12 Inventory Management

Techniques You Need to Know

12 Inventory Management Techniques

You Need to Know
Inventory management refers to the collection of techniques, strategies, and tools
used to store, track, order, and deliver inventory or stock. Companies invest a
considerable amount, if not the majority of their capital in their inventory. As
such, it’s crucial to find and use an effective inventory management approach that
keeps inventory levels right where they need to be.

Small businesses often struggle with cash flow, which can affect stock levels,
leading to stock-outs and unhappy customers. Too much of this and the company
could go out of business. This is where inventory management techniques are

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helpful.

With the right inventory control methods, business owners can keep optimal
inventory counts, reduce human error, save resources when it comes to physical
inventory stock, and more.

Let’s take a look at 12 of the most widely used inventory techniques today. These
are highly effective techniques you can use to improve inventory control in your
business.

Minimum Order Quantity

Minimum order quantity (MOQ) is the lowest set amount of stock that suppliers
are willing to sell. If you can’t purchase the MOQ of a specific product, then you
won’t be able to buy it from that supplier.

Suppliers use minimum order quantities to increase their profits while getting rid
of more inventory and removing “bargain shoppers” at the same time.

The minimum order quantity is set based on your total cost of inventory with any
other expenses you must pay before reaching profit. This means MOQs help
wholesalers remain profitable and maintain steady cash flow.

Just in Time Inventory Management

Just-in-time Inventory management is making what is needed when it’s required
in the amount it’s needed. A lot of companies operate with a just-in-case Inventory
management approach holding onto 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

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chain. This signals the staff that they need to order inventory or begin producing
the required items.

Just-in-time Inventory management provides a variety of benefits, including:

Less obsolete and outdated or spoiled inventory

Reducing waste and increasing efficiency by minimizing or eliminating
warehousing and stockpiling while maximizing inventory turnover
Decreasing costs related to insurance and rent by reducing your inventory
Identifying and fixing production errors faster because production
happens on a smaller and more focused level
Maintaining healthy cash flow by ordering stock only when it is necessary

FIFO and LIFO

FIFO and LIFO are accounting methods that are used to value inventory and
report profitability.

FIFO stands for first in first out. It is an inventory accounting method that says
the first items in your inventory are the first ones to leave, so you always get rid
of your oldest stock first.

LIFO stands for last in, first out. It is an inventory accounting method that says
your last items in your inventory are the first ones to leave, meaning that you get
rid of the newest stock first.

If you’re operating a food business or otherwise handling food Inventory

management or any other perishable items, you pretty much have to use the FIFO
rule. Otherwise, you’ll end up with obsolete inventory that you have to write off as
a loss.

LIFO is an excellent method for non-perishable homogeneous goods like brick or

stone, so if you get a fresh batch of items like these, you don’t have to rearrange

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your warehouse or rotate batches because they’ll be the first ones out anyway.

Reorder Point Formula

The reorder point formula alerts you when you should order more stock. You are
told when you reach the lowest amount of inventory you can sustain before you
need more.

The formula for the reorder point is: (Average Daily Unit Sales x Average Lead
Time in Days) + Safety Stock.

With this equation, you can stop being a victim to market spikes and slumps and
consistently order the right amount of stock every month.

Not all inventory management techniques apply to all businesses and

industries. It takes a bit of research to understand which will work best for your
company and to change from one method to another.

ABC Analysis
ABC analysis of inventory sorts your inventory into three categories according to
how much they cost to hold and how well they sell.

A-Items: The best selling items that don’t take up a lot of your warehouse
space or cost.
B-Items: The mid-range items that sell regularly but cost more than A-
Items to hold.
C-Items: The rest of your inventory that makes up the bulk of your
inventory costs but contributes the least to your bottom line.

Using ABC analysis helps to keep you are working capital cost low because it
identifies the items you should reorder more often and which items you don’t

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need to stock as frequently. ABC analysis optimizes your inventory turnover rate
and reduces obsolete inventory.

Lean Manufacturing System

The lean manufacturing system is sometimes referred to as lean manufacturing or
lean production. This system is known for maximizing product value for the
customer and minimizing waste without sacrificing productivity.

This inventory tracking system originated in the Toyota production system, which
attempted to prevent:

Muda: This refers to everything in your manufacturing process that

creates waste or causes constraints on your ability to create a valuable
product
Mura: This refers to everything that creates an efficient and inconsistent
workflows
Muri: This refers to all loads or tasks that put too much stress on your
machines or employees.

All lean manufacturing systems adhere to the following principles:

Lean manufacturing delivers the most valuable product to the consumer.

It maps out the steps and processes required to manufacture valuable
products.
It undergoes a process of ensuring all of your value-adding steps flow
smoothly without bottlenecks, delays, or interruptions.
Products are built using a just-in-time basis, so materials are not
stockpiled, and customers can receive their orders within weeks rather
than months.
Lean thinking and process improvement is a core part of company culture.

Minimizing or eliminating Muda, Mura, and Muri while adhering to the five

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principles, this inventory management technique allows you to produce the
highest quality products while also increasing productivity and revenue.

Batch Tracking
You may also hear bats tracking called lot tracking. It’s a process to trace goods
along the distribution chain with batch numbers efficiently.

Whether it is raw materials or finished goods, batch tracking allows you to see
where your products came from, where they went, how much was shipped, and if
they have an expiration date, when they expire.

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

6 Sigma
Also known as Six Sigma, This is a data-driven process that aims to reduce
product defects down to 99.99966% defect-free products over the long-term or
3.4 defective parts per million.

Using statistical models, Six Sigma practitioners methodically improve and

enhance a company’s manufacturing process until they reach the level of Six
Sigma.

Most often, this uses a five-step process known as DMAIC, which stands for
define, measure, analyze, improve, and control.

The DMAIC process uses data and measured objectives to create a cycle of

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continuous improvement in manufacturing methods. DMAIC is useful to improve
your current processes, but Six Sigma also uses DMADV to develop new
processes, products, or services.

DMADV stands for define, measure, analyze, design, and verify.it is as data and
thorough analysis to help you create efficient processes or develop a high-quality
product or service.

It works with intensive training and focused projects along with practical
statistical analysis to help save your business a lot of money.

Lean Six Sigma

Lean Six Sigma is the fusion of Six Sigma with lean manufacturing to create a
complete system that removes waste and reduces process variation to streamline
production and optimize product output.

Lean Six Sigma primarily uses Six Sigma processes as the backbone of the system
to drive focused improvements in manufacturing. It also incorporates many tools
and techniques from the lean approach to reduce wasteful processes and steps.

Consignment Inventory
Consignment inventory refers to a business Arrangement where a vendor or
wholesaler known as a cosigner agrees to give their goods to a cosine e, most
often a retailer without the retailer paying for the goods upfront. The cosigner
still owns the products, and the cosigner pays for the goods only when they sell.

This is a win-win relationship between suppliers and retailers as long as they’re

both willing to share the risks and the rewards.

Vendors get low inventory carrying costs, direct to retailer shipping, and access
to new markets. Retailers get minimal risk, improved cash flow, and lower cost of

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ownership.

Perpetual Inventory Management

You may sometimes hear Perpetual Inventory management referred to as a
continuous inventory system. Perpetual inventory systems track sold and stocked
inventory in real-time, updating your accounting system whenever a sale is made,
new inventory has arrived, or inventory is used.

All of this information is sent to a central hub that authorized employees can
access at any time. The advantages of this system include the ability to manage
multiple locations quickly, more informed forecasting, and proactively monitoring
inventory turnover.

Demand Forecasting
demand forecasting is the process of predicting what your customers will buy,
when they will buy it, and how much of it they will buy.

You can use several informal methods such as guessing, or you can use
quantitative methods such as past sales data analysis.

Demand forecasting will help you make better decisions for managing and
growing your business, whether you are using it to plan production, enter a new
market, or managed inventory.

Best practices for demand forecasting include:

Creating a repeatable monthly process

Determining what to measure and how often to measure it
Integrating data across all of your sales channels
Maintaining real-time, up-to-date data
Measuring forecast accuracy at the location, customer planning, and SKU

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 level

Use company data and goals to determine the best inventory management system
to use within your company. Then, to maximize its benefits for your organization,
make sure you have the tools you need to make it as easy as possible.

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