Choosing the Right Inventory Management Strategy for Your Business
Choosing the right inventory management approach is understanding how inventory impacts your business because it is essential for success. Having both shortages and excesses of inventory can result in serious consequences for your business. Improving inventory management, on the other hand, can offer a variety of advantages, including cutting expenses and preventing supply and demand fluctuations. Choosing the appropriate inventory management system is only one of several steps that can assist businesses in making a positive impact.
What exactly is inventory management strategy?
Inventory is generally goods, products still in the production process, and raw materials that need to be handled effectively for a business to deliver orders on time, maintain price controls, and grow. Inventory management is the practice of handling that operation. It's a highly adaptable process that determines how a company orders, stores, uses, and sells its products and materials.
An inventory management strategy's purpose is to most efficiently use raw materials and finished products based on the company's specific goals. Some examples of these unique needs could include ensuring that there wouldn't be a product shortage if an influx of orders came in, getting said orders out within a certain time frame, or barely using storage space so that it saves on renovations/building maintenance costs down the line.
Here are 5 types of inventory management strategies to track and manage inventory in the supply chain:
1. Economic order quantity (EOQ)
The economic order quantity (EOQ) is the number of units that a company should order to minimize the total cost of inventory. The EOQ equation takes into account the costs of ordering and holding inventory, and it provides a way to optimize these two factors. In general, the EOQ will be smaller when the cost of ordering is high and the cost of holding is low. The EOQ is a helpful tool for companies to use when they are trying to manage their inventory in the most efficient way possible. Additionally, the EOQ can be adjusted to account for fluctuations in demand, making it an even more versatile tool for businesses. By understanding and utilizing the EOQ, companies can save both time and money while still maintaining an adequate level of inventory.
2. Bulk orders
Many businesses take advantage of bulk ordering to save money on inventory costs. When a business orders products in bulk quantities, they usually receive a discount from the supplier. This can lead to significant savings, which can be used to improve other areas of the business. In addition, bulk ordering often results in faster shipping times and better customer service from the supplier. As a result, it is often an advantageous option for businesses that rely heavily on inventory.
3. Just-in-time (JIT)
In business, just-in-time (JIT) is a technique for reducing waste and increasing efficiency. The basic idea is to produce only what is needed when it is needed. This approach can be applied to any process, from manufacturing to inventory management. In manufacturing, JIT production reduces the need for expensive inventory storage space. It also helps to avoid the waste that can occur when products are produced in advance of demand. In inventory management, JIT ordering reduces the risk of stockouts and excessive inventory levels. By reducing waste and increasing efficiency, JIT can help businesses to improve their bottom line.
4. Safety stock
Safety stock is inventory that is maintained to protect against stockouts. It is a strategic reserve of inventory that can be used to meet customer demand in the event of an unexpected increase in demand or disruption in the supply chain. The level of safety stock required depends on the nature of the product, the variability of demand, and the lead time for replenishment. In general, businesses strive to maintain enough safety stock to cover their expected demand during the lead time, while keeping inventory levels as low as possible to minimize carrying costs. By carefully managing safety stock levels, businesses can strike a balance between meeting customer demand and minimizing costs.
5. ABC analysis
ABC analysis is a method used in inventory management that categorizes inventory into three classes: A, B, and C. Class A items are the most important and are given the highest priority, while Class C items are the least important and are given the lowest priority. The classification is based on a variety of factors, including the turnover rate, unit cost, and order quantity. ABC analysis can be used to optimize stock levels and improve decision-making about inventory management. When used correctly, it can help to improve overall efficiency and effectiveness.
There is no ‘one size fits all' solution when it comes to inventory management strategies. Depending on their business model and working capital objectives, different methods are suitable for various kinds of enterprises. By knowing the different types of inventory management, you can determine which strategy best fits your business!