When the stock level of an item falls below the minimum quantity, it is time to reorder the product, right? But we've found some instances where it is difficult to maintain accurate stock levels because it is impractical to record each individual material disbursement. For example:

• Items like pencils, pens, and other office supplies stored in a supply cabinet.

• Nails, screws, and similar items that are sold from open containers in hardware stores.

• Fasteners, solvents, and other items that are used as needed in an assembly or repair process.

• Sugar packets, complementary bottles of shampoo, and other amenities provided to guests in restaurants and hotels.

These are usually very inexpensive products that are taken from stock as needed by the user. But most of these items do have significant usage. And in many cases, a company would suffer a hardship in the event of a stock-out. After all, a product does not have to be expensive in order to shut down production or to be deemed important by customers.

If each material disbursement is not recorded, how do you know when to reorder the product? How does a buyer know when the stock level of the item falls below its minimum quantity? How do you record usage to forecast future demand of the item? In other words, how do you maintain effective inventory management of these items without accurately recording every material disbursement?

It is easy. We change our focus and don't concentrate on what people are using or buying. We track the rate at which we have to replenish the "open stock" available to consumers or other users of the product. The on-hand quantity in the computer system reflects the total quantity in unopened containers (boxes, cartons, gallon bottles, etc.) in "bulk storage" that have not yet been released for sale or use. Note that bulk storage could be a locked cabinet, a high shelf, or a bin location in the back room or warehouse. It just has to be a location that is not accessible by end users of the product. This bulk storage inventory is used to replenish the "open stock" of the item (i.e., the stock available to consumers). As a container is taken from bulk storage and made available to workers or customers, the on-hand quantity is reduced by the container quantity. Therefore the on-hand quantity in the computer reflects an accurate count of the quantity in bulk storage. When the on-hand quantity drops below the minimum stock level or order point, the product should be reordered. Usage history of the product reflects the number of containers of the product that were released from bulk storage in a day, week, month, or other significant inventory period. This usage history can be utilized to forecast future demand for each bulk-storage item. Unexpected increases in replenishment from bulk storage should be reported to management as it might reflect pilferage or some other problem that should be investigated.

From an accounting point of view, we are "consuming" the entire quantity when it is released to consumers. That is, the total inventory value is being reduced by the value of the container, though the product is still in your facility in an "open" bin. Is this a "perfect" solution to maintaining an accurate inventory? No. But the world is not perfect. And we have found it both difficult and counterproductive to have:

• Workers in a fabrication shop carefully account for every nut, bolt, and piece of sandpaper they use.

• Hotel chambermaids carefully record which rooms receive a new bar of soap on a given day.

• Cashiers verify that customers correctly recorded the right item number when they filled their own order from one of several kegs of nails.

Even though the on-hand quantity of open-stock items is not reduced when an individual piece is sold or consumed, customers or projects often must still be charged for the items. This can be accomplished in several ways including:

Issuing a special charge based on the average amount of open-stock material consumed on each order or in the course of a month. Most consumers are now used to their automobile dealers adding a line item on repair or maintenance invoices for "fluids and other consumable maintenance items." And many companies charge each department for a share of the total office supplies consumed in a month based on the number of people in that department.

Utilize a special type of inventory item in the computer system for open-stock products. These items can be billed out to a customer on an invoice (i.e., nails being purchased in bulk at a hardware store), but an individual sale does not reduce the on-hand quantity of the item.

Because they are usually small, inexpensive, and/or hard to count, open-stock items have proved to be a nightmare for many manufacturers, distributors, and retailers. Unfortunately they are often necessary elements in a manufacturing process or crucial in maintaining a high level of customer service. Our goal should be to maintain an adequate inventory of each of these products with the least amount of effort.