Inventory is the bread and butter of a business. It is the list of items, component parts, and raw materials that a company either uses in production or sells for revenue. In this blog post, we tell you how you can manage your inventory efficiently and skyrocket your profits significantly.
Inventory can broadly be categorized into three types: Raw materials and supply, work-in-progress goods and finished goods for sale.
Raw materials are the basic materials that go into the production of any item. They are used to make the final product. Work-in-progress goods are items that have had some production done on them, but not completed to go into the market. Finished goods are the items that are completely produced and are in a great shape to be sent to the market for sales.
What is inventory management?
Inventory management is the process of organizing and managing these stocks throughout the supply chain. Its main aim is to ensure the stock levels are consistent, there is a minimal cost of holding inventory, and the customer has a great, hassle-free experience while purchasing a product.
Why should you invest in inventory management?
Inventory management has a multitude of benefits. Firstly, it ensures there is consistent availability of inventory all the time. Having a robust inventory management strategy helps ensure there is no understocking or overstocking, leading to an ideal stock level throughout the cycle. That is, if there is high demand for a product, having an inventory management strategy in place can enable a producer to produce more of the items to ensure there is enough product to satisfy the increasing demand. Similarly, in case the demand for a product is dwindling, the system can help analyze the losses incurred and the brand can think of strategies to sell off the excess inventory.
One of the primary reasons why a brand should invest in inventory management is the seamlessness it provides to processes. Having a proper process for each stage of your product’s lifecycle can guarantee higher returns in terms of cost, time, and effort spent. Inventory management helps brands create processes and stick to it, and warns them when there might be any mishaps in the near future.
In a nutshell, if inventory is the heart of a business, inventory management is the brain that ensures all processes run smoothly throughout the chain.
Inventory management techniques for your business (with formulae)
Our research led us to some of the most prominent techniques experts use to ensure optimum inventory management. Here are 9 techniques you can use for an efficient inventory management process.
ABC analysis, or the ABC method of inventory control, is a technique where inventory is divided into three categories, i.e. A, B, and C, in descending value. That is, the items in the A category have the highest value, B category items are of moderate value, and C category items have the lowest value for the business.
The method is based on the Pareto Principle (a.k.a 80/20 rule) that states that 80% of your inventory costs comes from just 20% of your inventory.
Performing the ABC analysis for inventory management helps you decide which inventory needs to be stocked adequately, making sure you don’t miss out on the items that bring you the maximum profits. It also helps you understand which products are performing badly, and paves way for revamping your marketing strategy for the same.
Bonus: You can read more about the ABC analysis for inventory management in our recent blog post. You can learn the benefits of ABC analysis, how to perform the ABC method of inventory control, and more in the blog post.
In simple terms, Just-in-time or JIT inventory management technique is the one where the raw materials are received from suppliers only as and when they are needed. The main aim of this method is to reduce inventory holding costs and increase inventory turnover.
Did you know: Just-in-time manufacturing is also known as the Toyota Production System (TPS) because the car manufacturer, Toyota, invented the system in the 1970s to optimize their workflow.
It basically eliminates overproduction and ensures the brand produces only as much as needed at any given time. The Just-in-time production process’s success relies heavily on consistent production, high-quality workmanship, top-class production unit, and copper-bottomed suppliers.
FIFO (First in, First out)
First in, first out is probably one of the most commonly used principles in inventory management. It essentially means you push your oldest stock in the warehouse out first instead of the newest. It is especially useful in the case of perishable goods. For example, if your first batch of toothpaste was manufactured in December 2021, and you recently manufactured the next batch, it would make sense to push the Dec’21 batch out first as it will perish before the most recent batch.
Honestly, we believe this principle also works for non-perishables. If not sold sooner, they face the danger of going obsolete and then becoming dead weight to the brand. With brands revamping their branding and marketing strategies often to stay relevant, these products might end up staying in the warehouse forever if not sold on time.
ProTip: Employing FIFO (First in, first out)principle requires you to have a perfectly organized warehouse. Make use of RFID and barcodes to ensure you are up to date with when the inventory was brought (and also avoid pilferage). Make sure your entire team knows which inventory was manufactured when to ensure no human error occurs.
Per Wikipedia, “Safety stock is an additional quantity of an item held in the inventory to reduce the risk that the item will be out of stock. It acts as a buffer stock in case sales are greater than planned and/or the supplier is unable to deliver the additional units at the expected time.”
In simple terms, it is having a little surplus item in your inventory to save yourself in times of need. It acts as an insurance in times of fluctuations in the demand. You can calculate the safety stock you would require using the below formula:
Safety stock volume=(Maximum daily sales * maximum lead time in days) – (average lead time in days * average daily sales)
Having safety stock in hand ensures your sales doesn’t come to a halt all of a sudden in case you face a stockout. If stock outs have been bothering you, read our blog post on Everything you need to know about stock outs.
EOQ & MOQ (Economic Order Quantity & Minimum Order Quantity)
EOQ stands for Economic Order Quantity. In essence, EOQ is a technique used to determine the volume and frequency of orders required to satisfy a given level of demand while minimizing the cost of ordering and holding inventory. You can use the below formula to calculate the EOQ:
EOQ= dTC √2SD
__ = ____
D: Annual Quantity Demanded
Q: Volume per Order
S: Ordering Cost (Fixed Cost)
H: Holding Cost (Variable Cost)
TC: Total Cost
MOQ , or Minimum Order Quantity, on the other hand, is that unit of goods that, if sold, would cover the production cost and at least promise a break-even for the producer. You can calculate this by first calculating the Average Order Value for your goods. This can be done by dividing your overall revenue by the number of orders that you receive in a particular period of time. Now, you have to set your MOQ just above the Average Order Value.
Lean and Six Sigma
Lean Six Sigma is the integration of Lean and Six Sigma methodologies to reduce waste, and defects, and increase effectiveness and results. While lean focuses on efficiency, Six Sigma focuses on how effectiveness can lead to faster results. Together, they improve products, processes, and services significantly.
A reorder point (ROP) is the level at which your stock needs to be replenished. That is, if your stocks reach this level, you know you have to reorder the inventory to ensure you don’t face stockouts and have smooth transactions throughout. The longer you take to replenish the items, the more sales you will be losing.
You can calculate the reorder point of your inventory using the below formulae. There are two ways — One, with safety stock, and one without.
If you have safety stock, here’s the formula:
ROP= (Daily average usage X Lead time) + Safety stock
However, if you’re a brand that deals more with JIT inventory, having safety stock isn’t your cup of tea. In such cases, you can use the following formula:
ROP= Daily average sales X Lead time
Lead time: Time taken (in days) for your vendor/supplier to fulfill your order
Safety stock: The amount of extra stock that you keep in your inventory to help avoid stockouts
Daily average usage: The number of sales made in an average day of that particular item
Remember not to reorder too early as you’ll need to spend more on storing these excess items.
Discrepancies in inventory counting is one of the primary reasons why brands lose sales and revenue. It affects your order management, and customer experience, and can lead to high holding costs on goods that you didn’t even know existed. Counting your inventory consistently is the solution to accurately tracking products and materials in your warehouse. However, counting all inventory in one go can be time-consuming and exhausting. That’s why we recommend cycle counting. It is the process of breaking the inventory counting process down into manageable chunks, often 2 cycles in a year.
ProTip: To get the best results with cycle counting, it’s advisable to create dedicated inventory teams. This allows you to train team members to be experts at the counts.
Cycle counting helps ensure the inventory in your storage matches the inventory in your systems. It helps you identify product damage, admin errors, pilferage, and a whole lot of human errors that the system wouldn’t be aware of.
Recently, data found that 73% of retailers struggle with inventory demand forecasting. It is the process of using data to analyze the historical demand and predict future demand accurately. While many brands still opt to go the brick-and-mortar way to go about forecasting demand, we strongly suggest adopting AI-led software to do this for you.
Forecasting demand accurately ensures you know what products need to be produced in how much quantity to skyrocket your profits and avoid unnecessary loss. For example, some goods are seasonal. Knowing and acknowledging that they will have high demand only during a particular season (think Christmas) can help you avoid overstocking them the rest of the year.
Remember, demand forecasting can be a boon to your business if done using the right data. Make sure you have proper logs of sales as well. You can use the ABC analysis for inventory management to ensure you know which goods need to be focused on.
Bonus: As we have mentioned before, it is highly advisable to go for an AI-led inventory management solution to ensure you have a top-notch supply chain process. However, if you aren’t sure how to choose the right vendor, here are a few things to consider:
Things to consider while choosing an inventory management system
Cost-effectiveness: Not only should it be within your budget, it should also help you with reducing costs through seamless management of inventory.
Real-time inventory tracking: What’s the point of tracking any data if it doesn’t happen in real-time? Look for a vendor who offers real-time data tracking through a central application.
Accurate demand forecasting: One of the most important features of the system should be accurate demand forecasting. The app must be able to predict the demand for your products based on historical data, and should also be able to replenish orders as and when needed automatically.
Multi-device capability: In today’s mobile-first world, it is highly advisable to go for vendors who provide both computer/laptop and mobile capabilities. That way, you can make decisions on the go without any hassles.
In-depth data insights and data granularity: Data plays a humongous role in ensuring your business keeps flourishing. Every decision you make needs to be backed by data in order to ensure optimum results.
24*7 Support: Often overlooked, having a robust, collaborative support system with your vendor makes sure you don’t get lost in all the technicalities of the platform.
What are the metrics to be aware of while managing inventory?
Inventory management can seem like a daunting task. With a plethora of materials available about inventory management, one can often lose track of what is actually important. Here are the 5 metrics you should be tracking to ensure sound inventory management.
This refers to how much inventory is used in a given time frame. Tracking your assets helps understand what you have to produce and in what quantities to ensure smooth transactions across your supply chain.
This refers to the value of your company’s current inventory. If certain products bring you more revenue, you can then allocate more storage space or create marketing strategies to sell more of those high revenue-generating products.
Storage is expensive. Overstocking usually takes up useful storage space that could have been leveraged for other in-demand items. Knowing the available space in your warehouse or storage unit is crucial for a smooth experience.
Order cycle time
This refers to the typical length of time between one order and the next. A longer order cycle time can negatively impact your business, at times even leading to customer dissatisfaction and pushing them to the competitors.
Inventory Management is key to a smooth supply chain process
Having robust inventory management can help you streamline your processes, increase your team’s performance, expedite your sales, and skyrocket your sales. Now that we’ve established the importance of inventory management, tell us some inventory management tips that have worked for your brand. Bookmark this page so you have access to our expert tips all the time.
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