Effective Inventory Management | Tools to know
14 Jun 2021
There is no doubt that the critical business component of companies operating in retail and wholesale trade is inventory. In the most simple terms, the whole business rotates around having and selling the proper stock in time. With the increase of inventory volumes, the inventory management becomes more challenging. Here is where businesses feel the importance of an effective inventory management system to succeed in retail and wholesale.
What is Inventory Management?
Inventory management is the process of supervising the flow of goods and materials from producers to buyers. Depending on the business model, stock supervision includes production and tracking of each new item, recording of returned stock, as well as sales of products.
An example of ineffective inventory management might happen when a business does not hold adequate inventory levels to meet customer needs. Not having the required amounts of inventory at the right time might cause reliability issues and drive the customers away. The other scenario guided by “just in case” psychology can also be problematic. When businesses hold more than required levels of stock, they face the issue of the time value of money and lose potential sources of income that the money could have generated in case it was invested in something else. The extra levels of inventory also mean additional holding costs, which in its turn causes reduced income.
How to ensure adequate inventory management?
So, inventory management is beneficial for the company. But how to ensure its effectiveness? There are many techniques, tools, and approaches. Read some of the below.
Economic order quantity
Starting from the very base:
- How to find the perfect quantity of inventory to reduce inventory costs, including ordering, handling, and shortage costs?
- How to ensure that the right amount of stock is ordered so there will not be extra costs associated with frequent ordering and avoid costs associated with handling additional inventory levels?
Economic Order Quantity (EOQ) measure calculates inventory order amounts that would minimize costs yet ensure to meet the customer demands.
This method is helpful for businesses that have fixed or clearly forecastable demand rates.
Not all inventory items have equal values. Some of them are used more frequently and have higher costs. Depending on different kinds of factors, one can define which items require more attention.
The method for evaluating and categorizing inventory is ABC analysis. ABC approach starts with grouping inventory in 3 groups.
Group A: These categories represent the essential items. Because of the high costs and/or high usage, those items require greater attention. Those are also the items responsible for the high profits. This group includes around 20% of the inventory.
Group B: This group is likely to consist of 30% of inventory items. These items fall between the most and least valuable ones.
Group C: Although these usually are of the highest quantity – around 50% of total inventory, group C items have lower inventory value.
Just-in-time inventory management
The purpose of the just-in-time (JIT) management approach is to hold minimum amounts of inventory and order on an as-needed basis. As a result, there will not be excess amounts of inventory in the warehouse causing high handling costs as well as the risk of having dead stock. If implemented carefully, this method avoids storage costs and keeps inventory fresh.
First-in, first-out (FIFO) system
As the name suggests, the first in, first out system controls the inventory turnover by using or shipping the oldest stock first. The first item that comes to the warehouse is the one to leave the warehouse first. Newly received items cannot be used until the stock delivered earlier is utilized. This method aims to avoid and/or reduce the costs of obsolete or expired inventory. The FIFO system usually works with the economic order quantity model.
Dropshipping is a supply chain management strategy, the purpose of which is to reduce inventory handling costs by holding no inventory. So, instead of keeping the stock, the company orders from the third-party supplier and ships directly to the client. For example, this method is used by furniture brands that have limited samples in the showroom where the customer can choose and then get the items shipped from the supplier once the purchase is made.
To reduce the risks and ensure efficient dropshipping, the business must ensure inventory visibility, which refers to the awareness of available inventory levels, accurate shipment tracking, etc., as well as reliable third-party relationships.
Batch tracking, sometimes referred to as loT tracking, is tracking inventory by using batch numbers. Each batch contains items with similar characteristics, such as expiry date. Expiry date tracking is important, especially for businesses operating in cosmetics, pharmaceuticals, food & beverage industries, etc. Despite expiry date tracking, batch tracking would also help analyze batch return rates, check product differences, provide answers to customers, etc.
Inventory tracking is an essential requirement for any business that is dealing with inventory. By applying a software tracking system, such as eSwap inventory management software, timely stock level updates and order synching will be easily managed. By implementing digital tracking systems, inventory control processes would become much simpler.
Businesses operate to generate profits, or at least not to incur losses. That is why effective inventory management is an absolute necessity to avoid extra costs, reduced profits, customer churn, and the decrease or absence of business growth. We discussed several inventory management approaches and tools that you can use simultaneously to ensure efficient and effective inventory management and an uninterrupted process of supply chain. The method efficiencies may vary depending on the business profile, inventory characteristics, company sizes, and client predictability.