Inventory Management Concepts and Techniques

Inventory refers to the finished products for sale or raw materials available in hand to be used in manufacturing. From increasing sales to customer satisfaction, inventory is important for the smooth operation of all functions associated with your business. The inventory must be available in the right amount for the uninterrupted functioning of your business. An excessive quantity of inventory can lead to capital blockage and inadequate inventory usage. On the contrary, a minimal inventory can negatively affect sales and customer experience.

What is Inventory Management?

Inventory management is required by businesses to ensure the proper buying and selling of inventory stock. It determines the amount of inventory that a company must buy at a given period. Good inventory management ensures that there is never any shortage of inventory stock.

Excessive amounts of inventory can indicate the stock being unused. Calculating inventory turnover can help in preventing excessive or insufficient inventory stock. Inventory turnover identifies the period a company needs to sell the inventory stock.

Objectives of Inventory Management

Businesses often spend around 90% of their working capital in purchasing inventory. This makes proper inventory management essential. There are both functional and financial objectives of inventory management. The functional objective includes possessing the right amount of inventory by the company. In contrast, the financial objective ensures that only a minimum amount of working capital is blocked in the inventory.

Mentioned below are the objectives of inventory management:

• Maintaining a sufficient amount of inventory stock for enhanced sales and customer experience.
• Ensuring that there is neither excessive nor inadequate amount of inventory.
• Minimising the blockage of working capital in inventory.
• Minimising material cost for reducing the cost of production.
• Avoiding any duplication in inventory purchasing.
• Minimising inventory loss because of wastage, shrinkage, theft, warehouse accidents, etc.
• Stabilising the prices.

Inventory Management Techniques

• Drop-Shipping

In this inventory management technique, the company does not invest in purchasing inventory. When a customer places an order, the company purchases from a third party and ships that product to the customer without even seeing or touching it.

• FIFO and LIFO

FIFO stands for first in, first out. This technique ensures that the new inventory is up for sale only when the old inventory is sold out. It helps in maintaining inventory freshness.

LIFO stands for last in, first out. This technique prevents the inventory from spoiling by selling the new stock first.

• Bulk Shipments

This technique reduces the cost of purchasing inventory by ordering shipments in bulk at once.

• Demand Forecasting

Retailers majorly use this technique for predicting future demand based on past sales. Inventory is purchased by companies based on this prediction/estimate.

• EOQ

EOQ stands for economic order quantity. This technique reduces overhead costs by evaluating several aspects like production costs, demand costs, etc., to identify the ideal amount of inventory to be purchased.

• ABC Analysis

This technique works by dividing the inventory into three groups: A, B, and C. The most valuable and profitable products are included in category A. Category B consists of the somewhat profitable products. Finally, the third category C has the products that do not add much value individually but are profitable when added with other categories.

• Cross-Docking

Cross-docking reduces the cost of warehousing by directly unloading the materials from an inbound truck to an outbound truck.

• MOQ

MOQ refers to the minimum order quantity that the supplier is ready to sell.

• Safety Stock Inventory

This inventory management technique prevents any inventory shortage by purchasing extra stock than the estimated amount.

• Batch Tracking

This technique eases the process of checking inventory expiration by grouping products with similar traits together.

• Lean Manufacturing 

This technique enhances efficiency by removing unnecessary elements or activities from daily operations.

• Six Sigma and Lean Six Sigma

Six sigma helps eliminate fluctuations in-process and enhance the overall output by undertaking a statistical problem-solving approach.

Lean six sigma combines both lean manufacturing techniques and six sigma for eliminating wastes and enhancing in-house operations.

• Reorder Point Formula

Reorder point formula is used for deciding the minimum quantity of stock a business must possess before reordering.

•  Consignment Inventory

It is a technique wherein the consignee (retailer) takes products from the consignor (wholesaler or vendor) and pays only when the products are sold.

• JIT

JIT, or just-in-time inventory, enhances cost efficiency by ordering stock as and when needed.

• Perpetual Inventory Management

It is a basic technique wherein the inventory is counted immediately after arriving.