What is inventory management?
Inventory management is how we can track and control a business’s inventory. Inventory governs the entire flow of goods from purchasing of raw material to sale of finished goods. This ensures that the business always has the right quantities at the right time and at the right location.
5 common inventory management techniques:
Adapting these common inventory management techniques can be a great way to control stocks.
Just In Time inventory (JIT)
Just in time means holding as little inventory as possible because this way a business can negate the cost and risk involved with keeping a large amount of stock in hand. A lot of companies operate with just in time inventory management approach holding and a small amount of stock in case there is an unexpected demand increase.
Using just in time Inventory (JIT) management aims to establish a zero inventory system by creating Goods to order. It operates with a pull system where an order comes through and initiates a cascade response throughout the entire supply chain. This signals the staff that they need to order inventory or begin producing the required items.
Benefits of JIT Inventory Management
- Less outdated and obsolete inventory
- Decreasing costs related to insurance and rent by reducing inventory
- Maintaining healthy cash flow
- Identifying and fixing production errors faster because production happens on a smaller level
ABC analysis of inventory, sorts inventory into 3 categories according to the holding cost and demand.
- A-items: these are the best selling items which do not have high holding cost and do not take too much space.
- B-items: this is mid range items that will sell regularly but costs more than A-items while holding
- C-items: the rest of inventory that has high cost and less demand comes under this category.
Abc analysis identifies the items that have to be reordered and helps in keeping working capital cost low. ABC analysis optimizes the inventory turnover rate and reduces obsolete inventory.
Quote: Not all inventory management techniques apply to all businesses and industries. Because, it takes a bit of research to understand which will work best for your company.
Perpetual inventory management
Many people heard perpetual inventory management as continuous inventory system. In this system a company can track sold and stocked inventory in real time. Updating the accounting system whenever a sale is made.
All of this information is sent to the central hub and then employees can access this information. The advantage of this system includes the ability to manage multiple locations quickly, more informed forecasting and proactively monitoring inventory turnover.
The batch tracking is a process of tracing goods along the distribution chain with batch efficiently. Whether it is raw material or finished goods, batch tracking allows people to see where products came from and where they are going and how much to ship. It also contains its expiration date and when they are going to expire, if applicable.
This inventory management technique comes with a variety of benefits, including:
- Improved supplier relationships
- Easy and fast recall
- Streamlined expiration tracking
- Fewer accounting errors from manual tracking
Reorder point formula:
The reorder formula send alert to the user when new stock is ordered and placed. It also tells when their stock reaches the minimum level of inventory and they have to order more.
So, The formula for the reorder point is: (Average Daily Unit Sales x Average Lead Time in Days) + Safety Stock.
With this equation, an organization can stop being a victim of market spikes and slumps by consistently ordering the right amount of stock every month.