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Understanding Inventory Concepts

This guide provides a deep dive into the core concepts that power the Kezi ERP inventory system, explaining "why" things work the way they do.

What is Inventory Management?

Inventory management is a comprehensive system that tracks, values, and manages all aspects of your stock throughout its lifecycle, from purchase to sale.

It answers four fundamental questions:

  1. How much do we have? (Quantity)
  2. Where is it? (Location)
  3. What is it worth? (Valuation)
  4. When does it need replenishing? (Reordering)

Double-Entry Inventory

Just like double-entry accounting, modern inventory systems use a double-entry method for stock. Nothing disappears; it only moves.

  • No "Lost" Items: Instead of reducing stock quantity directly, you move items from "Warehouse" to "Scrap Location" or "Customer Location".
  • Audit Trail: Every change in inventory is a "Move" record (StockMove) from a Source Location to a Destination Location.
Movement Type Source Destination
Receipt Vendor Location Your Warehouse
Delivery Your Warehouse Customer Location
Internal Transfer Shelf A Shelf B
Inventory Loss Your Warehouse Inventory Loss (Virtual)

Valuation Methods Explained

How do you calculate the cost of the goods you sold? Kezi supports standard accounting methods:

1. FIFO (First In, First Out)

  • Concept: The first items purchased are the first ones sold.
  • Best For: Perishable goods (food, medicine) or when costs are rising.
  • Mechanism: The system tracks "Cost Layers". If you bought 10 units @ $100 and then 10 units @ $120, the first 10 sold will have a COGS of $100 each.

2. LIFO (Last In, First Out)

  • Concept: The most recently purchased items are sold first.
  • Best For: Non-perishable goods (coal, sand) or tax strategies in inflation.
  • Mechanism: The system consumes the newest Cost Layer first.

3. AVCO (Average Cost)

  • Concept: The cost is the weighted average of all units in stock.
  • Best For: Commodities, identical items mixed together.
  • Mechanism: Recalculated after every receipt: (Old Value + New Value) / Total Quantity.

4. Standard Price

  • Concept: You define a fixed cost per unit manually.
  • Best For: Manufacturing with standard costing or stable prices.
  • Mechanism: Variances between Purchase Price and Standard Price are posted to a Price Difference Account.

Tracking Dimensions

Lots vs. Serial Numbers

  • Lots: A batch of products identified by a single code (e.g., "Batch 101" of Paint). Used for traceability and expiration dates.
  • Serial Numbers: A unique code for one single unit (e.g., "SN-59283" of a Laptop). Used for warranty and strict theft control.

Stock Quantities

The system tracks three numbers for every product/location pair:

  1. On Hand: What physically exists in the bin.
  2. Reserved: What is physically there but promised to an outgoing order.
  3. Available: On Hand - Reserved. This is what can be sold to new customers.

Reordering Strategies

The system helps you maintain optimal stock levels:

  • Reordering Rules (Min/Max): When stock falls below "Min", the system prompts a purchase to reach "Max".
  • MTO (Make to Order): Do not hold stock. Only buy/make when a customer orders it.

Integration with Accounting

Inventory is strictly tied to the General Ledger:

  • Receipts debit Inventory Asset and credit Stock Input Account.
  • Deliveries debit COGS and credit Inventory Asset.
  • Landed Costs: Freight/Duty fees can be added to the inventory value of the received goods rather than expensed immediately.