Inventory Management Techniques

Meaning of Inventory Management

Inventory Management techniques help in tracking and controlling the inventory orders, their usage, and storage, along with the management of finished goods that are ready for sale. Improper inventory management can increase storage cost, working capital crunch, wastage of labor resources, increase in idle time, disruption of the supply chain, etc. All this leads to a reduction in sales and unsatisfied customers. Therefore, inventory management is an important aspect of the business that the management cannot afford to ignore. Effective and efficient management of the same is a must.

7 Most Effective Inventory Management Techniques

There are various types of inventory management techniques that can help in efficient inventory management. They are as follows:

ABC Analysis

Types of Inventory Management Techniques

ABC analysis stands for Always Better Control Analysis. It is an inventory management technique where inventory items are classified into three categories: A, B, and C. The items in the A category of inventory are closely controlled as it consists of high-priced inventory, which may be less in number but are very expensive. The items in the B category are relatively less expensive than in the A category, and the number of items in the B category is moderate, so the control level is also moderate. The C category consists of a high number of inventory items that require lesser investments, so the control level is minimum.

Refer to ABC Analysis for a more detailed article.

Just In Time (JIT) Method

In the Just in Time method of inventory control, the company keeps only as much inventory as it needs during the production process. With no excess inventory in hand, the company saves the cost of storage and insurance. The company orders further inventory when the old inventory stock is close to replenishment. This is a little risky method of inventory management because a little delay in ordering new inventory can lead to a stock-out situation. Thus this method requires proper planning so that new orders can be timely placed.

Read more about it at Just in Time.

Material Requirements Planning (MRP) Method

Material Requirements Planning is an inventory control method in which the manufacturers order the inventory after considering the sales forecast. MRP system integrates data from various areas of the business where inventory exists. Based on the data and demand in the market, the manager would carefully place the order for new inventory with the material suppliers.

Continue reading: Material Requirements Planning (MRP).

Economic Order Quantity (EOQ) Model

Economic Order Quantity technique focuses on making a decision regarding how much quantity of inventory the company should order at any point in time and when they should place the order. In this model, the store manager will reorder the inventory when it reaches the reordering level. EOQ model helps to save the ordering cost and carrying costs incurred while placing the order. With the EOQ model, the organization is able to place the right quantity of inventory.

Read more on it at EOQ.

Inventory Management Techniques

Minimum Safety Stocks

The minimum safety stock is the inventory level that an organization maintains to avoid a stock-out situation. It is the level when we place the new order before the existing inventory is over. For example, if the total inventory in an organization is 18,000 units, they place a new order when the inventory reaches 15,000 units. Therefore, the 3,000 units of inventory shall form part of the minimum safety stock level.

Read more about Safety Stocks.

VED Analysis

VED stands for Vital Essential and Desirable. Organizations mainly use this technique for controlling spare parts of inventory. Like, a higher level of inventory is required for vital parts that are very costly and essential for production. Others are essential spare parts whose absence may slow down the production process. Hence it is necessary to maintain such inventory. Similarly, an organization can maintain a low level of inventory for desirable parts whose requirement does not arise more often for production.

Keep reading VED Analysis

Fast, Slow & Non-moving (FSN) Method

FSN method of inventory control is very useful for controlling obsolescence. All the inventory items are not used in the same order; some are required frequently, while some are not required at all. So this method classifies inventory into three categories, fast-moving inventory, slow-moving inventory, and non-moving inventory. The order for new inventory takes place on the basis of the utilization of inventory.

For a detailed article, refer to FSN Analysis

Perpetual Inventory System

This technique keeps a continuous and updated record of inventories after each transaction of purchase, sale, withdrawal, etc.

Read about Perpetual Inventory System in this detailed article.

Conclusion

Inventory management is an essential part of every business. With an effective inventory management system in place, the business can significantly reduce its various costs like warehousing cost, inventory carrying cost, ordering cost, cost of obsolescence, etc. It improves the supply chain of the business. Managers are able to forecast the level of production at which they need to place new orders for inventory. Hence, organizations should take all the necessary steps to maintain an effective inventory management and control system.



Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

8 thoughts on “Inventory Management Techniques”

  1. Good Information worth reading & knowing the basics of inventory management , but can you also detail the guide line for the trading/Retail company Inventory management system to improve the Free Cash Flow. Thanks.

    Reply
  2. This article is on the latest trending topics. This is one of the most incredible blogs I’ve read in a very long time.

    Reply

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