concept of Inventorying
Inventories or stocks are mostly kept on warehouse premises, so they are available for sale, distribution or further use. Inventory management is the management of goods to ensure sufficient quantities of goods without holding more or less inventory than the required quantities.
Inventories must be maintained reasonably so the warehouse does not run short of supplies or carry more inventory than needed. To ensure efficient production, distribution, or trading activities, a business may maintain a certain amount of inventory, such as finished goods, raw materials, or unfinished goods (work in progress).
Functions of inventory management
Various activities are conducted in a warehouse when managing goods in stock. The following are some of the most essential functions of inventory management:
1. Receiving stock
This involves accepting deliveries of goods from suppliers or other traders, notifying the purchasing department of the receipt, and keeping records of the goods received. It also involves unloading the deliveries and inspecting or checking the condition of the goods against quantity and quality, as well as the type of goods against the order documents.
2. Issuing stock
This involves the whole process of releasing the goods from the warehouse. It includes verifying requisitions, releasing the goods, and recording the goods or stocks moved out of the warehouse. Recording is done to ensure proper record keeping and warehouse goods adjustment.
3. Care of stock
This involves keeping stored goods in good condition within the warehouse, sorting out spoiled goods, and extraordinary maintenance of fragile goods.
4. Placement of stock items
Proper allocation or placement of goods allows convenient separation. Properly arranging goods inside the warehouse allows smooth inspection and ensures their safety. For example, heavy goods should be kept below the light ones, while frequently demanded goods should be placed in areas where they are easily accessible.
5. Stock control
Stock control involves checking and keeping proper records of the quantity and value of goods in a warehouse for a particular period. This ensures a reasonable stock level is always maintained to avoid over- or under-stocking. Stock control involves:
-
- Stock-taking:Â Checking and keeping records of the quantity of stocks in a warehouse. It involves physical counting and recording of all the stock in business operations.
- Re-stocking:Â Ordering new goods against the replenished ones.
- Stock valuation:Â Determines the stock’s current value in a given period. Stock may be valued at cost or market (selling) price.
Warehousing and inventory management are interconnected. Effective warehousing ensures proper inventory storage, while accurate inventory control improves warehouse space and resources.
Types of inventories
Identifying inventory types helps businesses to effectively manage their resources and improve their operations. The main inventory types are:
1. Raw materials
Raw materials are the primary substances or components used to create a product, such as wood for furniture or cotton for fabric.
2. Work-in-progress (WIP)
WIPs are partially completed products, such as bicycle frames without handlebars, pedals, or tyres attached.
3. Finished goods
Finished goods are products ready to be sold to customers, such as assembled smartphones, clothes, shoes, bags, art crafts, or packaged food items.
4. Maintenance, repair, and operations (MRO) inventory
These are items used to maintain and operate a business but are not part of the final product, such as office supplies and tools.
5. Cleaning equipment or repair parts
Needles and threads may be needed to make a doll, but they are not sold to the customer buying the baby doll. As businesses grow, merchants can invest in better stock management tools like advanced spreadsheets or software.
Activity 3: Fresh juice business
Imagine you are starting a small business selling fresh fruit juice in your neighbourhood or within the business club.
(a) Identify the types of inventories you will need for your business.
(b) What is the most suitable warehouse type for your business? Provide the reason (s).
(c) Create a simple inventory management system to track stock levels.
(d) What challenges might you face in managing inventory and warehousing for your business?
Exercise 2
- Elisha is a small business owner selling traditional crafts in his community.(a) What types of inventories would he need?(b) Describe the challenges he might face in managing his inventory.
(c) How can he improve his inventory management to minimise costs, prevent stockouts, or run out of stock?
- Mwanaisha plans to start a small shop at Kizimkazi in Zanzibar. Analyse the inventory challenges she might face and propose strategies to overcome them. Consider factors such as perishable goods, stockouts, and overstocking.
Essential documents for warehouse and inventory management
Activity 4
Visit a local store near your school:
(a) Ask the storekeeper to share the documents they usually receive after completing the purchases of a particular good; and
(b) The documents they use for keeping track of the inventory.
Warehouse and inventory management involve the proper storage and control of goods. Accurate and timely documentation ensures smooth operations, prevents losses, and makes informed business decisions. Many of these documents can be created manually on paper or by using inventory management software so that they can be accessed online.
Key documents small business owners should use for effective inventory management are:
Goods received notes (GRN)
Goods received notes are documents prepared by a business owner upon receipt of goods from a supplier. They provide evidence of goods received and help verify quantities and conditions of goods. This document can be a hard or soft copy and is a basis for paying suppliers.
GOODS RECEIVED NOTE
BUSINESS LOGO
Received Note No: ________
Date: ________
Location received at: ________
Person/Company/Organisation received from: ________
Related to PO No (if applicable): ________
Waybill No: ________
Delivery Method: ________
Total No. packages: ________
Total volume: ________
Total weight: ________
| Our Type | Item description | Number of units received | Number received damaged | Lot/batch/P1. No. | Condition |
|---|---|---|---|---|---|
Remarks: ________
Name of Person Receiving: ________ Signature: ________
Name of Person Delivering: ________ Signature: ________
Figure 3:Â Goods received note sample
Bin cards
A bin card is a document that tracks the inventory levels of a specific item in a specific bin. It is used for recording and monitoring the number of items in stock and the dates and quantities of items received, issued, or transferred. The bin card provides a continuous record of item movement and helps to identify stock levels and whether an item needs to be reordered.
BUSINESS NAME – BIN CARD
Material Name: ________
Material Code: ________
Location: ________
Maximum stock level: ________
Minimum stock level: ________
Reorder level: ________
| Date | Receipt | Issue | Balance | Name | ||
|---|---|---|---|---|---|---|
| GRN No | Qty | Request No | Qty | |||
Figure 4:Â A bin card sample
Delivery note
Delivery notes are documents accompanying goods dispatched to customers. They confirm the items and quantities delivered and serve as proof of delivery. They can help ensure the sales and inventory records are accurate.
DELIVERY NOTE
Business name:Â ________
Business slogan:Â ________
Logo
Order Date: ________
Order No: ________
Delivery Note No: ________
Customer ID: ________
Dispatch Date: ________
Delivery Method: ________
Shipping Address
Name: ________
Company Name: ________
Street Address: ________
City, ST ZIP Code: ________
Phone: ________
| Item No | Description | Ordered | Delivered | Outstanding |
|---|---|---|---|---|
| 331122 | Product 3 | 12 | 12 | |
| 112233 | Product 2 | 5 | 5 |
Figure 4.5:Â A delivery note sample
An inventory ledger
An inventory (stock) ledger (book) records all inventory transactions for a specific item. It provides a complete history of item movement and helps calculate the cost of goods sold, which supports financial reporting.
STOCK LEDGER
| DATE | DESCRIPTION | BEGINNING | DISBURSED | BALANCE ONLINE | |||
|---|---|---|---|---|---|---|---|
| QUANTITY | AMOUNT | QUANTITY | AMOUNT | QUANTITY | AMOUNT | ||
Figure 6:Â An inventory ledger sample
Other documents for warehouse and inventory management
Business owners who keep good records will be better able to make decisions in the business’s best interest. Other important documents that may be helpful for small businesses are:
- Purchase orders:Â A formal request to a supplier for goods or services.
- Stock-take sheets:Â A document that records physical inventory counts.
- Stock valuation reports:Â A summary of the inventory value.
Exercise 3
- Michael, a small electronics retailer, experiences a sudden increase in demand for headphones. Despite placing a large order from ABC Enterprises, it found that the supplier could not meet customer demand. A physical inventory count from the supplier warehouse reveals a mismatch between the recorded stock levels and the number of headphones in the warehouse. The retailer has relied on manual inventory tracking methods, including handwritten bin cards and a basic spreadsheet system. This system has become increasingly unreliable due to human error, stock theft, and the rapid sales pace. Which document and what aspect of the document could be of help?
- Bwanamkubwa started a small upcycling furniture shop to address environmental degradation. A customer, excited about supporting sustainability, purchases an upcycled stool from Bwanamkubwa. Upon delivery, the customer discovers a significant scratch on the stool’s surface. The customer is disappointed as the stool was a centrepiece for their newly renovated living room. Bwanamkubwa sources unique materials for the upcycled products from various suppliers. Create a document Bwanamkubwa could use to understand the condition of the materials received from suppliers and the condition once it get to customers.
Methods for inventory management
Activity 5
You and your business club peers are running a school shop. The list below shares the current inventory and sales made:
Initial inventory
| Item Name | Quantity | Price (TShs) |
|---|---|---|
| Pencils | 50 | 500 |
| Erasers | 30 | 1,000 |
| Notebooks | 20 | 1,000 |
Sale 1: 10 pencils sold
| Item Name | Quantity | Price (TShs) |
|---|---|---|
| Pencils | 40 | 500 |
| Erasers | 30 | 1,000 |
| Notebooks | 20 | 1,000 |
Sale 2: 10 notebooks sold
| Item Name | Quantity | Price (TShs) |
|---|---|---|
| Pencils | 40 | 500 |
| Erasers | 30 | 1,000 |
| Notebooks | 10 | 1,000 |
How will you and your business club peers manage inventory in your store?
Inventory management is crucial to business operations, especially for small businesses. Effective inventory management ensures enough stock to meet customer demands without overstocking or understocking.
Some standard inventory management methods include:
1. Manual inventory management
The manual inventory management method involves physical counting and recording inventory items. It is widely used by small businesses in the community due to its simplicity. While this method is low-cost and easy to implement, business owners are more likely to make errors in recording items. This method is also time-consuming, making it inefficient for extensive inventories.
2. Periodic inventory system
The periodic inventory system method involves counting inventory at regular intervals, such as weekly, monthly or quarterly. It provides a snapshot or quick look at stock levels at specific points in time. While it is less time-consuming than continuous inventory, it is suitable for low-value items. The problem is that this method is not real-time or live, which may cause stockouts or overstocks.
3. Perpetual inventory system
The perpetual inventory system continuously tracks inventory levels using software or spreadsheets. It uses technology to provide real-time information on stock availability, accurate stock levels, better decision-making, and reduced stockouts. However, this method requires finding a technology solution or application that may require tools like barcodes and scanners. Many of these can now be downloaded on the phone.
4. ABC analysis
The ABC Analysis method categorises inventory items based on their value;
- A items:Â High-value items requiring close monitoring.
- B items:Â Medium-value items requiring moderate control.
- C items:Â Low-value items requiring minimal control.
This method focuses on high-value items and improves efficiency but requires regular analysis and updates.
5. Stock turnover ratio
This method measures inventory management efficiency by calculating the number of items sold and replaced within a specified period. This process may help identify slow-moving items so business owners can better decide what to stock. To use this method, business owners must keep accurate sales and inventory data.
Exercise 4
- A group of women farmers in the village of Kweshamba in Mtwara region suffer crop losses due to unpredictable weather. What kind of warehouse is suitable for these women to store their crops? Why?
- Mgala has been invited to talk to small business owners who do not know the importance of storing their products in the warehouse. What words would he speak to them to help them understand the importance of storing their products in the warehouse?
- Small business owners at the Majengo Market face difficulties storing their goods to ensure their safety before selling them.(a) What knowledge do these small business owners lack?(b) What benefits will they get after acquiring the above knowledge?
Skills lab activity
Explain different documents used to manage inventory and their importance in your business club.
Project activity
Prepare inventory documents for your business club’s activities.
Chapter summary
- Warehousing is a set of activities that involve receiving, storing and preparing goods for shipment or distribution to traders and customers.
- Warehouse management involves supervising, controlling, and evaluating various activities in a warehouse to ensure an efficient and reliable supply of stocks and thus competitively satisfy the customer’s demand.
- Effective warehousing and inventory management are critical for businesses to operate efficiently and profitably.
- There are six types of warehouses: public warehouses, private warehouses, bonded warehouses, distribution centres warehouses, climate-controlled warehouses and smart warehouses.
- Stocks or inventories are goods mostly kept on the premises of a warehouse so that they are available for sale, distribution or further use.
- Goods received notes, bin cards, and the inventory ledger are essential warehousing and inventory management documents.
Revision exercise
Choose the correct answer among the given alternatives in questions 1 to 5 and write its letter in your exercise book.
1. One of the following is considered a warehouse that stores imported goods waiting for customs clearance.
2. Which of the following is the merit of storing goods in a warehouse?
3. ______ refers to the whole process of releasing goods from a warehouse.
4. ______ refers to a set of activities that involve receiving, storing and preparing goods for shipment or distribution to traders and customer
5. Mr. Zuberi always ensures that, in the business, goods are always sufficient without holding more or less stock than the required quantities. This activity done by Mr. Zuberi is known as:
6. Evaluate the benefits and drawbacks of using a warehouse.
7. Your friend runs a milk business recently linked to an outbreak of foodborne illness. What do you think is the reason? What should he/she do?
8. How can you use inventory management to improve customer satisfaction?
9. You are running a small electronics shop experiencing frequent inventory problems. You use a manual system to track stock levels. Discuss how implementing an inventory management system with barcode scanning technology and integrated software can help you to reduce inventory discrepancies and losses.
10. Match the items from Group A with those in Group B by writing the letter of a correct option in Group B that corresponds to an item in Group A
| Group A | Group B |
|---|---|
| (i) Warehouse that stores imported goods until customs duties are cleared. | A. Warehouse |
| (ii) Public, private, bonded, climate-controlled and distribution centres. | B. Bonded warehouse |
| (iii) A warehouse owned by manufacturers, wholesalers and retailers. | C. Stock keeping |
| (iv) Stores goods that usually are affected by weather conditions. | D. Public warehouse |
| (v) The warehouse is open for rent space and pays storage fees for their goods. | E. Types of warehouses |
| (vi) Management of goods to ensure sufficient quantities of goods without holding more or less stock than the required quantities. | F. Climate-controlled warehouse |
| (vii) The process of accepting deliveries of goods from suppliers or other traders, notifying the purchasing department of the receipt and keeping the records of the goods received | J. Stock administration |
| (viii) Receive goods directly from factories and suppliers, regroup them into orders and ship them to customers swiftly. | K. Private warehouse |