Inventory management techniques and best practices

Posted by Colleen Rodericks
inventory techniques mangement

If you’re just getting started to manage your inventory, you might be overwhelmed with all the different techniques and practices in place today. In this article, we’ll look at a few inventory management techniques and best practices and make sense of them.

Just-in-Time (JIT)

The Just-in-Time (JIT) inventory management technique helps with managing cash flow for a retailer. You only buy what you need from a vendor when you get a customer sales order.

This is great if you’re the retailer, but if you’re the manufacturer, this can get more complicated. As a manufacturer, you might require data on trends (buying behaviors and patterns, seasonal information, location and price point) in order to make sure you have enough stock for your retailers.

Best Fit for JIT:

  • Businesses that do drop-shipping such as e-commerce companies
  • Businesses that build customized products – luxury cars, furniture, jewellery, computer manufacturers, etc.
  • Service-based businesses – food, event planning, auto repair, etc.

ABC Analysis

ABC is a hierarchy of your most valuable items to the least (by dollar value). This is also referred to as the Inventory Categorization Method. Since you may not value your entire stock equally, this control will have you focusing your time and resources on items that make you the most money.

A- items are big-ticket or priority stock. These goods require tighter controls and monitoring since they are your largest revenue and cost contributors. Due to their costs, you would most likely be carrying smaller volumes on hand. Since these items are heavily sought after, they should be stored under “lock and key”. In addition to security, A-list products will require higher frequencies of stock reviews and re-ordering. This ensures that you have adequate supply.

Conversely, C-items have lower values but you may be carrying large volumes of them. For example, if you owned a hardware store, nails in bulk may be considered a C-item. B-items sit right in the middle for value, volume, frequency of stock reviews and re-orders.

Inventory Management Best Practices for Small Business

Minimal Stock Level

Minimal stock is the minimal amount of safety inventory you are willing to keep on hand before replenishing your supplies. This quantity is never static and should be adjusted when needed.

For instance, with a seasonal business like skis, bikes and home improvements, adjustments in stock levels are made based on the time of year. Making adjustments ensures that you never run into stock-outs during your peak seasons. In your low seasons, holding fewer inventory items will free up your cash flow.

Businesses that use perishable goods will also want to use minimal stock as a control. Set your minimum and maximum levels to be the same. This lowers your risk of carrying dead stock if it is not used in time. More monitoring is required for using minimal stock as a control measure. By carrying less volume, you will need to increase the frequency of your replenishment. In the end, this may not save you any money since you may be incurring more shipping charges.

If you’re using inventory software such as inFlow Inventory, you can easily set your reorder points and be altered when stock is low. Furthermore, in a few clicks you can create a PO to easily replenish your stock.

First-In-First-Out (FIFO) for Perishable Stock

FIFO is the best practice for getting the oldest products out the door first. This is especially crucial for items with a limited shelf-life such as products with expiration dates like chemicals, pharmaceuticals and food items. Best practice for FIFO is to have proper warehousing procedures and documentation. When new products are being received, place the oldest ones in the front of the queue. This way they get picked first.

Last-In-First-Out (LIFO) for Heavy Raw Materials

On the opposite spectrum of FIFO is LIFO. This is commonly used for heavy raw materials such as with stone and sand. These materials are stored in piles at a stock yard with new goods being piled on top. When purchasing the raw material, you pick from the top of the pile first.

Inventory Management Techniques for Stock Review or Cycle Counting

Regardless of the controls your business uses, regularly-scheduled audits are required. The three most common ways to perform stock reviews or cycle counting are:

  • Visually – eye balling your stock and usually no documentation is needed
  • Tickler – an ongoing tally of sub-sections of your inventory. Eventually all the inventory is accounted for.
  • Click Sheet – every time an item gets moved out of inventory you literally tick if off a master list.

Stock reviews can be full of inaccuracies if done manually on paper. By simply automating the cycle counting process through barcodes and inventory management software, you can reduce time and costs to your business.

inFlow solves your inventory issues by providing you with real-time data so you can manage your business effectively. You always have a full insight into how your stock is moving, as well as what location(s) your stock is sitting at, the quantities on hand and the reserves you have set aside for customer orders.

Once a customer sales order is booked, the software will notify you on your inventory levels and whether it is time to replenish your supplies. inFlow Inventory will also improve your warehouse receiving processes. Whenever new stock is being received, you can verify the items against the purchase order. You have visibility into what is coming in and if returns are needed to be processed for that order.

If inFlow was a person at your company, he/she would be your materials management rock star! Get inFlow working on your inventory today, so that you can focus on growing your business to the potential that you envisioned.

You can download the software for free!

About Colleen Rodericks

Colleen is a freelance writer and technology enthusiast. She has over a decade of experience in marketing ERP, CRM and workforce management software. Outside of writing and blogging about technology, Colleen is passionate about natural medicine and wellness.

Have a question or comment? Let us know below!

    1. Sorry DHIRAJ, power plant inventory management is a little outside our area of expertise, since it’s a very specific category of equipment, and I wouldn’t want to steer you wrong with a bad guess. I think Google may have to be your guide for that topic right now.