What Are Lots, Lot Tracking and Why You Need To Use Them

So much of successful inventory management comes down to traceability. Yet, tracking and tracing items throughout the supply chain—and being able to access this information quickly—is more than just a matter of operational efficiency.

Because the reality of retail sometimes bites. Products become contaminated or are received with defects. Other times, as the automobile industry knows all too well, defective parts will trigger a sweeping government recall. When these situations do arise, the ability of organizations to track and trace inventory will impact the speed and quality of their response.

In the meantime, customer satisfaction, supplier relations, and brand perception hang in the balance …

What are lots and what is lot tracking?

For large-scale inventory management that supports national or global supply chains, the requirements around traceability can be really, really granular. And traceability becomes an even stickier matter (sometimes literally) for businesses that deal with perishable goods, potentially harmful products, or nearly any commodity with an expiration date. But tracking at the lot level (or batch) isn’t just for perishables. Lot-level tracking for something as simple as a t-shirt is necessary to know your landing costs, costs at a particular moment in time, and/or the shelf life of a finished good.

Businesses operating within this area of retail commonly use lots as part of their inventory management strategy. A lot is a batch of products made or collected together into a distinct or uniform group that’s identified by a shared lot number and managed separately in inventory. Usually, all of the items in a given lot share something like production date, production variation, or expiration date in common.

A lot could also be created based on some shared point in time, too. For example, inventory management software can create lots from a purchase order or the time the item was received.

Examples of items that are typically assigned lot numbers

Items with expiration dates are commonly assigned lot numbers, yes. Medical supplies, for example, or vitamins and supplements. Yet, lot numbers do more than store data about items that expire. Where lot numbers shine is their usefulness in storing data on an item for a specific moment in time. This helps keep track of expiration dates, of course; but it can (and often is) used for detailed reporting of on-shelf life, or in first-in-first-out (FIFO) accounting.

Here are a few other examples of inventory items that usually have lot numbers:

• Batteries and fire extinguishers
• Household cleaners and detergents
• Smartphones and other electronics
• Vitamins and supplements
• Medical supplies

In some industries, as within the medical supply vertical, the use of lot numbers is mandated by regulatory bodies. Other industries use lot numbers as a matter of operational efficiency or inventory management best practice.

Stock keeping units (SKUs) vs. lot numbers

Lot numbers are not the only identifiers used tracking and traceability purposes. Lot numbers differ from stock keeping units (SKUs), as SKUs are used to track products based on specific traits, such as manufacturer, price, color, and available options. SKUs are retailer-specific codes that can be used to check stock on hand using a scanner, display related items on an e-commerce site (based on common traits), or run reports on stock levels and sales for a given SKU. A lot is a receipt of one SKU at one specific time.

Serial numbers vs. lot numbers

The difference between serial numbers and lot numbers is more straightforward. Whereas lot numbers are one-to-many, meaning one lot number is assigned to many products or SKUs, serial numbers are one-to-one. This means that serial numbers are only assigned to a single product.

A car is a good example: each vehicle has its own vehicle identification number (VIN). There might be ten thousand 2001 Ford Mustangs, red in color and with the eight-cylinder engine, each with its own VIN number. Your MacBook or iPhone is a good example of how all three can be used together: a MacBook has a lot when it is manufactured; it has a SKU number for the model (grey Macbook Pro, for example); and it has its own unique serial number.

Definition of lot tracking

Like serial numbers and SKUs, lot numbers can (and definitely should) be tracked using barcodes, scanners, and inventory management software. Lot tracking is the process of tracing a group of products throughout the supply chain, start to finish.

Lot tracking allows a retailer to verify, for example, which batch of red candle wax went into a run of red tea candles (and when). In the event of an automobile recall, to use another example, lot tracking can be used to generate a list of all customers that received a car with a recalled part. Finally, lot reporting can be used to pinpoint the source of a defective item that a customer has contacted you about.

Why is lot tracking so important?

You might remember “Bendgate,” during which it was revealed that Apple knowingly sold the iPhone 6 and iPhone 6S Plus even though the phones were prone to screen failure due to bending. In response to the massive PR bomb and subsequent fallout, Apple made changes in how these phones were produced. Using lots, they could accurately identify which versions of the iPhone 6 were prone to bending and which weren’t.

For a smaller to medium sized business, you can only get away with not having lot tracking for so long. Sooner or later, the absence of lot tracking becomes unmanageable. For large companies and more complex supply chains, the implications of inadequate lot tracking can be disastrous.

Lot tracking has a couple of key benefits:

• Narrow down the source of issues – Lot tracking includes detailed reporting that can be used to, for example, figure out why so many returns are coming from a particular lot.
• Identify inventory trends – Which product batches are moving fast? Is there a correlation between the time of year and slow-moving stock with a particular lot number? Lot reporting and advanced analytics dashboards can provide rich insights.
• Help avoid waste, spoilage, and contamination – Some items don’t last long on the shelf. Lot reports can help maximize inventory, sell off items that are closer to their sell-by dates, and avoid costly waste or unsellable items.
• Lessen the impact of recalls – Recalls often happen unexpectedly and require quick action. Federal regulators, for example, might ask that organizations quickly procure exhaustive lists of recalled items “out in the wild,” which can be done using lot management software. The ability to understand the scope of a recall, generate a list of affected products, customers, and suppliers will quicken communication and help speed up resolution.
• Avoid human error – Believe it or not, some companies do track lots manually. Automating this process using lot management software can help avoid costly errors or tracking delays.
• Achieve regulatory compliance and certification – Depending on the industry, certain companies must meet regulatory requirements with regard to the way they manage inventory. The Food and Drug Administration (FDA) and the International Organization of Standardization (ISO) are two bodies that enforce such regulations and certification requirements.
• Understand actual landing costs – Lot tracking helps get a better understanding what your actual landing costs are, since all the items in a lot were purchased at the same time (as opposed to, for example, average costs based on SKU).

Lot tracking best practices

There are two best practices to follow when you are dealing with lots, lot adhering and fulfillment by lot. The result will give you much more granular reporting and accurate inventory.

Lot adhering

This one is pretty straightforward and self-explanatory. Under lot adhering, you stay true to your lots process by counting inventory at the lot level, increment/decrement inventory from the correct lot, and add the lot number either as a scannable barcode or as a visual sticker.

Fulfillment by lot

Now that you’re adhering to lots you have to make sure to fulfill from the correct lot as well. A lot of retailers who use lots as part of their inventory management process fail to fulfill by lot.

This typically results from a lack of warehouse employee knowledge on why they need to fulfill from the lot and/or a lack of software procedures ensuring the correct SKU is being fulfilled from the correct lot. By fulfilling at the lot level every time, you can stay current with your correct inventory shelf-life and overhead costs.

Use barcode scanning

This is an inventory management best practice no matter what kind of tracking codes your business uses. We highly encourage the use of bar codes, which can help save time and reduce error by taking much of the manual labor and data entry otherwise required by lot tracking.

Store your lots wisely

Many businesses will opt to store products with the lot numbers in the same locations. Aside from helping companies respond to recalls faster and more completely, storing lots with a bit of foresight can prevent employees from accidentally picking or shipping items that are defective, under recall, contaminated, or past the sell-by date.

Have a strategy for short-dated items

It’s important to record lot expiration dates into your inventory management solution, especially for items that expire quickly. Using lot reporting, you can automate certain campaigns or discounts for items that are nearing sell-by or expiration dates to clear this inventory instead of letting it go to waste.

Use lot tracking software

Not all retailers use lot tracking and of those that do, not all have the same requirements. In the same vein, not all inventory management software is created equal. Ultimately though, for large operations—or businesses that intend to become large operations—doing it all manually is just not possible.

Comprehensive inventory management software can not only manage lot tracking but help with traceability for all codes and items throughout the supply chain.