As your business grows, you’ll need to start deciding how much capital to invest in your inventory — especially since inventory makes up the largest percentage of costs for many retail and wholesale businesses.
Although it sounds like a straightforward question of demand and supply, poor inventory management can ruin a business. These range from fearing worst-case scenarios and carrying excessive inventory that is subjected to obsolescence or spoilage, to carrying an insufficient amount that results in dissatisfied customers.
Everything boils down to satisfying customer demand and optimizing inventory turnover… but how?
The core concept behind inventory management is to ensure you have the right amount of inventory, in the right place at the right time, at the right cost.
Deciding how much stock to order appears to be a gamble, but asking a few questions can simplify the whole process and help you get started.
The Fixed-Order Quantity System ensures that an order is placed once the inventory level drops to a predetermined level that marks the reorder point in order to maintain the inventory level.
However, the Fixed-Time Period System sets a target inventory level to be maintained and inventory is checked in preset intervals (eg. every week), placing orders to restore the target quantity as required.
Now that everything’s set up, all that’s left is to measure the health of your inventory management system!
Two standard metrics to measure the efficiency of your inventory management and the financial health of your organization are the inventory to sales ratio (which should be kept low) and the inventory turnover rate (high rates = success, but be careful if it’s too high).
Inventory management success starts with understanding the fundamentals, but the key lies in using your creativity in tailoring these to develop custom solutions for your business.
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