Which would you prefer? An inventory with a balanced incoming and outgoing stocks operation that automatically updates as you go along, or a stock that requires you to take pen to paper all the time to stay updated? I know the former is every business dream. It is no doubt that the end goal of inventory management is to have the right stock at the right time and at the best cost. Where then is the place to start? What inventory management methods should you use?
Although every situation is a little different for each business, you can take the same general steps to move in the right direction. Whether you are a business owner trying to improve operations, or an inventory manager looking for ways to stay organized ahead of orders, we will adequately cover in this article the inventory management methods for you to consider. But before we start looking at steps, let us look at what inventory management is and why it is necessary for your business.
Just as the name implies, Inventory Management is storing, ordering, sourcing, optimizing, and organizing a company’s goods most cost-effectively. The inventory management system includes the management of raw materials, components, and finished goods. Some of the other names given to it include inventory control and stock management.
You can break down the types of inventory into five main categories;
A poorly managed inventory costs a fortune. There is no getting around it in the fast-paced market of today. If you have too high inventory levels, you may be tying up cash for other equally important things. On the flip side, too low an inventory level can lead to delayed delivery and a mob of unsatisfied customers.
Inventory is just so central to a business dealing with physical products. It can be the difference between barely surviving and thriving. And this also includes choosing the right solution that allows you to manage your inventory on the next level. These days, inventory management comes with your point of sales software. With this, you can build an integration tailored to the needs of your unique business. As a modern business owner, you need systems in place that meet your business needs, make life easier, and gives you time to spend on growing the business.
The EOQ is a formula as old as the 1900s. It is for determining the maximum amount of inventory you should purchase based on market demand. EOQ method helps to minimize your costs, including what it costs to order and hold stock, as well as the costs associated with having none. The system works well when both the inventory costs and rates of usage are steady. However, keep in mind that some inventories might require a calculation of different variables such as reorders, seasonality, or huge events.
The Pareto principle, also known as the 80/20 rule, states that 80% of the total output gets generated by only 20% of the valuable effort. This approach is necessary when you carry a mix of products. If we translate that statement to inventory management, we could say that not all products are created equal. That is where the ABC analysis as one of the inventory management methods comes in handy. ABC analysis considers that you should prioritize products that sell faster and bring in more profits. As a manager, understanding your sales within a certain period will help you evaluate and segregate which product belongs in categories A, B, or C. Doing this will also assist the purchase manager in analyzing what to buy and in what quantity. To do it, you should categorize your products, materials, and supplies into three categories.
Category A is the smallest, always reserved for the biggest moneymakers. It represents the highest quality, most valuable products, and customers that you have. Such products will contribute heavily to the overall profit without costing many resources. (Most important)
Category B products are less critical than Category A products and more critical than Category C products. This category, in particular, holds the potential to either get moved into category A if the sales are good or can even slip down to category C. (Moderately important)
Category C items are marginally valuable. These products contribute to the running of your business. They provide a fixed and steady income but do not contribute much value to either the seller or the business. (Least Important)
Once you have categorized your inventory based on ABC analysis, you need to add two variables to each category:
(i) Value percentage: annual consumption value of a given inventory item; and
(ii) Quantity percentage: total number of products
These numbers are not constant, so you should define them based on your actual numbers and goals. For instance:
A = 10% of the items account for 70% of the consumption value
B = 20% of the items account for 20% of the consumption value
C = 70% of the items account for 10% of the consumption value
Based on the classification above, you can identify your most valuable products and, thus, focus your energy on tracking stock levels on those products more often.
Just in time is understood to be one of the most popular and widely-used inventory management methods. This method of manufacturing is adopted to precisely fill the demand. You make the finished goods when orders come in, not before. This method is applied to cut down costs from the production process. It is said to balance customer satisfaction with business efficiency.
JIT focuses on answering:
i. What is needed?
ii. When is it needed?
iii. How much of it is needed?
Supermarkets use a form of JIT. When you go into a supermarket, there are several choices, but only a few of each item. When an item runs low, the supermarket system flags this up, so the manager can order more. With this method, all wastes and inefficiencies get identified and reduced as much as possible.
Some elements to focus on for JIT are:
1. Eliminates waste; look at all your resources here.
2. Constant performance evaluation; what could you be doing better?
3. Improving continuously; Aim higher with all your processes
4.. Balance your work setting; create a clear and focused atmosphere.
5. Become customer-focused; Using supply-chain strategies that account for customer demand.
Consignment Inventory is ideal for manufacturers or wholesalers. In this method, the manufacturer or wholesaler gives products or materials to a retailer that only pays back once the items get sold to the final consumer.
This method is a brilliant idea for trying out a product that has had no market research. In addition, vendors are likely to agree to take stock if they do not have any risk with goods getting sold or not. On top of that, you get to save a lot of money by reducing the number of deliveries you make. You send off a big batch to a customer, and they return what they did not sell months later.
Also know as Bulk Shipment, a supplier’s MOQ is the smallest amount of stock they are willing to sell. Thus, if you can not buy the less amount stipulated, it’s not worth their time to sell to you. One way to look at it is the difference between wholesale and retail. A wholesaler can get you a great deal on jewelry, but you have to buy at least 100 of them. Your local jewelry store can sell you one at a time, but you end up paying more.
Explore more Inventory management techniques here
Steps To A Successful Inventory Management
Step1: Automate your inventory management process – use a POS System.
Step2: Decide on roles – who does what).
Step3: Practice periodic inventory count.
Step4: Do more than count. Go deep into numbers and data presented.
Step5: Forecast your demands.
At this point, you might understand that manually managing inventories could be excruciatingly hard, if not impossible, especially for volume inventories. However, with the help of Point of Sales software, inventory managers can automate some of the most tedious aspects of the job, reduce the risk of error, and make smarter decisions.
POS Shop limited helps retail and hospitality track, organize, and effectively manage their sales and inventory processes exceptionally. Our solutions have accurate inventory management, reporting, and accounting features that would help you take your business to where you want it to be. Contact us here pos@posshop-ng.com.