Inventory Management Techniques: The Rundown
What are the different inventory management techniques? To properly manage operational costs and cash flow, selecting the right inventory management system is key. This is especially true for small businesses as proper inventory control is essential for growth and success.
No matter what inventory management tool is used, the goals include lowering operational costs, maximizing customer service, synchronizing supply and demand, and minimizing inventory investment.
The following are some inventory management techniques that can help your business grow by increasing your inventory turnover and customer loyalty.
This method of inventory management classifies and controls inventory in proportion to its level of importance. Dollar usage is generally the factor used to determine how important a product is. However, there are other criteria, including usability and sales volume. ABC inventory management is based on the traditional 80/20 rule.
According to pre-determined criteria, the ABC inventory management method classifies items. Class A items receive highest priority and tightest control. The advantages include:
- Better control of high-priority inventory: High-priority or Class A items receive tighter and more frequent controls. Customers request these products most often. Additionally, Class A inventory links directly to the company’s success. This process helps monitor the demand of such items constantly to ensure stock levels match the demand.
- More organized cycle counts: During cycle counts, the ABC inventory management efficiently helps you allocate your resources. The cycle count process involves counting specific items on scheduled dates. The frequency of the count and the selected items depends on the rate of your inventory fluctuation. By classifying inventory, you can schedule regular cycle counts for high-priority products, saving both time and labor.
Using the aggregate inventory management method, you classify your inventory into separate groups and create different levels of control for each group. Controls for each class of inventory depends on the pre-defined rules for that particular class. In many cases, it follows a minimum/maximum policy. You order more inventory only when it reaches a minimum level in order to maximize the level.
There are two strategies to follow: The level strategy (where you maintain a steady inventory rate), and the chase strategy (where you match the demand and supply period by period). While a level strategy allows you to maintain a constant level of inventory and meet demands, a chase strategy allows you to hold your inventory to the lowest level possible (the minimum/maximum policy). The latter also means considerable savings for many companies.
If you need a basic method of inventory management, safety stock is the right approach. There are various reasons that make safety stock a popular inventory management technique. These reasons focus on one common concept: “Uncertainty.”
- Uncertainty of supplier performance
- Uncertainty of consumer demand
- Uncertainty of product availability
Therefore, your inventory should be above the average demand or use of a product. The biggest advantage of using this process is that it increases your cash outlay and the carrying cost.
Of course, with the advancements in digital technology and software as a service, inventory management software solutions often make the most sense for today’s SMBs. Here are some of the benefits:
- Complete supply chain visibility – Inventory software provides the entire operation with actionable information around both inbound and outbound product flows.
- Quality management – The nature of durable and non-durable goods is that issues and errors do occur. Inventory software identifies and tracks the various issues that could occur, and provides guidance regarding factors impacting quality.
- Forecasting and planning – Inventory management software not only manages “optimal” stock levels at the warehouse, but can also predict your future capacity requirements.
- Cost management – Any product sitting on your shelf too long is a liability that picks away at your business’ profitability.
- Efficiency and customer service – Optimizing your inventory processes can reduce the amount of time required to replenish stock, process shipments, and serve your customers.
- Scale – Inventory management software ensures growth without adding a significant amount of hardware or system expenses.
The one thing common in all these inventory management systems is that they improve your ability to monitor and react to supply and demand. You can make critical decisions, such as when to reduce inventory, without affecting customer service. Therefore, inventory management measures add significantly to the bottom-line of your organization.
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