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Essential Inventory Management Techniques to Grow Your Business

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Inventory Management Techniques

Inventory management is mission-critical in all businesses, but nowhere more critical than in the food and beverage industry. Effective inventory management techniques allow you to

  • Respond to rapid changes in customer demands.
  • Maintain the highest quality standards in your product.
  • Ensure compliance with all applicable regulations.

On the other hand, poor inventory management

  • Costs your staff time and lost productivity.
  • Jeopardizes customer relationships.
  • Hurts your bottom line.

Also, depending on your industry, products sold may be perishable, seasonal, or subject to highly fluctuating demand. Furthermore, companies also have to comply with safety standards and government regulations. This illustrates the importance of proper inventory management which can make or break your business.

There are many different inventory management strategies, and no one solution is right for every business. In fact, using a combination of various techniques is often a good choice, depending on your product, your business, and your needs. For example, it is a good idea to manage perishable items differently than non-perishables. Another example would be to control seasonal inventory differently than ongoing merchandise.

Whatever inventory management technique or techniques you use, it should take into account the following core principles:

Core Principle 1: Avoid unnecessary storage costs

While it is prudent to have stock on hand, inefficient tracking and management can often lead to inflated storage costs. In fact, about 20% to 30% of a company's inventory is often dead or obsolete. Here are some types of storage costs that you should be aware of to prevent them from harming your company's profits:

  • Warehouse space
  • Handling cost
  • Utilities and maintenance of your storage area
  • Temperature cost to preserve your product's quality
  • The opportunity cost to use the space for other purposes, for example, renting out space, utilizing it for other business functions, etc.

Core Principle 2: First in, first out (FIFO)

You should distribute stock so that the oldest items are the first shipped. For perishable items, this prevents spoilage and loss. But even for non-perishable items, following the first-in, first-out (FIFO) rule prevents inventory from aging on the shelf, as packaging may wear out during prolonged storage.

To achieve this, you will need to conduct training as well as consider how you store products on the shelf. For training, members of the warehouse and operations teams first need to be educated on FIFO and why it is important. Then, the physical storage of the items may need to be adjusted so that the newer products are added to the back, so that your employees can easily find and access the products produced or received earlier. Similar to how milk is typically kept on the shelf in grocery stores.

Core Principle 3: Regular audits

Do not rely exclusively on reports or documents to track inventory levels. Perform regular audits or spot-checks to verify the accuracy of inventory levels and identify potential problem areas. Regular inspections help to refine your inventory management system so that it becomes more accurate over time.

Even if you are managing a small business, it is still good practice to carry out regular checks. This is essential as your inventory is often the most expensive asset you own.

Core Principle 4: Forecasting and contingency planning

Successful inventory management techniques allow you to forecast and plan accurately for contingencies. The ability to do these things well goes to the heart of customer satisfaction and long-term relationship building, as you demonstrate the ability to anticipate and respond to their changing needs.

By coming up with different "what-if"; scenarios, your management will be better equipped to deal with any possible inventory management challenges that might come your way. Here are some real-life scenarios that could impact your company.

  • You face a sudden and unexpected increase in sales and you oversell your stock.
  • You encounter a cash flow shortfall situation and you cannot purchase the material needed to build your product.
  • You run out of space in your warehouse and cannot accommodate your seasonal increase in inventory.
  • You miscalculated your stock and you either have more or less stock than you initially planned for.
  • Your manufacturer is unable to deliver the raw materials necessary for you to continue production.

Based on your readiness for these "what-if" scenarios, you can evaluate if there is a need to change your inventory management techniques based on your forecast for the month or year. Doing so will allow you to react better to changes in your business environment and stay ahead of your competitors.

After following the above four principles, you can next determine your specific strategy for ordering, storing, and shipping inventory. This is often based on a variety of factors, and can be flexible, determined by what works best for your company. Here are the most common inventory management techniques:

Technique 1: Bulk shipment

bulk shipment

What is it?

You purchase, store, and ship inventory in large quantities.

How can it help you?

With bulk shipment, you can have significant cost savings as a result of discounts normally given to large orders. Bulk shipment allows for high sales volume and covers you in the case of contingencies or shortages.

While there are often cost advantages when purchasing inventory in bulk, they can be offset by the financial risk of investing a large percentage of the company capital in unsold inventory. Large quantities of on-hand inventory can cause your business to have:

  • Higher storage costs.
  • Labor costs to manage
  • Higher inventory audit cost
  • Increases the risk of inventory being spoiled or damaged before it can be sold.

You will need to identify if the nature of your products is suitable to employ this strategy. You will need to weigh if the cost savings outweighs the potential cost of excess and unsold inventory.

Technique 2: Just In Time (JIT)

just in time

What is it?

Just In Time(JIT) method involves purchasing inventory only before it is needed for sale or distribution. This means that the company does not hold any safety stock and operate at low inventory levels.

How can it help you?

This method saves storage costs and spoilage. Space once originally used to store inventory can now be deployed for production or other needs of the company. However, this strategy leaves little room for contingency. Using the JIT method is considered risky because mistakes or delays have a more significant impact on you and your customer.

For this method to be successful, you need to accurately predict and forecast your demand to prevent stock-outs from occurring. You will need to have good coordination with your suppliers and retailers in your distribution channel to ensure that your goods can enter and exit your warehouses on time.

Technique 3: Dropshipping

dropshipping

What is it?

Dropshipping is a retail fulfillment method where incoming customer orders are transferred directly to your customers, eliminating your storage and transport cost.

How can it help you?

This is a very cost-effective technique.It not only helps your business minimize risk and cost but also offers convenience and practicality to your company. However, one needs to take into consideration that your profit margins tend to be lower because your added value is decreased.

You can consider dropshipping if you have an interest in eCommerce but are not willing to take on the risk of starting a business. Also, if you are a medium to large sized retailer who is aiming to scale efficiently and quickly, dropshipping is an option worth considering.

Technique 4: Cross-docking

cross docking

What is it?

Cross-docking means that incoming orders are transferred directly onto outbound delivery trucks, with little or no warehousing in between

How can it help you?

This method lowers costs associated with inventory storage and warehouse staff. You eliminate the need to store products in your warehouse and also material handling. These are the different types of cross-docking options used by companies.

  • Manufacturing cross docking
  • Distributor cross docking
  • Transportation cross docking
  • Retail cross docking
  • Opportunistic cross docking

However, one will need to account for the additional cost and complexity of transport logistic from using this technique. Walmart is perhaps the best example of successful cross-docking. They rely on their extensive network of trucks and distribution centers to move inventory directly to stores, with minimal warehousing and storage.

You can consider this option if the material type of your products falls under this category.

  • Perishable products that require immediate shipping
  • High-quality products which do not need you to inspect during goods receipt
  • Pre-tagged goods (RFID, barcode) that are ready to be sold to your customers
  • Newly launched or promotional merchandise
  • Basic products that do not have much fluctuations in demand
  • You have customer's order from another stock location that has been pre-picked and pre-packaged.

Technique 5: Back-ordering

backordering

What is it?

In back-ordering, you order items only after your customer has already ordered them from you, reducing time spent holding inventory.

How does it help you?

This method is very low risk because there no chance of inventory remaining unsold, but the customer must be willing to accept a delay in delivery. Long delays may prompt a customer to cancel a placed order. This is discussed extensively; in this study from the Eindhoven University of Technology, which establishes a ratio between the period of the demand (for example, perishable or seasonal items) and the probability or necessity of canceling a back-ordered item.

Technique 6: ABC method

ABC method

What is it?

In the ABC method, you rank inventory according to:

A: high-value, low-quantity items, typically the highest priority. These are goods normally which have the highest annual consumption value. The top 70%-80% annual consumption value of a company typically is attributed to only 10% to 20% of the total inventory.

B: moderate-value, moderate-quantity items. These are products that normally have a medium consumption value. 15% to 20% of annual consumption value typically account for 30% of the total inventory

C: low-value, high-quantity items, generally the lowest priority. These products typically have the lowest consumption value. These products fall in the lower 5% of annual consumption value and account for 50% of the total inventory.

How does it help you?

You need to manage each category differently. For example, you might order in bulk and audit the items less often for category C items. Category A items might be back-ordered, cross-docked, or drop-shipped to reduce the risk of them being unsold or going to waste in storage, and audited and tracked more carefully. However, the ABC technique does not comply; with Generally Accepted Accounting Principles and conflicts with normal costing systems, which do not distinguish between the priority levels of different classifications of inventory.

You can employ this technique to help you analyze which of your inventory plays the most significant role in determining your inventory cost. With this information, you can plan and strategize how best to manage the different sets of inventory.

Conclusion

inventory management

Ultimately, every business should adopt the inventory management technique that works best for their company and their customer. Combining different techniques may make the system more accurate and provide better customer service. But doing so might increase the labor costs due to the need for more administration and reconciliation between techniques. The right balance can be hard to find but it is necessary to help your business grow

Apart from adopting the appropriate inventory management techniques, you also need to have an efficient inventory management system set up to help you manage your inventory. Fortunately, the team at Sweet Technology have come up with a robust cloud-based inventory and order management application for wholesalers, manufacturers and retailers.

Sign up for a free trial and discover how Sweet can solve any inventory problems you might encounter.