In the inaugural episode of Secret Life of Inventory, we dive deep into the fundamentals of inventory management, exploring what it really means, why it’s crucial for business success, and the essential techniques every business owner should know.
This episode covers the basics of inventory management, from understanding what qualifies as inventory to exploring popular techniques such as ABC Analysis, FIFO/LIFO, Just-in-Time inventory, safety stock, reorder points, and the differences between perpetual and periodic inventory systems. You’ll learn why proper inventory management can make or break your business and discover which techniques might work best for your business.
This article will briefly summarize the key concepts covered in the podcast, but we’re just scratching the surface here. For the complete breakdown, detailed explanations, real-world examples, and all the insider tips, be sure to check out the full episode linked below.
What exactly is inventory management?
At its core, inventory management is about having what you need when you need it. Now, don’t make the mistake of thinking this only applies to retail stores with shelves full of products. Inventory management extends to every industry, from wholesale & distribution, manufacturing, warehousing, field services, and even asset tracking. The reality is that any business with physical goods that need to be tracked needs to think about inventory management.
When it comes to inventory, the goal is simple: maintain the perfect balance. You want enough inventory to fulfill orders and meet demand, but not so much that you’re drowning in storage costs or dealing with dead stock that ends up gathering dust. However, while the goal may be simple, achieving it is anything but.
Why inventory management can make or break your business
Here’s a scenario that’ll hit close to home: imagine you own a backpack company. Customers want to buy your backpacks, but you’ve run out of stock. No backpacks means no sales, which means no revenue. Game over.
On the flip side, what if you ordered too many backpacks? Now you’re paying to store them, risking theft or damage, and if a newer, better backpack hits the market, you’re stuck with inventory nobody wants.
Both these scenarios can leave a business in a very sticky situation, and many companies, both big and small, fail because of inventory-related issues like these.
Essential inventory management techniques you need to know
The world of inventory management offers numerous strategies, and the beauty is that you can mix and match techniques based on your specific needs. Let’s explore some of the most impactful methods:
ABC analysis
ABC Analysis follows the 80/20 rule, categorizing your inventory into three buckets. Your ‘A’ items are high-ticket, expensive-to-store products with lower profit margins. ‘B’ items fall in the middle, while ‘C’ items, typically representing just 20% of your inventory, are your money-makers, accounting for roughly 80% of your profits.
FIFO
First in First Out (FIFO) is a popular costing method that ensures older inventory moves before newer stock. It’s crucial when managing perishable goods or preventing obsolescence. Toyota popularized this approach with the philosophy that anything sitting on shelves has a higher chance of being lost, stolen, or becoming obsolete.
Just-in-time inventory
Walmart popularized just-in-time inventory management back in the late 90s. It was once the gold standard, focusing on having exactly what you need when you need it. However, recent supply chain disruptions have shown the risks of this approach. I’m sure we all remember the great toilet paper shortage of 2020.
Safety stock and reorder points
Consider safety stock and reorder points as your company’s insurance policy. Safety stock is your “just in case” inventory for unexpected demand spikes or supply issues, while reorder points trigger when it’s time to order more. Modern inventory management systems can automate these notifications, eliminating the headache of manual tracking.
The technology advantage: perpetual vs. periodic systems
Gone are the days of managing inventory with pen and paper (though believe it or not some businesses still do). Perpetual inventory systems provide real-time visibility into your stock levels, automatically updating as items come and go. This beats the old periodic approach, where you only knew your inventory levels when you physically counted everything.
What makes these systems even more powerful is the ability to track inventory across multiple locations, providing a clear view of which warehouse has which products at any given time. This level of visibility transforms how you fulfill orders and manage your supply chain.
Your next steps in inventory management
Understanding these fundamentals is just the beginning. Each technique we’ve covered has specific applications, formulas, and best practices that can dramatically impact your bottom line. The key is identifying which methods align with your industry, business model, and growth stage.
Want to dive deeper into these inventory management techniques? Check out our full episode where we break down the formulas, share real-world examples, and explore how different industries apply these strategies.
0 Comments