4 Inventory Management Techniques to Know
Apart from having the best storage solutions, such as stainless steel shelves, inventory management is also a crucial part of operations for businesses that rely on efficient supply chains. Having the right inventory management techniques in place can increase profits, improve customer satisfaction, and reduce costs. In this article, we explore the strategies used across industries to help you determine which could be applied to your business.
1. ABC Analysis
ABC analysis is a technique that categorises items based on their importance and usage frequency, enabling businesses to optimise their inventory control and procurement strategies. It works by grouping items into three categories: A, B, and C, based on consumption patterns and value to the company.
Category A consists of high-value items with a high consumption rate that account for a significant portion of the business's revenue. These should always be monitored and stocked to ensure that they are always available. Category B consists of moderate-value items with a lower consumption rate and revenue. And category C consists of low-value items that generate a small amount of revenue due to their low consumption rate. They can be managed with a more relaxed approach.
Businesses that carry a large inventory of items or have limited storage space will benefit most from using ABC analysis. It can help businesses identify which items require the most attention and resources, prioritising their inventory management efforts and reducing the risk of stockouts and overstocking.
2. Just-in-Time Inventory
Just-in-Time (JIT) inventory involves holding inventory for the shortest time possible to reduce holding costs while ensuring ample stock levels to meet customer demand. It is widely used in manufacturing industries to optimise their supply chain operations, reduce waste, and improve efficiency.
Instead of producing large quantities of products in advance and storing them, JIT inventory focuses on making only what is needed, when required. This approach reduces inventory holding costs, improves cash flow, and eliminates the need for large storage facilities. It is most beneficial to businesses that have a high degree of demand volatility or those that produce high-value products with short shelf lives, such as electronics, automotive parts, and pharmaceuticals.
3. Batch Tracking
Batch tracking is a technique used to track products that are produced in batches or lots. It assigns a unique identification number to a group of products that are manufactured or received at the same time, enabling businesses to track the products through their entire lifecycle, and to easily identify which batches are affected by quality issues or defects. This approach also provides accurate data on the amount of inventory available and the date of expiration of each batch, allowing businesses to better plan their production schedules.
4. FIFO and LIFO
The First-In-First-Out (FIFO) method is commonly used in industries where the product's shelf life is limited, such as perishable goods like food and pharmaceuticals. Items are arranged in chronological order, and the first item to enter the inventory is the first item to be sold. FIFO is a logical approach to inventory management because it ensures that the oldest inventory is sold first, reducing the risk of spoilage or products becoming obsolete.
On the other hand, in the Last-In-First-Out (LIFO) method, the newest inventory is sold first, and the older inventory remains in stock. This means that the cost of goods sold reflects the most recent, and often higher, cost of inventory. LIFO can be beneficial when prices are rising because it reduces taxable income by matching the most expensive inventory items with revenue, which results in a lower gross profit.
Inventory management techniques are important if you want to better deal with your physical goods and supplies. With the right strategies and equipment, businesses can minimise waste, reduce costs and improve overall efficiency. We hope that this article has helped you gain a better understanding of inventory management.
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