Inventory Control Methods
If you are a trader or manufacturer, you would agree with me that the Inventory management is not that simple; its a nightmare to keep track of the number of products that the company has, the number it has purchased but not received, the amount that it has sold but not yet delivered and many more.
The word inventory management dreads many small and medium-sized businessmen. While it can be a cumbersome task, inventory management can become a lot simpler if done in an organized manner.
With the advent of cloud-based software systems, this task of inventory management has become a lot easier. But many people in developed countries are still not familiar with the technology and face issues in reconciling their inventory at the end of the year.
In accounting terms, you can call stock as a placeholder for your money. This is because you had paid money when you purchased or manufactured the product and you will get it back when you sell it. This makes inventory management a crucial part of any business.
In this article, we will talk about what is inventory control, different methods in inventory control, the types of inventory and also some useful inventory management techniques to cut losses.
Let’s dive in..
Why Is It Essential To Implement Inventory Control Methods?
If you have a lot of inventory in your warehouse, it will tie up your cash as well as space. This makes inventory management and controls very crucial. Here are some of the reasons you should implement inventory control methods:
A good inventory control system can save your money by:
Avoiding spoilage: If you have a product which gets spoilt or expired, then you have to keep track that you sell it on time. With a good inventory management system in place, spoilage can be avoided.
Avoid Dead Stock: Dead stock are products that cannot be sold anymore, although they are not expired. This can be because of a change of fashion trends, season or some other reasons. You can avoid accumulation of dead stock by inventory management.
Reduce Storage Costs: Warehousing is a cost too and if you have accumulated a lot of products then you might have to spare some money for additional storage, or you might now have space for products in demand. Storing too many products can lead to money wastage.
Improve Your Cash Flow: Apart from saving money, inventory control can improve your cash flow too. Inventory is purchased with money, and you will get it back when you sell, but not when it is still in your warehouse. Thus it becomes crucial to consider inventory control in your cash flow management.
This is because inventory has a direct effect on your sales as well as purchases which impacts the amount of cash you have. Better inventory management system will help you keep minimum inventory at hand, provide regular reordering insights and alerts and avoid loss of customers too.
8 Techniques for Inventory Management and Control
Inventory management can be a tricky task, but if you set an optimal system for this process, then you can remove human error and make your business process smoother. Take help from a good inventory management software to improve your inventory management and cash flow.
These techniques will prove useful regardless of the system you use or if you choose to do it manually.
1) Setting Par Levels
You can manage your inventory by setting par levels for all of your products. Par levels mean the minimum amount of product that should be in your stock at any point in time. If your inventory level goes below the par levels, then it is time to reorder. You should order a minimum quantity that will get your product back above par level. You can set this level based on past sales trend of the product and the ease of acquiring it. This will take some research and analysis of your existing monthly or yearly sales of the product. By setting par levels, you can make quick decisions, and even your staff can order even in your absence. You should modify the par levels on a regular basis according to the sales trends.
2) FIFO Principle
FIFO means First in First Out. It is a simple and vital concept in inventory management which means that what comes in first in your warehouse should go out first too. That is the oldest stock should be sold first and not the newest. This rule is fundamental when you are dealing with products that get spoilt or expires. Although you should use this principle for non-perishable goods too, for perishable ones this is a must. If you do not want to end up with a lot of spoilt or obsolete stock in your warehouse, then it is essential to practice this rule.
Having an organized warehouse is essential to apply the FIFO system. Make sure old products remain in the front of your shelves or keep barcoding according to purchase date.
3) Regular Inventory Auditing
Time changes and so does the inventory trends and customer behaviour. Hence it is essential to perform a regular reconciliation. You can do this in the following ways:
- Physical Inventory: This process involves keeping a count of all your stock at once. This is done usually at year-end when businesses have to file income tax and do auditing. Although most companies do it once a year, it is recommended to do it more often to make it easier to pinpoint the discrepancies.
- Spot Checking: If you find it difficult to do a full physical inventory at the end of the year and you do not have time to do it more often too, then you should do spot checking. This is suitable for business having lots of products, and it involves choosing a product randomly and counting it. Then you must compare it with the number it was supposed to be. It is recommended to do regular spot checking for fast moving or problematic products.
- Cycle Counting: Cycle counting is an effective means of inventory auditing. It spreads the reconciliation process throughout the year. In this method, different products are audited each day, week or month on a rotating schedule. Count expensive items more often.
4) Contingency Planning
Faulty inventory management can cripple your business. You can run into problems such as:
- Your sales may spike unexpectedly, and you might oversell.
- You purchase unnecessary stock and then run into cash deficit for buying products you need desperately.
- Warehousing of unnecessary stock leaves no space for seasonal products.
- Calculation mistakes while counting products.
- Slow moving product blocks your warehouse space.
- Your manufacturer runs out of stock, and you have to fulfill orders.
- Your manufacturer discontinues production of the product you need without any notice.
To deal with these problems, you must have a contingency plan in place. You should know how you will react and solve the problem. Proper planning can save you a lot.
5) Prioritize Top Moving Items
Some products sell faster than others and need more attention. You can prioritize your inventory based on the ABC analysis method. Add your products to one of the three categories:
- High-value products having a low sales frequency
- Moderate value products having average sales frequency
- Low-value products having high sales frequency.
You must pay regular attention to products in a category as its sales are unpredictable. On the other hand, category C requires less oversight while those in B category fall in-between.
6) Consider Drop Shipping
This is an ideal mechanism for inventory management. Instead of managing inventory you allow the manufacturer or wholesaler to ship to your customer. This removes the hassle of inventory management from your business. Ask your supplier if they provide this service. This can reduce expenses associated with storage, holding inventory and fulfillment.
7) Forecast Accurately
A good inventory management involves accurate demand prediction of products. Several software can get you precise forecasting. You can predict your future sales based on:
- Market trends.
- Last year sales.
- Annual growth rate.
- Seasonal sales and condition of the economy.
- Contracts and subscriptions that you hold.
- Sales from recent marketing campaigns.
- Upcoming promotions and discounts.
8) Manage Relationships
You should be able to adapt quickly to have better inventory control. To deal with inventory issues, you should have good relations with your suppliers. This will solve problems associated with returning slow-selling items, restocking, drop shipping, etc. It can help your business go a long way. You can even negotiate on minimum order quantities.
To maintain a good relationship, you should keep good communication. Many issues related to sales and inventory control can be managed with proper communication. It will also help you serve your customers effectively. Happy customers would mean better business.
Because of all the mentioned benefits of inventory management, it is inevitable for all businesses to take control of inventory management and stop wasting money. Choose and implement the best inventory management techniques from ones mentioned above and take control of your inventory today.