Effective Inventory Management Techniques

July, 2020

It would really be hard if your business loses money because you were not able to manage your inventory properly. Especially, if there are several techniques you can use to make your business profitable and competitive. Most of a company’s investment is in its inventory and it is important to be in control of your inventory as best as you can to minimize losses and maximize your potential earnings.

To get an idea of what method will work for your business, you may refer to the list of some of the commonly used inventory management techniques.

1. Economic Order Quantity

The objective of this technique is to reduce inventory, as much as possible, to manage the cost of maintaining the inventory as low as possible. Even though you are keeping the inventory of the product to the lowest possible amount, it still must meet the demand of all your clients and not go out-of-stock. It also allows you to keep your product from not being obsolete.

This inventory management is used by calculating how many the company should order. The formula is for you to establish the greatest number of product units you have to order to minimize buying.

2. Minimum Order Quantity

This technique works when there is a certain quantity requirement you need to order for your product order to be processed. This technique allows you to gain your profit while quickly emptying up your inventory. This is an ideal method for wholesale business, it keeps the business profitable and ensures a regular flow of cash, which can be used to reinvest.

3. ABC Analysis

You need to categorize your products to be able to implement this technique. The three categories are as follows:

  • Category A – are the items you value most but take minimal space in your warehouse. These products are also usually the best-seller(s) and more profitable,
  • Category B – these are products that are also selling on a regular basis. Although, the product costs more to maintain compared to Category A.
  • Category C – These are items that take up most of the space in your inventory but do not contribute too much to

This method allows you to optimize the rate of turnover by identifying what products move faster and which stays longer in your inventory.

4. Just-in-time Inventory Management

It is a little risky doing this type of technique and might affect how you handle business with your customers. By putting this technique in place, you keep the number of products in your inventory based on what is needed during that certain period only. Going out-of-stock is one of the risks with this method.

5. FIFO and LIFO

First-in, First-out is selling the products which arrived first in your inventory to your customers. This method ensures that the products your customers get are fresh. This is ideal if you have products that are prone to spoilage or are perishable.

Last-in, First-out is okay to use if the products you are selling have a long shelf life despite being stored for extended periods of time. It’s like selling electric wires, construction materials that would still be the same if it is sold on a later date. LIFO saves you time from keeping track of your inventory and organizing it based on the dates it was delivered.

6. Cycle Counting

It is counting a specific location of your inventory on a certain day. This makes you check your inventory for possible inaccuracies. This ensures also that you have the product on-hand whenever your customer orders it.

7. Batch Tracking

This is an ideal technique to use if the products that you sell are perishable. This way, if there is a problem with a product that belongs to a certain batch, it can be easy for you to trace and recall the product.

8. Consignment Inventory

It is putting your products in the hands of the customer to be displayed and will only be considered sold until the goods are consumed. This allows you to only keep small quantities of the item in your inventory. This requires high levels of trust between the consignee and the owner of the product, also known as the consignor.

An example of the consignment is when you put your product in a mall or a store. When your product gets purchased from the store, that is the only time the store will pay you for your product. The downside of this is that if you sell perishable products if the item spoils, it will be returned to you by the consignee and will now be tagged as a loss.

9. Dropshipping and Cross-Ducking

Dropshipping saves you all the expense from keeping a product in a storage facility. You only order the product from the supplier once an order by the customer is placed. The product then will be directly shipped to the customer. This method is commonly done through e-commerce platforms wherein you want to maximize your earning potential by paying for the storage facility they offer. Although, this method takes longer periods of time for the product to reach your customers.

Cross-ducking is, somewhat, similar to drop shipping, wherein products are delivered to a warehouse just to be sorted. Then it is immediately reloaded to another truck stationed at the warehouse to be delivered to the customer.

Basically, the main goal of this technique is to keep the products moving from the supplier to the end consumer, without paying for a storage facility. But this method would require you to have a fleet of delivery trucks.

10. Bulk Shipment

These are suitable if your business orders unpacked goods in large quantities. A good example of these are petroleum, grains, or gravel.

11. Perpetual Inventory Management

This is the continuous monitoring of your inventory. It records all movements in your inventory in real-time such as when an item is purchased, a good is transferred, or delivery of a product has arrived from your supplier.

12. Periodic Inventory Management

This pertains to performing a physical count of your inventory, which is from the time the product is delivered to your ware- house and the purchases made, within a certain accounting period.

13. Safety Stock Inventory

This is keeping extra stock of the product in your inventory to prevent it from being out-of-stock. It ensures you have the product in your inventory when you foresee a possible shortage on the side of the supplier or problem in delivery. It keeps you prepared for certain situations or occasions wherein there is a sudden surge of sale of a certain product. Although by doing this method, it adds an increase in the cost of maintaining your inventory.

These are the common techniques you can apply to your business. There are several more techniques you can choose to further optimize how you handle your inventory. It is now simply up to you, what you feel suits your business best.

Having an Inventory Management system can assist you in performing these methods to your business by seamlessly integrating with other software, to make you more efficient. To know more about the different techniques of inventory management, you can book a free scope call here!

Are you ready to bring that perfect system in your head to life?


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