Inventory management is an important aspect of businesses around the globe. Managing and storing inventory can be challenging, expensive and time-consuming. That is why companies are constantly finding new strategies of managing inventory in order to improve operational efficiency, save cost and save time.
In business, Inventory refers to all items, materials and goods being held for the purpose of future sale to customers. There are four major categories of inventory. They include; raw materials, work-in-progress, finished goods, and maintenance, repair, and overhaul (MRO). These different types of inventory represent different steps in the production process.
Inventory management is thus, the process of ordering, handling, storing and using an organisation’s inventory (or its non-capitalised assets). The aim is to organise and track all the goods owned by the company at a particular time in a bid to ensure operational efficiency and longevity.
Having good inventory management strategies is important to minimise inventory risks. This ensures a company is still able to sell and that the commodities do not depreciate in value. Some of the major strategies for inventory management include;
Economic Order Quantity (EOQ); This refers to the ideal amount of a product that should be ordered at any given point in time, in a bid to minimize the total inventory costs. It is how much product a company should purchase in order to maintain a cost-efficient supply chain. These inventory costs which ought to be minimised include holding costs, order costs, and shortage costs. The EOQ is also called the optimum lot size and it is calculated using the formula below:
EOQ = square root of (2 x D x S/H) or √ (2DS / H)
- D = demand, or the units of the product that need to be purchased.
- S= setup cost.
- H= the holding fee or storage cost per unit of product.
ABC Analysis; The ABC analysis suggests that the inventories of any given organisation do not have an equal value. Such inventories are categorised into three groups; A, B and C according to their estimated level of importance. The ABC analysis, therefore, is a means of classifying inventory items based on the consumption value of the items. This method is also known as the Selective Inventory Control.
Safety Stock Inventory; Safety stock is the additional inventory that is held by a company to mitigate risk that the item will be out of stock as a result of fluctuations in supply and demand. It is sometimes called “Buffer Stock” because it acts as a buffer perhaps the sales of an item are greater than planned or if the company’s supplier is unable to deliver additional units at an agreed time. This method of inventory management ensures there is reduced risk of a company’s production being disrupted. By deciding on how much safety stock to carry, this method ensures that the holding cost does not strain the organisation’s finances.
The Just In Time Strategy; This method involves ordering and receiving inventory needed for production and customer sales only when it is required, not anytime before then. By ordering such inventory on an “as-needed” basis, an organisation increases operational efficiency, does not hold any safety stock, and decreases inventory wastage and its associated costs. Because this concept is based on a cluster of lean manufacturing activities specifically designed to only manufacture the exact quantity of products to meet a customer’s demand, the JIT method is also called the Lean Manufacturing or the Toyota Production System.
Dropshipping; This is a method that allows companies to drastically cut down their inventory costs by essentially not holding any inventory at all. As opposed to holding inventory at a warehouse, in dropshipping, when a client makes an order, a company buys goods from a third-party and the items are shipped directly to said client.
While five methods of managing inventory have been highlighted above, there are many more that can be used to help a business. Others include but are not limited to;
- Batch tracking
- Consignment inventory
- Perpetual inventory management.
- Six Sigma
- Lean Six Sigma
- Demand forecasting
- Bulk shipments
- The Pull Strategy
- The Push Strategy
The importance of having good inventory management strategies cannot be overstressed. With the advancement of technology, inventory management software have been created to simplify the entire process, save money, time and sanity as businesses try to meet their inventory management demands.