Optimizing Inventory Management Techniques for Supply Chain ManagementFebruary 13, 2024
In the wake of the COVID-19 pandemic and other pronounced challenges to the global supply chain, newspapers have devoted many headlines to matters that relate to shipping networks and logistics. This publicity has generated increased interest from people seeking to solve these challenges by pursuing a supply chain and logistics management career.
Completing a specialized supply chain and logistics management program like the one at North American Trade Schools (NATS) is a great way to lay the foundation for professional success in this field. This program covers essential supply chain management principles that include basic inventory control.
Importance of Inventory Management
The finished products and goods that flow out of an organization and the raw materials and other operational necessities that flow into it, inventory is an essential business component. Inventory management is the strategic oversight of this inward and outward flow to track and record the movement of inventory and ensure that inventory is available where and when needed. At the highest levels, logistics leaders attempt to optimize inventory management in supply chain systems.
The Role of Inventory Management in Global Supply Chains
Supply chains of all sizes rely on effective inventory management to meet the demands of businesses and consumers alike. Beyond guiding the global flow of goods from production to consumption, inventory management is necessary to ensure that stock remains replenished and distribution meets demand. Inventory management also prevents missed opportunities, unnecessary expenses, and general waste associated with maintaining excess or insufficient stock levels.
Key Techniques of Inventory Management
To play the necessary role in daily business operations and global supply chains, inventory managers have developed various processes and techniques. Here are a few of the most successful and influential:
Just-In-Time Inventory Technique
Known by the acronym JIT in the supply chain and logistics sectors, the just-in-time method of inventory management concentrates on eliminating waste by keeping on-hand inventory levels as low as possible. Rather than stockpiling large numbers of products and large amounts of raw materials, a JIT inventory manager will order small shipments of stock to replace inventory as needed to fulfill current orders and meet forecasted demand.
ABC Inventory Management Technique
A hierarchical system of inventory management, ABC involves analyzing and evaluating inventory items to prioritize certain items for procurement and storage. It consists of placing items into one of three categories that measure the value against volume. The “A” category contains items that account for roughly 20% of overall stock but up to 80% of inventory value. The “B” category includes items that account for approximately 30% of overall stock but roughly 15% of inventory value. The “C” category contains items that account for around 50% of overall stock but only 5% or less of inventory value.
First In, First Out (FIFO) Technique
The first in, first out (FIFO) inventory technique stresses the importance of shipping out or exhausting stocks of older inventory before ordering or producing newer inventory. Extremely important when dealing with highly perishable goods, FIFO assumes that the first inventory acquired will be the first inventory used or sold. Beyond its emphasis on rapid turnover, the FIFO rule can help accurately estimate current inventory value and calculate the cost of final goods sold.
Exploring Different Types of Inventory Control Systems
Systems used to manage and control inventory commonly fall into one of two general categories: periodic or perpetual.
The Periodic Inventory System
“Periodic” inventory management systems evaluate inventory for financial reporting purposes by performing physical inventory counts at specific intervals (typically monthly, quarterly, annually or at the beginning or end of established fiscal quarters). This systematic approach is commonly used by small and mid-sized businesses that find it both easy to implement and cost-effective over the long term.
The Perpetual Inventory System
Rather than examining inventory periodically, the “perpetual” approach to inventory management continually tracks inventory changes in real time using digital technology. Perpetual inventory systems eliminate the need for physical inventory checks, offering minute-to-minute updates of inventory changes and constantly recording those changes. This immediate reporting system ensures that inventory managers know the precise inventory level.
Inventory Management Methods and Their Application
The specific techniques employed within periodic and perpetual systems can serve a range of valuable purposes for effective inventory management.
Periodic Inventory Management Method
A key metric in the practical application of periodic inventory management is the cost of goods sold (COGS), which is calculated by counting inventory at the beginning of a period and then making the appropriate inventory additions and deductions throughout the period that tallies with a final count at the end of the period.
Perpetual Inventory Management Method
A perpetual system updates accounts instantaneously by recording each acquisition, disposition, and sale to offer an up-to-date COGS at any time. Other advantages of the perpetual inventory system include analyzing transaction details in real time and investigating inventory-related errors.
Implementing Inventory Control Best Practices
To maintain smooth and profitable supply chain and logistics processes, you cannot underestimate the importance of following industry standards to optimize inventory control.
Management Methodologies Used in Inventory Control
In addition to just-in-time (JIT), ABC inventory, and first in, first out (FIFO) methodologies, inventory managers can employ any number of valuable methods to control the flow and level of inventory. For example, an inventory manager would want to stress materials requirement planning (MRP) to meet ongoing production needs and communicate effectively with suppliers in the manufacturing sector. Other helpful inventory control methodologies include economic order quantity (EOQ), which times and sizes inventory orders to minimize setup and holding costs. Days sales of inventory (DSI) is also helpful; it calculates the average time it takes a company to turn over its inventory.
Tips for Managing Stock Effectively
Beyond timing inventory orders and prioritizing inventory items, stock managers should regularly audit inventory using all the tools. The frequency of these audits will depend on the risk of irregularity between projected and actual inventory levels. A good stock manager will also closely monitor the operational efficiency of internal processes as well as the external processes of suppliers and distributors. And you certainly cannot discount the value of modern technology in stock management.
How Technology Aids Inventory Management
Like most areas of business operation, inventory management has been entirely transformed by digital technology. Its timesaving and cost-cutting results are incredibly well documented, and any inventory manager who isn’t using industry-specific computer software and hardware has surely fallen behind those who are!
Use of Barcodes in Inventory Management
Everyone knows the UPC barcodes that scan prices on household items for easy checkout at the supermarket or department store. Barcodes are incredibly useful for maintaining absolute accuracy and efficiency in shipping, receiving, and storage processes.
However, fewer people realize that supply chain and logistics professionals use similar barcodes to track inventory from initial production to final destination.
Radio Frequency Identification (RFID) in Inventory Management
Radio frequency identification (RFID) accomplishes the same ends as barcoding but adds many desirable benefits. While the data on a barcode is “read-only” and cannot be changed, RFID data can be updated in real time, which supports far greater flexibility in the supply chain.
Furthermore, RFID scanners can process many codes simultaneously from various angles, unlike barcode scanners, which require a direct line of sight and must scan each code individually.
Understanding Supply Chain Inventory Control
Regardless of the tools used to accomplish it, effective inventory control is essential for any organization that wants to outpace its competition. Here are a few guidelines to help you optimize inventory control processes and operations.
Supply Chain Inventory Control Techniques
One of the essential techniques in inventory control is demand forecasting, which involves using existing data to predict future consumer demand and maintain the proper types and amounts of inventory an organization needs to meet that demand. To ensure this inventory is on hand at the right time, many inventory control professionals keep safety stock in storage to deal with unexpected demand surges and set reorder points to trigger communications with suppliers at specific inventory levels.
How to Optimize Your Supply Chain with Effective Inventory Control
While addressing general inventory control approaches like those described above, many inventory managers are adopting innovative supply chain and logistics models, many of which would be impractical, if not impossible, without the help of modern digital technology. Cross-docking and dropshipping are two models that can support highly effective inventory control. Cross-docking eliminates storage costs and hassle by receiving supplier inventory and shipping it to customers immediately. Dropshipping goes even further by keeping no inventory in stock and outsourcing all direct consumer shipping operations to a third-party supplier or logistics provider.
Inventory Control Policies and Process for Efficiency
Whether moving raw materials into your company or delivering products from your warehouse, practical and streamlined inventory control policies and processes are an absolute must.
What to Include in an Inventory Control SOP
By establishing clear, standardized operating procedures (SOP) for inventory control, an organization can ensure that every relevant team member will know what to do every time an inventory item is moved. A comprehensive SOP will cover the reception of goods and supplies, the storage of goods and supplies, and the shipment of finished products. It should also address scheduling and security matters related to these inventory-related activities.
Basic Control Policies to Improve Inventory Management
Beyond the general SOP guidelines detailed above, wise inventory control professionals will diligently track any losses arising from theft or damage. Fortunately, countless traditional and state-of-the-art tools help inventory managers precisely do this!
Exploring Software Solutions for Inventory Control
For centuries, business managers have used written ledgers to track and control inventory. Today, pen and paper have given way to computer hardware and software, which have proven to be highly capable of managing inventory automatically and with far greater speed and accuracy.
Features to Look for in Inventory Control Software
When choosing a digital platform to govern inventory management, you should emphasize its ability to forecast inventory needs and develop appropriate ordering and distribution schedules. Depending on your particular wants and needs, you may also require inventory control software compatible with barcode/RFID scanning, customizable configuration, and actionable inventory analysis features. You must also decide between software as a service (SaaS)/cloud-based systems (which are generally more affordable) and on-premise systems (which are generally more effectively targeted and managed).
Benefits of Using Inventory Control Software
A good digital inventory management system can lead to many competitive advantages by boosting the speed and accuracy of inventory tallies and calculations, saving you a great deal in terms of time, money, and headaches.
How Can Proper Inventory Management Techniques Enhance Supply Chain Efficiency?
By following this article’s guidelines and best practices, inventory managers can dramatically boost productivity and drive ongoing improvements in global supply chain and logistics operations.
Global Supply Chain & Logistics – A Field of Growing Importance
Beyond essential inventory control, the supply chain and logistics profession is rising to meet increasing daily challenges. If you want to be a part of the solution to the many shipment problems plaguing the global supply chain, you owe it to yourself to check out the Global Supply Chain & Logistics Management Program at NATS. For more information, fill out the short digital contact form at the top of the page.