Inventory control methods
30 Sep 2021
Choosing the best-fitting inventory control technique is a complicated decision for a business. With the business growth, inventory management becomes a more challenging task. Thus, it is crucial to set a well-informed and proper foundation from the very beginning. Following, we will discuss different inventory management techniques and practices which you can use as a guide.
When it comes to purchases, in many industries buying in large quantities can lead to price decreases. For that reason, many businesses prefer to obtain their inventory in bulk. Because the initial purchase price is lower, there is a higher potential for more significant profits. The risk here is that buying inventory in bulk means investing large amounts of capital in stock.
Moreover, when businesses purchase large quantities in each order, the ordering frequency decreases lower shipping costs. However, with the reduction of the shipping costs, the holding costs increase because the company holds larger inventory volumes.
Bulk shipment is a suitable inventory control technique for businesses dealing with predictable market demands and non-perishable products. Unfortunately, when there are demand fluctuations, the ordering and handling practices are harder to adjust efficiently.
ABC analysis is a tool, which refers to categorizing products by their importance. The level of the stock importance should be equally correlated with the attention and focus received.
Group A represents goods with the highest value for the business. They are generally low in quantity but high in price. Group B items are both moderate in amounts and prices, so their control level is also moderate. The C group includes the inventory of minor importance. It requires the least investment and minimum control.
The primary benefit of the ABC analysis method is its support in improved time management and resource allocation. Because of the tiered approach to inventory, customer service is also performed accordingly. The technique is also usable for strategic pricing.
The strongest downside of the ABC model ignores that there can be new products, which can potentially increase in value.
The backordering is one of the inventory control methods that refers to the practice of receiving customer orders on products that are not available at the moment. So, when a customer wants something but a business does not have it on hand, they order a product and receive it later when it becomes available. Usually, that happens when demand changes and supply levels cannot meet the critical market needs.
The general unwritten rule of back-ordering suggests that the items of larger physical and monetary values receive higher customer delivery tolerance.
Although it is hard to control, back-ordering can lead to increased sales volumes. So, it is a risk that many businesses are willing to take on. Especially when it comes to small retailers who cannot afford over stockings, the “buy now” option is becomes a “pre-order.”
Of course, back-ordering also has its negative sides. Order fulfillment takes longer, and as a result, there is an increased risk of customer dissatisfaction.
Just-in-time (JIT) model
The purpose of the just-in-time inventory management model is to lower on-hand inventory volumes and, as a result, reduce stock holding costs and eliminate the risk of deadstock. The Just in time approach is suitable for businesses that are capable of handling shorter production cycles.
Before adopting the JIT method for inventory control practices, businesses should ensure the following:
- Suppliers are reliable and will ensure on-time delivery of products.
- The business has a clear and thorough understanding of sales cycles and accurately forecasts demands and potential fluctuations.
- The order fulfillment system allows receiving customer orders on time.
The fact that the inventory is purchased right before the planned distribution or sale times makes the JIT method risky.
Generally speaking, the consignment approach refers to selling something on someone else’s behalf. During a consignment sale, a wholesaler (consignor) provides stock to a retailer (consignee), but the payment does not follow immediately. The retailer shows the goods on its shelves and pays back to the wholesaler when the final customer makes the purchase.
The main terms to consider before entering into consignment sales include the following:
- Clarifications of return, transportation, and insurance policies.
- Expected sales commission from the purchase price.
From the point of view of a retailer, the main advantage of buying on consignment is the reduced inventory risk. A retailer can return the stock to the wholesaler if the stock fails to get sold. This model is also low-cost and low-risk for the retailers since they do not need to purchase the inventory.
The method also has its disadvantages. There is a risk of ending with 0 sales for which security, storage, and other holding costs are made. Moreover, because the stock is under the physical control of a retailer, the financial risks in case of theft or damage are covered by them.
Each inventory control model has its advantages and disadvantages, and there are no perfect inventory management methods.
Depending on a business’ profile and characteristics of stock, best-suiting inventory control methods differ among companies. When choosing stock management methods, the primary goal should be to reduce costs and increase sales volumes.