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Understanding Product Coding System for Proper Inventory Management

Understanding Product Coding System for Proper Inventory Management

Understanding Product Coding System for Proper Inventory Management

One of the most frequently asked questions that I receive from clients is on the topic of product coding. Product coding is the process of creating or using a numerical or alphanumerical system for product identification, classification, and management. I would like to make a disclaimer here before proceeding with the content of this article: this guide is not a universal answer for every business. Mostly, this article focuses on micro-retailers. If you own or manage a large retail chain or a larger store, this may not exactly correlate with your current situation. If you have no clue where to begin, then this is a great starting point to help you understand coding systems.

Background

Essentially, the art of managing inventory begins with being able to identify the product at the time of purchase (product sourcing), at the time of product reception and internal movement (within the store), and at the time that the product will be sold. Although this seems rather simplistic, identification through these three separate processes is not always easy.

The reason is that a store may use some code to identify the product within the organization. Another code, such as a UPC (Universal Product Code, which will be explained later), may be used to scan the product at the time of sale. Additionally, a different number or code may be used by the vendor, thus requiring its use at the time of replenishment. These distinctions in codes are not really a problem as long as your internal business process and accompanying business systems have the capability of translating the two. For instance, if a Point of Sale (POS) system can sell using a UPC and also allow for a separate field than can store an item number (vendor code) that differs from said UPC while being able to use this different number at the time of replenishment (i.e. purchase order), then this is a well-controlled process and should work. As long as all products are labeled and all codes are entered into the information system, the process should be sufficiently optimal.

Understand Suppliers

Optimization should be considered when there is some sort of numbering system available for both the time of purchase and the time of sale. Therefore, before beginning to develop your own proprietary coding system, keep the following in mind: DO NOT REINVENT THE WHEEL. Meaning, use what is readily available. The reason that this is important is because stores should minimize as much unnecessary work as possible. If your vendor has a decent product identification system, then you should probably use that as it would take minimal effort on your part. If your vendors do not have one or their coding system is not good enough, then that is an adequate reason for creating a new one. The other reason that you should consider using your vendor’s product identification system is that it will assist in the product replenishment process. Your vendor and your store personnel would be able to identify the product using the same number. This, in turn, would simplify everything when sending a purchase order for product replenishment. Product codes would not have to be “translated” to whatever your vendor understands the product to be.

Universal Product Codes (UPC’s)

Universal Product Codes, or UPCs, are the official barcodes used in most marketplaces and are controlled and regulated. Meaning, these numbers cannot be made up. They must be registered with GS1-US, which is the organization that is in charge of managing the codes. If you are selling products that have UPCs, this may be a good numbering system to use as you are mostly guaranteed to have a unique identification in place. A retailer holding such product would not be required to do anything additional as the products themselves would be labeled. If the label is missing or damaged, one can simply print out the barcode with the already existing code. If you are a manufacturer of a product, you may need to register UPCs in order to sell to retailers and distributors. For example, Walmart requires vendors to have products with UPCs. Online marketplaces such as Amazon and EBay now require these as well. A good scenario where it is efficient to use this numbering system is when most products held have these barcodes and your suppliers either use the number as part of their identification system or can identify the product by description alone.

Same Product, Multiple Suppliers, Multiple Codes

What do you do when you purchase a product from multiple suppliers but each one has their own item number to identify the product? This is probably the more complex of the scenarios presented. The solution depends on the tools that the store has at its disposal. Most current technology products come with the ability to “translate” item numbers depending on the supplier being used. For example, most Point of Sale system may hold multiple alternate codes. When a user selects a specific supplier, the purchase order generated will use the assigned item number for the selected supplier. If this option is not available, then a decision has to be made where the elected option depends on what is simpler. A store may elect to use an internal item number or code (UPC, generated number, item number, etc.) and conditionally obligate the suppliers to translate those numbers themselves. This, however, can lead to replenishment errors. Another option that I have seen is to add the different item numbers toward the end of the product description so that these are visible on a purchase order and a vendor can easily identify the product. A combination of these can also be used.

Conclusion

A coding system is used in order to be able to identify products. Therefore, as long as you can identify a product and your suppliers can identify the same product within the construct of the replenishment process, then what you are using is adequate. What determines efficiency of this process is this simple notion. All else is not as important.



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