The crucial role of inventory management
Inventory management is the process of keeping a tab on an organization’s stocked goods and monitoring their location, weight, dimensions, and quantity. The aim of inventory management is to make sure that a company has enough stock-in-hand to cater to its customers’ needs. It’s only with an effective inventory management system that a business can do away with spoilage, unsold stock, and save money on storage.
Inventory optimization: How to do it the best way?
When it comes to inventory management, it’s pertinent to throw some light on inventory optimization. It is a method of balancing capital investment and service-level goals over an extensive collection of stock-keeping units (SKUs) while considering demand and supply changes.
If you wish to improve your inventory optimization process, then here are techniques you should follow:
1. First-In-First-Out (FIFO)
One of the most popular inventory optimization technique is ‘First-in, first-out.” Under this technique, your oldest stock gets in first and sold first, while your newest stock follows. This method is particularly useful in the case of perishable inventories because it can prevent unsellable spoilage. But some non-perishable goods can also be stocked following this method. To get the best out of this method, you will have to maintain a well-organized warehouse. This usually means that you add new products from the back, or just make sure that your old product stays at the front.
2. ABC Analysis
One of the best inventory management tips that experts give is to follow the ABC method of managing inventory. ABC stands for Always Better Control. This is an inventory optimization technique where you categorize your inventory items into three groups, namely A, B, and C. The items under category A are tightly controlled as it consists of inventory which may be less in quantity but are extremely expensive. The items under category B are relatively lesser expensive compared to category A items, and the number of items is moderate. As such, the control level in this category is also reasonable. The category C consists of a large number of inventory items which need lesser investments and minimum control level.
3. MRP method
MRP stands for Material Requirements Planning (MRP). This method of inventory management is simple to understand and follow. The manufacturers perform a sales forecast and then order the inventory after considering the data. They often employ specialized MRP systems, which integrate data from various departments of the business where inventory exists. Based on the sales data and the demand in the market, the manager would cautiously place the order for new inventory with the business’ material suppliers. This method of inventory optimization ensures that material acquisition takes place within the budget and without the risk of having dead stock in the warehouse.
4. Just-in-time method
Under the Just in Time method of inventory management, the organization keeps only as much inventory as it requires during the production process. Having no extra stock in hand, the company can save on the cost of storage and insurance. The company orders further inventory only when the old inventory is nearing replenishment. It may seem like a little risky method of inventory optimization because a delay in calling for new inventory can lead to a stock-out situation for the company. So, implementing this method of inventory management requires proper planning so that the manager can time the new orders properly.
5. Economic order quantity (EOQ) method
Following the Economic Order Quantity (EOQ) technique is one of the most rewarding inventory management tips you can find. This method focuses on making a decision about (a) how much quantity of stock should the enterprise order at any point in time and (b) when should they order the inventory from their supplier. In this model, the store manager will reorder the stock when it touches the minimum level. The model helps them to save tremendously on order and carrying costs borne while ordering the stock. With this model of inventory optimization, the company can order inventory in the right quantity.
6. VED Analysis
VED stands for Vital Essential and Desirable. Companies primarily use this technique of inventory optimization for controlling spare parts of inventory. For example, a company would require a higher level of inventory for producing vital components that are also very costly. Others include essential spare parts, whose absence may hamper the manufacturing process. As such, it is necessary to maintain such stock in hand. Similarly, a company can choose to keep a low level of inventory for some parts, which are not often required for production.
7. Minimum safety stocks
You can follow the minimum safety stocks method of inventory optimization. The minimum safety stock is the level of stock which a company maintains to avoid an unpleasant stock-out situation. It is the level where it places the new order before the existing inventory is empty. For instance, if the total inventory in a company is 20,000 units, they reorder the inventory when its level reaches 5,000 units. So, the 5,000 units of stock form a part of the minimum safety stock level.