Chapter 2

Inventory Management Techniques

As you witness growth in your business, you need to prioritize your inventory management accordingly but how do you select an appropriate method?

 

‘One size fits all’ rule cannot be applied for selecting inventory management methods. There are various ways in which inventory can be managed, and it is up to an organization to choose the inventory management technique that best suits their business.

 

 

However, to select the best approach for your business, you need to know all of them in detail so that you can make a wise choice.

 

Let us look at some of the commonly used inventory management techniques in detail:

 

 

1.  Perpetual Inventory Management

 

The perpetual inventory method of accounting inventory, as the name suggests, is about tracking inventory ‘perpetually’ as it moves throughout the supply chain.

 

In this approach, warehouse managers keep a continuous track of inventory balances, which means the stock is updated automatically every time an item is received or sold through every point of sale.

 

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2.  Periodic Inventory Management

 

As opposed to the perpetual inventory system, in periodic inventory methods, the inventory is not tracked each time a sale or a purchase is made. Here, inventory is monitored at the beginning and end of the accounting period.

 

Periodic inventory management is about accounting stock for its valuation after the designated time frame. Warehouse employees take a physical count of their products periodically according to the set period.

 

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3.  ABC Analysis

 

ABC analysis is derived from the term “The Pareto Principle” named after an Italian economist Vilfredo Pareto, also called the 80/20 rule. This principle suggests that 80% of the total output is generated only by 20% of the valuable efforts.

 

When it comes to stock or inventory management, ABC analysis typically segregates inventory into three categories based on its revenue and control measures required.

 

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4.  Just-in-Time Inventory

 

Just in time fulfillment (JIT) is an inventory management practice to enhance returns on investments while improving product quality. The method also helps in cutting down the wastages since the receiving goods are obtained only when they are needed in the production process.

 

Hence, as the name suggests, the Just-in-time inventory method refers to having the inventory readily available at the right time and in the right place as per the demand but not overstock it creating a deadstock.

 

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5.  FIFO & LIFO

 

FIFO or LIFO are the methods that companies use to assess their inventory and calculate profit. The amount of profit a company generates affects their income taxes.

 

FIFO, the acronym stands for First-In-First-Out. It is an inventory accounting method where the oldest stock or the inventory that entered the warehouse first is recorded as sold first. FIFO is one of the most popularly used in inventory valuation methods.

 

LIFO, the acronym stands for Last-In-First-Out. It is an inventory accounting method where goods produced or purchased most recently are recorded as sold first.

 

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6.  EOQ Formula

 

The Economic Order Quantity is a quantity designed to assist companies to not over- or under-stock their inventories and minimize their capital investments on the products that they are selling. The cost of ordering an inventory touches down with an increase in ordering in bulk. However, as the seller wishes to grow the size of the inventory, the carrying costs also increase.

 

The EOQ is exactly the point that optimizes both of these costs i.e. cost of ordering and the carrying costs which are inversely related.

 

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7.  Vendor Managed Inventory

 

Vendor Managed Inventory is one of the most popular business models for managing inventory and there’s no wonder that the world’s largest corporations like Walmart, Tesco, and Amazon use this method.

 

Vendor-managed inventory (VMI) is a business model in which the buyer of a product provides certain information to a vendor or the supplier of that product and the supplier takes full responsibility for maintaining agreed inventory levels of the material, usually at the buyer’s preferred location or store

 

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8.  Two Bin Inventory Control

 

As the name suggests, this method comprises two identical plastic bins that are utilized alternately. Both of them are filled with components that are fitted onto the final product.

 

The workers on the production line shall use the first bin until it is emptied. Once the first bin is wholly utilized, they will start utilizing the second bin. The empty one will act as a signal for replenishment.

 

Thus, the manufacturing is continued without stopping the line to fetch the required components. In most cases, these items are used in semi-finished goods which are in the final stage of production.

 

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9.  Dropshipping Guide

 

For someone who is new to the e-commerce scene and is planning to venture into it, you may be wondering what is dropshipping.

 

Dropshipping is a retail fulfillment method where an online seller isn’t required to keep stock or store inventory. This business model allows a company to operate without owning a warehouse to store the products it sells or having to ship products to their customers. Instead of the retailer partners, up with a dropship supplier who either manufactures or warehouses products has complete inventory control and ships it directly to the customers.

 

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10.  Inventory Cycle Count

 

Cycle count is a subtype of a perpetual inventory management method. It is used for auditing purposes. Apart from internal processes, these audits are also required for financial accounting or taxation compliance purposes. In cycle count, a limited portion of the total inventory is counted at a time to constitute the figures for the entire stock. As a sampling technique, it utilizes data from a small portion to quantify the bigger picture.

 

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11.  Fast-moving, Slow-moving and Non-moving (FSN) Inventory

 

Fast-moving, the slow-moving and non-moving inventory, aka the FSN analysis, the method is about segregating products based on their consumption rate, quantity, and the rate at which the inventory is used.

 

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Chapter 1
What is inventory?
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Chapter 3
Inventory Management Processes