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Inventory Management Techniques

The document discusses various inventory management techniques that can be used to effectively manage inventory levels. These techniques include ABC analysis, where inventory is categorized into A, B, and C levels based on value and importance; just-in-time inventory management, which aims to receive inventory as needed to reduce storage costs; and economic order quantity, which determines the optimal order size to minimize costs. Other techniques covered are minimum order quantities set by suppliers, safety stock levels to prevent stockouts, perpetual and periodic inventory counting methods, and demand forecasting to estimate future customer needs. The overall goal of using these techniques is to reduce inventory costs and improve inventory turnover.

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374 views6 pages

Inventory Management Techniques

The document discusses various inventory management techniques that can be used to effectively manage inventory levels. These techniques include ABC analysis, where inventory is categorized into A, B, and C levels based on value and importance; just-in-time inventory management, which aims to receive inventory as needed to reduce storage costs; and economic order quantity, which determines the optimal order size to minimize costs. Other techniques covered are minimum order quantities set by suppliers, safety stock levels to prevent stockouts, perpetual and periodic inventory counting methods, and demand forecasting to estimate future customer needs. The overall goal of using these techniques is to reduce inventory costs and improve inventory turnover.

Uploaded by

sankasturkar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Inventory Management Techniques

That being said, inventory management is only as powerful as the way you
use it.

It’s well worth the extra time and money to have inventory management set up
by the experts who made the software. Work with them to make sure you’re
utilizing the proper techniques and features to get the most bang for your
buck.

Let’s take a look at some inventory-control techniques you may choose to


utilize in your own warehouse.

1. Economic order quantity.

Economic order quantity, or EOQ, is a formula for the ideal order quantity a
company needs to purchase for its inventory with a set of variables like total
costs of production, demand rate, and other factors.

The overall goal of EOQ is to minimize related costs. The formula is used to
identify the greatest number of product units to order to minimize buying. The
formula also takes the number of units in the delivery of and storing of
inventory unit costs. This helps free up tied cash in inventory for most
companies.

2. Minimum order quantity.

On the supplier side, minimum order quantity (MOQ) is the smallest amount of
set stock a supplier is willing to sell. If retailers are unable to purchase the
MOQ of a product, the supplier won’t sell it to you.

For example, inventory items that cost more to produce typically have a
smaller MOQ as opposed to cheaper items that are easier and more cost
effective to make.

3. ABC analysis.

This inventory categorization technique splits subjects into three categories to


identify items that have a heavy impact on overall inventory cost.

 Category A serves as your most valuable products that contribute the


most to overall profit.
 Category B is the products that fall somewhere in between the most and
least valuable.
 Category C is for the small transactions that are vital for overall profit
but don’t matter much individually to the company altogether.

4. Just-in-time inventory management.

Just-in-time (JIT) inventory management is a technique that arranges raw


material orders from suppliers in direct connection with production schedules.

JIT is a great way to reduce inventory costs. Companies receive inventory on


an as-needed basis instead of ordering too much and risking dead stock.
Dead stock is inventory that was never sold or used by customers before
being removed from sale status.

5. Safety stock inventory.

Safety stock inventory management is extra inventory being ordered beyond


expected demand. This technique is used to prevent stockouts typically
caused by incorrect forecasting or unforeseen changes in customer demand.

7. FIFO and LIFO.

LIFO and FIFO are methods to determine the cost of inventory. FIFO, or First
in, First out, assumes the older inventory is sold first. FIFO is a great way to
keep inventory fresh.

LIFO, or Last-in, First-out, assumes the newer inventory is typically sold first.
LIFO helps prevent inventory from going bad.

8. Reorder point formula.

The reorder point formula is an inventory management technique that’s based


on a business’s own purchase and sales cycles that varies on a per-product
basis. A reorder point is usually higher than a safety stock number to factor in
lead time.

9. Batch tracking.

Batch tracking is a quality control inventory management technique wherein


users can group and monitor a set of stock with similar traits. This method
helps to track the expiration of inventory or trace defective items back to their
original batch.

10. Consignment inventory.

If you’re thinking about your local consignment store here, you’re exactly right.
Consignment inventory is a business deal when a consigner (vendor or
wholesaler) agrees to give a consignee (retailer like your favorite consignment
store) their goods without the consignee paying for the inventory upfront. The
consigner offering the inventory still owns the goods and the consignee pays
for them only when they sell.

11. Perpetual inventory management.

Perpetual inventory management is simply counting inventory as soon as it


arrives. It’s the most basic inventory management technique and can be
recorded manually on pen and paper or a spreadsheet.

12. Dropshipping.

Dropshipping is an inventory management fulfillment method in which a store


doesn’t actually keep the products it sells in stock. When a store makes a
sale, instead of picking it from their own inventory, they purchase the item
from a third party and have it shipped to the consumer. The seller never sees
our touches the product itself.

13. Lean Manufacturing.

Lean is a broad set of management practices that can be applied to any


business practice. It’s goal is to improve efficiency by eliminating waste and
any non value-adding activities from daily business.

14. Six Sigma.

Six Sigma is a brand of teaching that gives companies tools to improve the
performance of their business (increase profits) and decrease the growth of
excess inventory.

15. Lean Six Sigma.

Lean Six Sigma enhances the tools of Six Sigma, but instead focuses more
on increasing word standardization and the flow of business.
16. Demand forecasting.

Demand forecasting should become a familiar inventory management


technique to retailers. Demand forecasting is based on historical sales data to
formulate an estimate of the expected forecast of customer demand.
Essentially, it’s an estimate of the goods and services a company expects
customers to purchase in the future.

17. Cross-docking.

Cross-docking is an inventory management technique whereby an incoming


truck unloads materials directly into outbound trucks to create a JIT shipping
process. There is little or no storage in between deliveries.

18. Bulk shipments.

Bulk shipments is a cost efficient method of shipping when you palletize


inventory to ship more at once.
ABC ANALYSIS
ABC analysis stands for Always Better Control Analysis. It is an inventory management
technique where inventory items are classified into three categories namely: A, B, and
C. The items in A category of inventory are closely controlled as it consists of high-
priced inventory which may be less in number but are very expensive. The items in B
category are relatively lesser expensive inventory as compared to A category and the
number of items in B category is moderate so control level is also moderate. The C
category consists of a high number of inventory items which require lesser investments
so the control level is minimum.

JUST IN TIME (JIT) METHOD


In Just in Time method of inventory control, the company keeps only as much inventory
as it needs during the production process. With no excess inventory in hand, the
company saves the cost of storage and insurance. The company orders further
inventory when the old stock of inventory is close to replenishment. This is a little risky
method of inventory management because a little delay in ordering new inventory can
lead to stock out situation. Thus this method requires proper planning so that new
orders can be timely placed.

Economic Order Quantity


Economic Order Quantity technique focuses on taking a decision regarding how much
quantity of inventory should the company order at any point of time and when should
they place the order. In this model, the store manager will reorder the inventory when it
reaches the minimum level. EOQ model helps to save the ordering cost and carrying
costs incurred while placing the order. With the EOQ model, the organization is able to
place the right quantity of inventory.

VED ANALYSIS
VED stands for Vital Essential and Desirable. Organizations mainly use this technique
for controlling spare parts of inventory. Like, a higher level of inventory is required for
vital parts that are very costly and essential for production. Others are essential spare
parts, whose absence may slow down the production process, hence it is necessary to
maintain such inventory. Similarly, an organization can maintain a low level of inventory
for desirable parts, which are not often required for production.

FAST, SLOW & NON-MOVING (FSN) METHOD


This method of inventory control is very useful for controlling obsolescence. All the
items of inventory are not used in the same order; some are required frequently, while
some are not required at all. So this method classifies inventory into three categories,
fast-moving inventory, slow-moving inventory, and non-moving inventory. The order for
new inventory is placed based on the utilization of inventory.

Conclusion
Inventory management is an essential part of every business. With an effective
inventory management system in place, the business can significantly reduce its various
costs like warehousing cost, inventory carrying cost, ordering cost, cost of
obsolescence, etc. It improves the supply chain of the business. Managers are able to
forecast the level of production at which they need to place new orders for inventory.
Hence, organizations should take all the necessary steps to maintain an effective
inventory management and control system.

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