Introduction to the Inventory Management Process
Managing inventory is no easy task, as companies must orchestrate everything from sourcing products to final order fulfillment and the transportation and storage needs in between. Without proper management, these processes can cost organizations significant funds, limiting profits.
However, by considering the different inventory management strategies, companies can reduce inventory costs, optimize procurement, and improve stock control.
Inventory Management Strategies
Inventory management becomes more challenging as businesses expand and acquire more product lines. However, managing merchandise is critical for operational efficiency, profitability, and sales.
Therefore, businesses should consider different inventory management strategies to determine the best practices.
1. Bulk Shipments
Companies can save money on product acquisition and shipments by purchasing goods in bulk. However, this method is only beneficial for high-demand products with consistent turnover rates. Otherwise, companies risk forming dead stock from products that are unable to sell.
Bulk shipments do come with inflated storage costs to house the large influx of goods. Sometimes these fees are so high that they offset the money saved from bulk shipping. Therefore, businesses must determine if the product's sales rate is worth the storage investment of bulk shipments.
- High likelihood of increased profits
- Reduced shipping costs
- Ideal for goods with stable demand and long shelf lives
- High capital risk
- High supply chain risk
- Inflated storage costs
- Challenging to adjust for fluctuating customer demand
2. ABC Inventory Management
The ABC inventory management technique categorizes goods in three groups by their sales rates to determine which products produce the most income. Group A consists of goods with the highest value with the lowest quantity. Group B holds the items with moderate value and quantity. Group C has goods with the least value but the highest quantity.
The ABC analysis is based on consumption rates and inventory volume to determine each product's overall value, allowing businesses to optimize their inventory control.
- Improved demand forecasting
- Improved time management and fund allocation
- Determine the best customer service approach
- Improved inventory accuracy
- Finetuned pricing models
- It doesn't accurately represent new products
- Can conflict with other inventory methods
- Requires extensive planning and resources
Backordering is a method that businesses use to accept payments for out-of-stock products with the intention of fulfilling orders as soon as inventory shipments are delivered. This method maintains cash flow even when stock is depleted but can make future logistics challenging.
If there is only one product out of stock, companies must simply collect and hold onto customer orders until the items arrive. However, this quickly becomes tricky when multiple products go out of stock.
The alternative is marking the product as Out-of-Stock, prohibiting purchases until restocks. However, this stalls incomes and significantly impacts cash flow.
- Increased sales
- Maintained cash flow
- Increased flexibility
- Reduced carrying costs and overstock risks
- Increased customer dissatisfaction risk
- Elongated fulfillment costs
4. Just-in-Time Method
The just-in-time (JIT) method decreases on-hand inventory and waits for customer orders to purchase more merchandise. This management strategy minimizes storage expenses but increases order fulfillment risks as businesses must work within a two to three-day window to source and distribute products.
Companies with excellent time and supplier management skills can use the JIT method to eliminate the risk of dead stock and storage overhead. These businesses must have sophisticated inventory management software that connects them directly with suppliers.
- Reduced inventory storage costs
- Improved cash flow
- Reduced risk of dead stock
- Challenging logistics
- Reduced risk appetite
- Increased risk of stockout
Consignment is where wholesalers give their stock to retailers, retaining ownership until products are sold. Once customers purchase the item, the retailer must pay the wholesaler for the inventory.
The consignment method assumes that the retailer is uncertain of the product's demand while the wholesaler typically has a good idea of inventory turnover.
- Increased product range
- Decreased restock times
- Eliminated product return costs
- Test new products without risk
- Transfer marketing responsibilities to retailers
- Collect valuable product data
For retailers For wholesalers
- Additional freight, returns, and insurance policies
- Pay sales commissions
6. Dropshipping and Cross-Docking
Businesses that dropship direct customer orders to their manufacturer for them to fulfill and ship the orders, eliminating inventory holding costs. Similarly, cross-docking minimizes travel between companies as inbound freight trucks unload their shipments directly on outbound vehicles.
By practicing dropshipping and cross-docking, companies can eliminate storage costs. However, businesses that use these methods need extensive logistics planning to ensure shipments and orders are fulfilled on time.
- Reduced storage costs
- Fewer resources required
- Improved profitability
7. Cycle Counting
Cycle counting is the practice of counting inventory in small increments each day to eliminate having to physically count an entire warehouse at one time. This technique enables businesses to continue their operations during inventory counts to maintain workflow and eliminate downtime.
With thorough cycle counts, companies can gain an accurate picture of inventory and recordkeeping methods.
- Improved time management
- Maintained workflow
- Minimized holding costs
- Improve inventory accuracy
- Constant inventory operations
- Does not account for seasonality
By reviewing the best inventory management strategies, businesses can optimize cost reduction and operational efficiency.