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Here’s an easy-to-understand model we’ve created to emulate the inventory cycle (Figure 1). While quite simple, every company follows this path to some degree.
Figure 1: Typical fulfillment processing flowchart.
Inventory Cycle in QuickBooks for the Typical Company
Sales orders may flow in through a variety of ways – phone, fax, email, online, or a client portal. In whatever fashion the customer’s order comes in, a customer service rep at the company takes the customer’s purchase order (PO) and turns it into a sales order for processing. At this point, you have a decision to make: do you pick it, order it, or produce (manufacture) it?
For a strictly wholesale or distribution company that always stocks ahead of demand, the choice is easy: “pick ’em and pack ’em” (left of “POP Decision” in Figure 1). In QuickBooks, you can change the template from a Sales Order to a Pick List (Figure 2) with one click to list the item quantities without prices. The company’s “picker” finds the items, possibly scans the items and serial or lot numbers into the form, then turns the cart over to the packing and shipping department.
Figure 2: Example of a Pick List
However, for most companies, it’s not that easy. It’s a balancing act to get supply to match demand and to keep within cash flow constraints. This is where a good purchasing manager comes in.
Ordering Process: Not as Simple as It Would Seem
To start the ordering process (middle of Figure 1 under “POP Decision”), you first have to decide which vendor to order from. QuickBooks lists only one Preferred Vendor to give you a quick reference as to who you ordered from last time. You must run a Purchases by Item Detail report or an Inventory Item QuickReport on the history of an item every time you want to order it to see prior purchases and suppliers.
Determining quantities to order and managing open purchase orders (POs) are jobs in themselves. If it’s a custom order and the quantity needed is known, you can assign the customer in the body of the PO. These items can then be “set aside” for that customer. Stocking the shelves for regular orders takes a lot more planning and input. You have to look at both prior purchases and prior sales. Have you ordered too many in the past? Is your business seasonal? How many items will the allotted space in the warehouse hold?
QuickBooks helps the purchasing manager track orders and items through three basic PO reports, all accessible under the Purchases submenu under the Reports menu. The first is the Open Purchase Orders report. This is a high-level list of open POs that doesn’t get into the individual item detail. However, if you have included fields for Ship Date, (Expected) Delivery Date, and Due Date on the PO forms, you can do some nifty planning. For example, by sorting on the Delivery Date, the receiving person and the production crew will know when to expect items to start arriving, and
To see which items are coming in, run the Open Purchase Orders Detail report. This report gives a breakdown of each item, quantity, and expected delivery date. It also shows how many have been received and how many are on backorder.
The last report, Open Purchase Orders by Job, lists the outstanding items on open POs, grouped by customers that have been identified, or “linked,” in the PO.
In QuickBooks Pro, Premier, and Enterprise, the Reorder Point is set at the bottom of the Edit Item screen for each item. Besides a Min field, a Max field was added with QuickBooks Enterprise Solutions (QBES) V14 (Figure 3).
Figure 3: Reorder Point Min and Max fields added in QBES V14
Your “friend” in seeing immediate stock levels to make decisions about ordering is one of two reports – Inventory Stock Status by Item or Inventory Stock Status by Vendor (Figure 4) – depending on how you want to use the reports. (In QBES with the Advanced Inventory module, users also have access to a similar report – Inventory Stock Status by Site – if multiple locations are turned on).
The first two reports are similar, except for how they’re sorted. They show min/max reorder levels, quantities on hand, and quantities available after reserving items for sales orders and assemblies. There’s also a checkmark in the Order column, which is the most obvious sign an item needs to be ordered. Both reports also show how many items are still on open POs.
Figure 4: Example of Inventory Stock Status by Vendor report
In QBES, at the top of these two forms, there’s a button to Create Auto POs. When you click on it, you’ll see a chart in spreadsheet format showing the items and their global reorder points. This wizard will always recommend a quantity of one above the difference between the reorder point and a combination of the quantity on hand and the quantity on other open POs. When the maximum reorder point for an item is identified, the wizard will suggest a reorder quantity that will take the item up to the maximum quantity available.
Realize that QuickBooks doesn’t automatically create POs when a trigger point, such as a reorder point, is “hit.” The Create Auto POs wizard gives an intermediate step. It lists all of the items that have gone below their designated reorder points. It then suggests a reorder quantity that either brings the on-hand quantity to one above the reorder point or to the maximum quantity, if that field was used. Note that it also doesn’t take into account the number of items on open sales orders.
Receiving is the next logical step, and this is where a good scanning device expedites the process. (Scanning isn’t required, only recommended.) For QuickBooks Pro, Premier, and Enterprise without Advanced Inventory, you’ll need to purchase additional software, such as Baus Systems or Wasp Inventory, that allows QuickBooks to “talk’’ to the scanning device or label printer. To add items to an item receipt, the user selects the Barcode field for the item in QuickBooks and scans the barcode on the item. This will work for serialized or lot-numbered items.
Packing slips or bills of lading should be collected from the delivery driver and scanned to attach to the Item Receipts, or forwarded to the accounting person for comparison to the bills when they arrive.
Once items are received, they may be:
- Set aside for fulfillment of custom orders;
- Held for inspection (quality control);
- Left to be tagged or additional labels applied;
- Held for transfer to another location;
- Placed into stock; or
- Moved to a staging area in preparation for production.
QuickBooks doesn’t alert the person who is doing fulfillment that sales orders can be filled and shipped once items have arrived. If you’re using Premier or Enterprise, you can, however, use the Sales Order Fulfillment Worksheet listed under the Customer drop-down. The Create Auto POs wizard shows you fillable, partially fillable, and unfillable orders in your workflow. Except for the Inventory Stock Status by Item report, there’s no other report or “alert” to inform people in production and fulfillment that items have arrived.
Production: A Result of Teamwork and Timing
The third big process is production, or simply manufacturing (right of “POP Decision” in Figure 1). QuickBooks was designed to handle basic assembly-type manufacturing, not complex manufacturing processes involving shop floor controls or production scheduling. Instead, QuickBooks can track a Bill of Materials (BOM) which lists the components, or “ingredients,” that make up an assembly when it’s time to build. A simple example might be a bike with many components: a frame; handlebars; a seat; lights; and two subassemblies, the wheels with more components. You can have multiple levels of a BOM, nesting subassemblies into a higher-level BOM, but this is where the tracking starts to become difficult. There isn’t a report showing the hierarchy of multiple-level assemblies, although these reports are available from third-party software companies, such as QQube and CCRQBOM.
Once you have an order from a customer or you just want to add to stock, you have to tell your workers what items and how many of them to build. In the true manufacturing world, this would be done with a manufacturing order, or work order. QuickBooks does have what it terms a Work Order, but it’s simply another template for a Sales Order. It can list the finished good (or item you’re going to sell), but it doesn’t list workflow instructions, like when to assemble what (think IKEA). One way around this is to print the Work Order and attach a copy of the Build Assembly, which we’ll discuss next, and give it to the head of production.
Your next step is to perform a Build Assembly transaction, or what we call a “build” (Figure 5). This takes the components in the BOM out of inventory and replaces them with an assembly (finished good or subassembly) of equal value. You can access this by either going to the Build Assemblies choice off the Inventory drop-down in QuickBooks, or by going to the item in the Item List and right-clicking the item and choosing Build Assemblies.
Figure 5: Example of a Build Assembly transaction
The Build Assembly is primarily for telling QuickBooks what attributes apply to a particular “batch” of assemblies and how many are going to be built. If you’ve done your homework in properly setting up the BOM, then this process should be easy. In the lower right of the Build Assembly form (not shown), QuickBooks shows you how many you can build with the available component quantities. Don’t try to build more; QuickBooks will refuse to complete the build (you can’t build what you don’t have) and will stamp it as “Pending.”
As mentioned, once the build is complete, the value of one finished good will equal the value of the value of the components that went into making it at the time the build was done. Note: Another way to “create” a finished good is by performing an Adjust Quantity/Value on Hand transaction. However, this only adjusts the quantity of the finished good and doesn’t take out the quantities of the components.
Whether you built the items or picked them off of the shelves, your customer’s items are now headed for the packing and shipping departments. Packing slips can be created as separate templates under either the Sales Order form or the Invoice form. The templates can be made to look the same. Which to use will depend primarily on when the customer gets invoiced. Sales orders don’t affect the financial statements; however, when you turn a sales order into an invoice, the revenue is recognized under GAAP rules. If your client ships the same day the goods are ready, use an Invoice template for the packing slip. If goods are “held,” or there’s normally a delay before invoicing the customer, use a Sales Order template.
QuickBooks contains a Shipping Manager that allows you to print shipping labels, schedule pickups, and track packages through UPS, USPS, and FedEx (Figure 6).
Figure 6: Shipping Manager screen for FedEx
While QuickBooks currently doesn’t have a feature that adds the tracking number back on the Invoice, there are third-party programs with this feature (and much more), such as ShipRush and ShipGear. These programs connect directly into your UPS WorldShip or FedEx Desktop programs for tighter integration and tracking. With the tracking number on the invoice, you can then email the Invoice to your customer or set up a special template to use as a tracking document.
This has been a whirlwind trip through the inventory cycle in QuickBooks, but we’ll be looking at some of these steps in more detail in future articles. Hopefully, you now have a greater understanding and appreciation for the many workflows that take place when controlling inventory, which will allow you to give clients a better idea of what to expect and consider when setting up their QuickBooks files.