Inventory Management Techniques: Benefits, Methods, Processes & Tips

If you are in a manufacturing business or wholesale seller, you would know the importance of inventory management. Chances are, you already know a few helpful inventory management techniques. For those who don’t know the methods of inventory control, running a business and supply chain will be extremely difficult.

Therefore, to help young entrepreneurs and new business owners, we introduce this blog that talks about the best inventory management techniques. We have compiled the best inventory management techniques mentioned in many expert blogs to make this article the one-stop solution for readers.

What is Inventory Management?

Before you ask what inventory management is, you should know what inventory is. Inventory is nothing but the warehouse of your business where you stock your product. In the case of digital products, the idea of inventory can be different, but what we define here is mostly the case for any manufacturing or wholesale company.

Now, inventory management is the process of stock-keeping – to store products in your warehouse to meet customer demand. It is a process in the supply chain where stock quantities are tracked in and out of the warehouse – maintaining records of entries and exits of products.

Importance of Inventory Management

If you ask why inventory management is important, it is the backbone of any supply chain. Without proper inventory management techniques, you may not meet customer demand effectively. Your products will frequently go out of stock or you will overstock the items.

Inventory control techniques are crucial to maintaining the synergy between production, storing, and selling the products. Improper inventory management can affect the entire company and disrupt the business.

How does Inventory Management Work?

Inventory management techniques ensure that stock is used as efficiently and effectively as possible. And how does it work? By tracking products and components across suppliers, tracking stock on hand, tracking production and tracking sales. Companies can maintain a manual ledger or logbook for record-keeping, but it is recommended to use bespoke software for many items.

Types of Inventory Management

Generally, the inventory types can be segregated into four major groups or sections – raw materials, work-in-progress, MRO goods, and finished goods.

• Raw Materials – More than one item goes into manufacturing a product. These can be items produced directly by your business or purchased from a supplier. For example, a chair-making business could purchase raw materials such as wood, varnish, and clamps.
• Works-In-Progress – Work-in-progress inventory stores unfinished items moving through production but not yet ready for sale. In the case of a chair-making business, work-in-progress inventory might contain chairs that still have unpolished rough surfaces and unvarnished.
• Maintenance, Repair, and Operations (MRO) goods – These are items used to support and facilitate the production of finished goods. MRO goods are usually consumed due to the production process but aren’t a direct part of the finished product. For instance, sandpapers to smooth the rough surfaces of chairs would be considered MRO inventory.
• Finished Goods – Finished goods inventory is the storing of products that have completed the production process and are ready to be sold. The chairs themselves, for example, are finished goods.

What are Inventory Management Techniques?

Inventory management techniques are a combination of processes to track the movement of supplies from the supplier to your warehouse to the customers. In simple words, it is the tracking of stock and supply chain. Essentially, there are five stages of inventory management techniques –

• Purchasing – From buying raw materials to turning them into the final product or buying products to sell them directly to the client.
• Production – This stage is only applicable for manufacturing companies. Make your finished product from its constituent parts.
• Holding stock – This stage tracks the storing. It can be storing raw materials before they’re used in the manufacturing process or your finished goods before they’re sold to the customers.
• Sales – Delivering products from your inventory to your customers.
• Reporting – Businesses ought to have a detailed sale report – how much it is selling and how much money it makes on each sale

Following these methods of inventory control keeps the supply of products to the optimum limit and helps in tracking the operational cash flow of a business.

Types of Inventory Management Techniques

Here is more about the best inventory management techniques. –

ABC Analysis in Inventory Management –

ABC analysis in inventory management is a sorting method. According to this, you should sort your inventory into three product categories.

• A-products are the ones that are high on demand and take less space and cost little to store in the warehouse.
• B-products are the ones that have moderate demand and take a little more space and also cost a little more to store in a warehouse as compared to the A-products.
• C-products are the ones that have low demand and take the most amount of space and also cost the highest to store them in the warehouse as compared to the A and B-products.

You can identify which products you can store more to keep the operating cost low and maintain a healthy cash flow.

Just In Time (JIT) Method –

It is simply making what is needed at the right time in the required amount. If you have a wide range of products with varied demands, sorting them into three or four categories can be difficult. That is why many companies only make products in fewer quantities. If and when the demand spikes, they can ramp up the production or supply to meet the demand surge.

These inventory management techniques help in –

• Minimizing the warehouse and insurance cost
• Prevents loss in obsolete and spoiled inventory
• Reduce product waste

After World War II, Toyota used the JIT inventory management technique and revolutionized their supply chain.

Material Requirements Planning (MRP) Method –

You must have noticed how some tech companies launch their products much ahead of the date of the sale. They initially make the products available for pre-order. This is a prime example of MRP methods of inventory control. In this inventory management technique, you must gather data on the market demand of your product from existing inventories. Once you feel that more supplies will be needed to meet the customer demand, you can produce/ order more supplies.

Economic Order Quantity (EOQ) Model –

Suppose you have 100 products in your inventory. Once the number reaches the minimum level, you should order the next lot of supplies. This is the Economic Order Quantity technique. It is very effective for expensive products and demands high inventory costs. Many car dealerships follow this method of inventory control to maintain a healthy cash flow.

Minimum Safety Stocks –

The minimum safety stock is an effective method of inventory control to avoid the out-of-stock situation. By following this inventory management technique, you only place new orders before the existing inventory is over.

For example, if the total inventory in your business is 10,000 units, you place a new order when the inventory reaches 3,000 units. These 3,000 units of inventory shall form part of the minimum safety stock level. There is no hard and fast rule to maintain this percentage of 30% inventory. It entirely depends on the product type, product cost, storing expenses, and demand.

 VED Analysis –

Organizations mainly use Vital Essential and Desirable analysis (VED analysis) to control inventory spare parts. A higher inventory level is required for vital components that are very costly and essential for production, like crucial spare parts that can slow down the production process. Similarly, an organization can maintain a low inventory level for desirable parts, whose requirement does not arise more often for production.

 Fast, Slow & Non-moving (FSN) Method –

The FSN method of inventory control is critical for controlling obsolescence. All the inventory items are not used in the same order; some are required frequently, while some are not required at all. So, this FSN method of inventory control classifies inventory into three categories –

• Fast-moving inventory
• Slow-moving inventory
• Non-moving inventory

The order for new inventory takes place based on the utilization of the existing stockpile.

Drop shipping and Cross-docking –

Dropshipping is probably one of the most cost-effective inventory management techniques because it eliminates the cost of holding inventory entirely. With a dropshipping agreement, you can directly place customers’ orders and shipment details to your manufacturer who then delivers the order to the customer.

Cross-docking is similar to drop shipping operations. Here incoming semi-trailer trucks or goods trains unload materials directly onto outbound trucks, trailers, or rail cars. Essentially, it means moving goods from one transport vehicle directly onto another, creating a JIT inventory process and eliminating the need for warehousing.

With this said, you might need a hub where the sorting of products is done before they are delivered to customers.

Cycle Counting –

Cycle counting is done in collaboration with other inventory management techniques, mainly the ABC analysis. The objective of the cycle counting is to see how accurately your inventory records match up with what you have in stock. The A-product items are counted more frequently than the C-product items because the former is a faster-moving goods.

Backordering –

Backordering is one of the most profitable and inventory management techniques that all product companies dream of having. In backordering, the company receives the order on out-of-stock products. When the product is in stock, you notify the customer to place an order. While this may look like a dream inventory management technique, major challenges exist.

During Amazon Great Indian Sales, you might have noticed products going out of stock very fast. This happens because of a huge demand for the item. However, a lack of preparedness can create a massive hurdle in the supply chain. As a result, the seller may not refill the stock before the sale ends, significantly reducing sales.

Consignment inventory –

If you are a retailer, try to opt for a consignment deal with the wholesaler if there is a demand uncertainty. In this case, the retailer only pays the wholesaler when the product is sold to a customer. While the retailer does save from writing-off losses for unsold items, the wholesaler saves on the warehouse expenses. It is a win-win for both the stakeholders.

Reorder Point Formula –

The reorder point formula alerts you when you reach the lowest amount of inventory. At that point, you should place the next order for more stock. There is a formula that can help business owners like you –

Reorder point = (Average Daily Unit Sales x Average Lead Time in Days) + Safety Stock

Following this equation, you can stop being a victim to market spikes and slumps and consistently order the right amount of stock every month.

Minimum Order Quantity (MOQ) –

Minimum order quantity (MOQ) is the lowest set amount of stock suppliers are willing to sell to retail businesses. For example, if you are selling nails and pins. You might be required to order a certain quantity. That way, you can maintain your inventory at the low yet sustainable threshold.

MOQ is one of the profitable and simplest inventory management techniques for wholesalers. It allows them to get rid of their inventory in bulk and reduces the number of bargain shoppers.

Batch Tracking –

It’s a process to efficiently trace goods along the distribution chain with batch numbers. Whether raw materials or finished goods, batch tracking allows you to see where your products came from, where they went, how much was shipped, and if they have an expiration date and when they expire.

Perpetual Inventory Management –

Perpetual Inventory management is also known as a continuous inventory system. Perpetual inventory systems track sold and stocked inventory in real-time, updating your accounting system whenever a sale is made, new inventory has arrived, or used inventory.

All of this information is sent to and gathered at a central hub that authorized employees can access. This inventory management technique can manage multiple locations quickly, more informed forecasting, and proactively monitor inventory turnover.

 Lean Manufacturing –

Lean manufacturing system is known for maximizing product value for the customer and minimizing waste without sacrificing productivity. This inventory tracking system originated in the Toyota production system, which attempted to prevent the three Ms:

• Muda refers to everything in your manufacturing process that creates waste or causes constraints on your ability to create a valuable product.
• Mura refers to everything that creates an efficient and inconsistent workflow.
• Muri refers to all loads or tasks that put too much stress on your machines or employees.

All lean manufacturing systems follow these five principles:

• Lean manufacturing delivers the most valuable product to the consumer.
• It maps out the steps and processes required to manufacture valuable products.
• It undergoes a process of ensuring all of your value-adding steps flow smoothly without bottlenecks, delays, or interruptions.
• Products are built using a just-in-time basis, so materials are not stockpiled, and customers can receive their orders within weeks rather than months.
• Lean thinking and process improvement is a core part of company culture.

Six Sigma –

Among all the inventory management techniques, the six sigma technique helps in reducing defective products at the manufacturing stage. Six Sigma is a data-driven process that aims to reduce product defects down to 99.99966% defect-free products over the long-term or 3.4 defective parts per million.

Generally, six Sigma uses a five-step process known as DMAIC – define, measure, analyze, improve, and control. The DMAIC process uses data and measured objectives to create a continuous improvement cycle in manufacturing methods. DMAIC is useful to improve your current processes, but Six Sigma also uses DMADV to develop new processes, products, or services.

Lean Six Sigma –

Lean Six Sigma is the fusion of two inventory management techniques – Six Sigma and lean manufacturing. By collaborating these two inventory management techniques, you can remove waste and reduce process variation to streamline production and optimize product output.

Bulk Shipments –

Bulk shipment method banks on the idea that it is almost always cheaper to purchase and ship goods in bulk. Honestly, it is true in most cases, which is why bulk shipping is one of the predominant inventory management techniques in the industry.

Inventory Management Process

As we have discussed so far, inventory management techniques are critical for the efficient performance of any business – retail, wholesale, and manufacturing. By adopting modern inventory management techniques, you can have a clear picture of the following fields of business management–

• Real-time Inventory Visibility
• Optimization via Smart Insights
• Integrated Supply-chain Automation

 Best Practices in Inventory Management: Inventory Analysis

Here is a list of best inventory management practices that you can consider for more growth, better cash flow, and sustainable warehouse expenses.

• KPIs to Improve Performance: Inventory management KPIs are important tools for analyzing and tracking the performance of inventory management activities. You can track how the stock is ordered, managed and turned. Further, KPIs or Key Performance Indicators help measure the progress of supply chain objectives and identify areas for improvement in your inventory or production.

• Inventory Write-off: Inventory write-off can be the biggest challenge if you are a supplier or seller of perishable goods. Tracking your inventory daily can help you reduce the losses. Following the FIFO-LIFO method of inventory control can be a good option.

According to the first-in-first-out (FIFO) inventory valuation method, it’s assumed that inventory items are sold in the order they’re manufactured or purchased. In simple words, the oldest inventory items are sold first.

LIFO, on the other hand, stands for last-in-first-out. It is an inventory accounting method that says your last items in your inventory are the first ones to leave, meaning that you get rid of the newest stock first

 Tips for Managing Inventory

At this point in the article, we hope that you are aware of the best inventory management techniques. Also, we have talked about the best practices in inventory management. Now here is a handful of tips that can help you set up an effective store management system.

• Prioritize your Inventory
• Track all Product Information
• Audit your Inventory
• Analyze Supplier Performance
• Practice the 80/20 Inventory Rule
• Be Consistent in How you Receive Stock
• Track Sales
• Order Restocks Yourself
• Invest in Inventory Management Technology
• Use Technology that Fits well with your Business

Inventory Management Apps, Software, and Systems

Inventory management apps make accessing and updating a business’ stock possible from any location using smartphones and tablets. Hundreds of apps help manage, control, and track inventory, and one can download them from the App Store or Google Play Store.

While choosing the best inventory management apps, consider the following points.

• Number of users allowed
• App integrations
• Device compatibility
• Data collection and management facility
• Whether you can create, edit, and manage orders
• Offline and online use
• User interface

Examples of Successful Inventory Management

Many brands successfully cracked the inventory management mantra. They have been turned into case studies for their innovative inventory management techniques. Here is one famous story of successful inventory management. –

Toyota Story

Toyota is one of the global leaders in car manufacturing and selling. As one of the first companies to implement the JIT model, they recognized raw material delivery was of their main factors affecting inventory management.

Raw materials used to be delivered days, weeks or months in advance at Toyota. Now, with JIT, raw materials are delivered to the production floor after the client has placed an order for the product. This makes Toyota agile and responsive to customer demands. They minimized excess raw materials and, as a result, saw a reduction in their waste and costs. Small amounts of raw materials are replenished when used and needed again.

McDonald’s Story

McDonald’s is a household name, and its business model has become a global phenomenon. It’s one of the most famous fast-food restaurants that have optimized their ordering process with a JIT system. In a McDonald’s, everything required to assemble an order is laid out systematically. The boxes are lined up, waiting to be filled, and the onions are chopped, ready to be layered onto the burger. Once the customer places an order for a burger, the burger is assembled right then and there. This streamlines the production and the customer experience.

 How Amazon Business can help in Inventory Management?

Being the largest online wholesale marketplace in India, Amazon Business can ease your procurement process. Bulk purchasing from Amazon Business can be a boon for retail business owners.

Here is why –

• Amazon Business does not have any Minimum Order Quantity
• You can place order as per your liking
• It saves you the inventory costing

Besides, buyers can save up to 28% through GST input tax credit. Apart from these benefits, Amazon Business ships all products to your door-step in just 2-3 business days if operating in tier-1 or tier-2 cities.

Conclusion

Improper and clumsy inventory management can increase storage cost, operating capital crunch, wastage of labor resources, idle time, etc. All these problems can mount up and disrupt the supply chain. In the worst case, the entire production line and supply chain can be hampered. As a result, businesses face a reduction in sales and unsatisfied customers. Therefore, inventory management is a crucial aspect of the business.

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