Inventory management is an intrinsic part of your business that you definitely don’t want to mess around with. The following are some common inventory management techniques and best practices deployed by organisations - along with their inventory holding costs and potential profits. You’d probably require a mix of different inventory control procedures for the best approach for your business.
The Just In Time (JIT) method works to lessen the volume of inventory that a business has on hand. It is considered a risky technique because you only purchase inventory a few days before it is needed for distribution or sale so that the items arrive just in time for use.
JIT helps organisations save on inventory holding costs by keeping stock levels low, and eliminates situations where deadstock sit on shelves for months on end. You need to conduct thorough research into customer buying habits, seasonal demand, and source for reliable suppliers and channels of transportation before implementing JIT into your business operations to minimise risks and screw ups.
Based on the Pareto Principle (also known as the 80-20 rule stating that 80% of the overall consumption value is based on only 20% of the total items), ABC analysis is a popular technique for dividing on-hand inventory into three categories: A, B, and C, based on annual consumption unit, inventory value, and cost significance.
A: Items of high value (70%) and small in number (10%)
B: Items of moderate value (20%) and moderate in number (20%)
C: Items of small value (10%) and large in number (70%)
*the values and number of items of each category are expressed as a percentage of the total
The trick is to manage each category separately and as required, as not every category needs the same amount of attention and effort. ABC Analysis allows for the prioritization in terms of managing different goods and inventory, where selective control and allocation of funds and human resources is deployed.
For instance, A Items should be eyeballed constantly and put under special and tight inventory control because the need for reordering will be more frequent and continuous. On the other hand, items in Category C require minimum attention and can be kept under simple observation, employing a rather hands-off approach.
This inventory management technique eliminates the cost of holding inventory altogether. When you have a dropshipping agreement, you can directly transfer customer orders and shipment details to your manufacturer or wholesaler, who then ships the goods directly to your customers. Thus you do not have to keep goods in stock, get to save on upfront inventory costs, and benefit from a positive cash flow cycle.
A technique similar to dropshipping where both methods rule out the need for warehouses or labour costs and risks involved with inventory handling, cross-docking is a practice where incoming semi-trailer trucks or railroad cars unload materials directly onto outbound trucks, trailers, or rail cars with little or no storage in between.
Essentially, it means you move goods from one transport vehicle directly onto another with minimal or no warehousing. You might need staging areas where inbound items are sorted and stored until the outbound shipment is complete and ready to ship though. Also, you will require an extensive fleet and network of transport vehicles for cross-docking to work.
This method banks on the notion that it is almost always cheaper to purchase and ship goods in bulk, so you plan to reorder products and replenish your inventory less frequently than you usually would. Bulk shipping is one of the predominant inventory management techniques in the industry, which can be applied for goods with high customer demand.
The downside to bulk shipping is that you will need to lay out extra money on warehousing the inventory, which will most likely be offset by the amount of money saved from purchasing products in huge volumes and selling them off fast.
Now, the hard truth is, you can use any inventory management technique to control your inventory, but without a good software solution to optimise your strategy, you’re fighting an uphill battle.
Having a solid system in place ensures that you go into battles well prepared because it will recognize the financial impact of your inventory management techniques.
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