Failure to effectively manage inventory can cost any business dearly but for many, it is a huge and time-consuming undertaking. Optimizing your inventory management requires planning, careful analysis and continual improvement in order to stay ahead of the competition, ensure you don’t miss out on sales and cut costs on wasted resources.
There are several ways to make sure you are on top of your inventory; here are three of the most effective techniques for optimal inventory management.
You may already be familiar with using ABC analysis. The idea is to effectively prioritize your attention and resources where it matters most. According to the Pareto Principle, 80% of overall inventory consumption comes from just 20% of your total items. This is where ABC analysis becomes a useful technique for identifying how to make your inventory management as efficient as possible.
Splitting your inventory into two categories would be a little too simplistic to work so this method divides your inventory into three types based on inventory value, annual consumption and cost significance.
Here’s how that categorization should look:
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%)
In order to create a guiding principle on how to best use inventory management resources and funds, every item now has a new, truer value that translates directly into a priority level. Naturally, the items that need the strictest control are those that are high in monetary value and low in number, they will be your ‘A’ items. It might sound like common sense but until you have categorized each item in your inventory, you may well find you are not optimizing as well as you’d thought.
While some seasonal trends can be obvious and you may have some great intel on your customers’ buying cycles, there will always be some outliers that can really throw a spanner in the works. Despite some fluctuations in demand appearing to be quite random, given enough data, it is often possible to predict trends that manual reporting and your usual business intelligence sources have missed. With the right software, historical sales data can take that guesswork out of inventory management and ensure that order quantities are always optimal through automated analytics and replenishments.
Just in Time (JIT) is still considered by some to be a risky business because your inventory will only ever be ready just before it needs to be distributed or sold. However, if you have robust analytics and automation functionality in your ERP, these risks are minimized. It is especially useful for those items that you don’t have the time to focus on too much – but once you know you can trust the system, it can be just as useful for your higher value products.
Having less inventory sitting around, unnecessarily tying up cash and potentially becoming spoiled or obsolete before it is sold, is a risk in itself. Solid research and analysis on demand levels and seasonal trends, along with reliable supply chains and logistics, make JIT ever more viable for an increasing number of businesses.