7 Major Inventory Management Techniques for Business Success
 Order Management

7 Major Inventory Management Techniques for Business Success

Simmons Bennett
Simmons Bennett
January 9, 2024
Last updated on:

January 9, 2024

|

Read time: 5 mins

Inventory management techniques are strategic methodologies that businesses must embrace to optimize the flow and storage of goods within the supply chain. These techniques encompass diverse practices and strike a delicate balance between minimizing holding costs and ensuring timely product availability. Effective implementation of inventory management methods, help businesses elevate operational efficiency, trim excess stock, and precisely navigate the intricate dynamics of supply and demand. 

This blog aims to offer comprehensive insights into established inventory management techniques and empower businesses to achieve success and stay a step ahead in competition.

According to a report by PR Newswire, the average level of inventory accuracy in US retail operations is a modest 63 percent.

What are the types of inventory management?

There are different types of inventory management which businesses use based on their operational needs. Here are some of them:

Perpetual Inventory System

  • Description: Continuously tracks inventory levels and transactions in real-time using technology.
  • Advantages: Provides up-to-date inventory data, improving accuracy and decision-making.
  • Disadvantages: Requires robust technology and can be costly to implement.

Periodic Inventory System:

  • Description: Inventory levels are updated at regular intervals, such as monthly or quarterly.
  • Advantages: Simpler and less expensive to implement compared to perpetual systems.
  • Disadvantages: Can lead to stockouts or overstocking between updates, reducing accuracy.

Vendor-Managed Inventory (VMI):

  • Description: Suppliers manage inventory levels based on data provided by the retailer or manufacturer.
  • Advantages: Reduces the burden of inventory management for the buyer and improves efficiency of the supply chain.
  • Disadvantages: Requires strong collaboration and data sharing with suppliers.

Consignment Inventory:

  • Description: Inventory is owned by the supplier until it is sold by the retailer or used by the manufacturer.
  • Advantages: Reduces inventory holding costs for the buyer and improves cash flow.
  • Disadvantages: Risk for the supplier, as they retain ownership until the sale is made.

Benefits of Inventory Management Techniques

Here are the benefits of inventory management techniques presented in bullet points:

  • Optimized Stock Levels: Ensures that businesses have enough inventory to meet demand without excessive holding costs.
  • Reduced Costs: Minimizes holding costs by preventing overstocking and stockouts.
  • Improved Cash Flow: Efficient inventory management ensures capital is not tied up unnecessarily in excess inventory.
  • Enhanced Efficiency: Streamlines operations, reduces lead times, and improves order fulfillment.
  • Better Decision Making: Provides accurate data for forecasting, planning, and strategic decision-making.

7 Essential Types of Inventory Management Techniques for Businesses

Let's take a look at some of the proven inventory management techniques that you may choose to utilize in your business operation.

1. Demand Forecasting

Demand forecasting is one of the most crucial inventory management techniques in the ecommerce business. It predicts future product demand based on historical data, market trends, and other relevant factors. When done correctly, it helps in optimizing stock levels, minimizing holding costs, and ensuring a responsive supply chain.

Consider a fashion retailer preparing for the upcoming winter season. The retailer analyzes previous winter sales data through demand forecasting, identifies popular items, and anticipates increased demand for winter coats. The retailer aligns its stock with projected demand by proactively adjusting inventory levels, ordering additional coats, and planning targeted marketing campaigns. This ensures a timely and sufficient supply of in-demand items, avoiding stockouts and optimizing inventory turnover.

Key Benefits:

  • Optimized Inventory Levels: Helps maintain optimal inventory levels, avoiding excess stock or stockouts.
  • Cost Reduction: Minimizes inventory holding costs by stocking only what's needed, reducing storage expenses and inventory obsolescence.
  • Efficient Production Planning: Provides insights for production scheduling, ensuring resources are allocated efficiently to meet demand.
  • Effective Marketing Strategies: Enables targeted marketing efforts by understanding demand patterns and trends, improving sales performance.

Uses of Inventory Management Techniques with Examples- A Case Study

A great example of how demand forecasting helps an organization manage its inventory effectively can be seen in the case of Walmart. The company faced challenges in maintaining optimal inventory levels across thousands of stores. This led to overstocking and high storage costs and waste while understocking caused stockouts and lost sales.

To overcome this Walmart implemented advanced data analytics and machine learning techniques to predict customer demand accurately. This helped the company to analyze historical sales data, weather patterns, and local events, improve demand forecasts and ensure that each of its stores received the right amount of stock. This precise forecasting also minimized excess inventory, reduced storage costs, and enhanced product availability.

Is inventory management and financial statements of a business related?

Yes, inventory management directly impacts financial statements. The value of inventory affects the balance sheet, and the cost of goods sold (COGS) derived from inventory influences the income statement, impacting profitability. To know more read our blog: ‘How Inventory Management Affects Financial Statements’

2. ABC Analysis

ABC Analysis is among the fundamental types of inventory management techniques that categorizes products based on their significance to overall business operations. It provides a systematic approach to prioritizing resources and efforts, ensuring efficient management of inventory with varying levels of importance.

For example, consider an electronics retailer implementing ABC analysis. High-end smartphones (Category A) represent a significant portion of revenue, so meticulous inventory control, regular reviews, and strategic decisions are applied to this category. Accessories like chargers (Category B) receive moderate attention, while generic cables (Category C) have less emphasis. This categorization ensures optimal resource allocation, reduces the risk of stockouts for crucial items, and streamlines overall inventory management.

Key Benefits:

  • Categorization: Classifies products into three categories: A, B, and C. Category A includes high-value items critical to revenue, category B comprises moderately important items and category C includes less critical, lower-value items.
  • Resource Allocation: Allocates resources, attention, and inventory control efforts based on the categorization. Category A items receive more focus and frequent monitoring than B and C items.
  • Continuous Review: Regularly reassesses and updates categorizations based on market conditions, demand, or strategic shifts changes.
  • Decision-Making: Guides decision-making processes related to procurement, stocking levels, and overall inventory management strategies.

U.S. retailers maintain approximately $1.39 in inventory for every dollar of sales, posing challenges in balancing stock levels and minimizing risks like dead stock. ABC analysis is increasingly favored for its effectiveness in managing inventory.

Key Inventory Management Methods
Image 1 - Key Inventory Management Methods

3. Just-in-Time (JIT) Inventory

JIT is one of the best strategy focused Inventory management techniques that works on receiving goods precisely when needed, minimizing holding costs, and streamlining the production process. It emphasizes efficiency, reduced waste, and responsiveness to changes in demand.

For instance, an automotive manufacturer orders specific parts precisely when needed for production instead of stockpiling large quantities of various components. This approach minimizes storage costs, reduces the risk of obsolete inventory, and allows the manufacturer to adapt swiftly to changes in consumer preferences or market demands. By embracing JIT, the manufacturer optimizes production efficiency, ensures a lean inventory system, and remains agile in responding to the dynamic automotive market.

Key Benefits:

  • On-Demand Ordering: Goods are ordered in quantities that align with immediate production or customer demand. It also minimizes excess inventory and storage costs.
  • Tight Coordination: Requires tight coordination with suppliers to ensure timely delivery and enhances the supply chain's responsiveness to fluctuating demand.
  • Reduced Storage: Emphasizes lean inventory levels, reducing the need for extensive storage facilities and frees up capital that would be spent on extra inventory.
  • Continuous Improvement: Involves continuous monitoring and improvement of production and delivery processes and also aims to optimize efficiency and minimize lead times.
Useful Inventory Management Formulas
Image 2 - Common Inventory Management Formulas to Boost Your Business

What are the best practices to integrate inventory management techniques in the supply chain?

Integrating inventory management techniques in the supply chain is crucial for optimizing operations, reducing costs, and improving customer satisfaction. Here are some best practices for effective integration:

  • Integrate ERP and inventory software
  • Utilize accurate demand forecasting
  • Implement lean practices (JIT, Kanban)
  • Optimize safety stock
  • Enhance supplier collaboration

4. Safety Stock Management

Safety stock management involves the maintenance of additional inventory beyond expected demand. This surplus stock acts as a buffer to safeguard against unexpected fluctuations in demand or delays in the supply chain, ensuring continuity in product availability.

For example, consider an online electronics retailer implementing safety stock management. Recognizing the unpredictable nature of consumer electronics demand and potential delays in global supply chains, the retailer maintains safety stock levels for popular products. In case of a sudden surge in demand or supply chain interruptions, the safety stock acts as a buffer, allowing the retailer to fulfill orders effectively and maintain a positive customer experience. This strategic approach safeguards against uncertainties in the dynamic electronics market.

Key Benefits:

  • Risk Assessment: Identifies potential risks such as sudden increases in demand, supplier delays, or unforeseen disruptions.
  • Determining Safety Stock Levels: Make calculations based on lead time variability, demand variability, and service level targets. 
  • Continuous Monitoring: Regularly monitors inventory levels, demand patterns, and supplier performance and adjusts safety stock levels based on changes in market conditions.
  • Responsive Replenishment: Triggers replenishment orders when actual inventory approaches the safety stock threshold and also aims to maintain a seamless supply chain even during unexpected disruptions.

5. Batch & Serial Tracking

Batch and serial tracking are designed to trace and monitor specific groups or individual units of products, enhancing visibility and control over inventory. This is particularly valuable for industries where product traceability and accountability are critical.

Let's understand this through an example. In the pharmaceutical industry, batch and serial tracking is essential for compliance with stringent regulations. Each batch of medication is assigned a unique identifier, and individual units within the batch receive serial numbers. This meticulous tracking allows pharmaceutical companies to trace each unit's production, distribution, and sale. In the event of a quality issue or recall, batch and serial tracking ensures swift identification and removal of affected products, safeguarding patient safety and meeting regulatory standards.

Key Benefits:

  • Batch Identification: Products are grouped into batches, each assigned a unique identifier. 
  • Serial Number Assignment: Individual items are assigned unique serial numbers and facilitate tracking of each unit throughout the supply chain.
  • Recording Movements: Every movement, from production to distribution and sales, is recorded against the batch or serial number. This enables a detailed history of each product's journey.

6. Economic Order Quantity (EOQ)

Economic Order Quantity (EOQ) is a widely adopted inventory management model. It determines the optimal order quantity to minimize total inventory costs and balance the costs of holding inventory and the costs associated with ordering.

Consider a retail business applying EOQ to determine the optimal quantity of a popular product. By analyzing the demand, holding costs, and ordering costs, the business calculates the EOQ. This calculation helps in identifying the ideal order quantity that minimizes the total inventory costs. Implementing EOQ ensures that the business maintains optimal stock levels, reducing holding costs and preventing excessive orders. The result is a balanced inventory system that meets customer demand efficiently while optimizing costs associated with inventory management.

Key Demands:

  • Demand and Holding Costs: Assesses the annual demand for a product and the holding costs per unit by considering factors like storage costs, insurance, and depreciation.
  • Ordering Costs: Evaluate the costs associated with placing orders, including processing and transportation costs.
  • EOQ Calculation: Utilizes the EOQ formula to find the order quantity that minimizes the total costs.
  • Reorder Point Determination: Establishes a reorder point, indicating when to place a new order based on the consumption rate and lead time.

What is the significance of effective inventory management in the supply chain?

Effective inventory management in the supply chain ensures product availability, reduces holding costs, optimizes cash flow, minimizes waste, and enhances customer satisfaction, leading to more efficient operations, improved profitability, and a competitive advantage.. A great example of how effective inventory management techniques enhance the supply chain can be seen in the operations of Zara, the global fashion retailer.

It is renowned for its fast fashion strategy, which heavily relies on efficient inventory management practices. Zara uses a combination of advanced technology, such as RFID (Radio Frequency Identification) tags on clothing items, and a sophisticated logistics system to manage its inventory. This allows Zara to track its inventory in real-time throughout its global network of stores and distribution centers.

7. Return-Merchandise Authorization (RMA)

Return-merchandise authorization (RMA) is a structured process for handling product returns. It ensures efficient management of returned items, clear communication with customers, and proper disposition of products in the inventory.

Let's understand RMA using an example. Imagine an e-commerce business implementing RMA to manage returns. A customer initiates a return by submitting an RMA request online detailing the reason for the return. The returned item is evaluated, and an RMA number is assigned if eligible. The system updates inventory, marking the product as returned. The RMA process allows the business to track return trends, identify potential product issues, and efficiently manage returned items' disposition. By providing a transparent and structured return process, the business enhances customer experience and gains valuable insights for continuous improvement.

Key Benefits:

  • Customer Initiation: The customer requests a return, providing reasons and details, and an RMA request is generated to initiate the return process.
  • Evaluation and Authorization: Evaluate the returned product to determine eligibility for return and assign an RMA number for authorized returns.
  • Documentation and Communication: Document the conditions of returned items and reasons for return and communicate with customers regarding the return item status. 
  • Inventory Update: Updates the inventory system to reflect the returned items.

Conclusion

Effective inventory management is essential for businesses, regardless of size. It is arguably the only secret mantra to stay competitive and deliver great customer experience. The challenge, however, lies in staying up to date with the latest techniques, and opting for cutting-edge inventory management tools. 

At Invensis, we provide robust inventory solutions tailored to meet the diverse requirements of your business and enhance overall customer satisfaction. Get started with us to streamline your business operations and maximize profitability with our expert order management services.

FAQs

What are the techniques of inventory management?

Techniques of inventory management include Just-in-Time (JIT), ABC analysis, Economic Order Quantity (EOQ), safety stock, demand forecasting, Vendor-Managed Inventory (VMI), batch tracking, and inventory turnover analysis, all aiming to optimize stock levels and reduce costs.

What are the 4 types of inventory in supply chain management?

The four types of inventory in supply chain management are raw materials, work-in-progress (WIP), finished goods, and maintenance, repair, and operations (MRO) supplies. These categories help manage production flow and ensure operational efficiency.

What are the 5 stages of the inventory management process?

The five stages of the inventory management process are demand forecasting, purchase order creation, inventory storage, inventory tracking, and order fulfillment. This cycle ensures optimal stock levels, efficient storage, accurate tracking, and timely delivery to customers.

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