40% of SMBs (Small Medium Businesses) consider ‘improving existing customer experience and retention as their top strategy for revenue growth’.
But, unfortunately, they don’t take into account the most important thing that can help in improving their business relationships with customers as well as vendors.
Do you know what missing thing is? It is inventory movement and storage that is at the heart of maintaining good relationships with both customers and vendors. Surprised?!!
If you don’t believe me, here’s what the experts Matthew A. Waller and Terry L. Esper have to say:
“A closer examination of supply chain relationships, particularly those involving product flows, reveals that the heart of these relationships is inventory movement and storage. Much of the activity involved in managing relationships is based on the purchase, transfer, or management of inventory. As such, inventory plays a critical role in supply chains.”
Managing or controlling inventory is an art. Technically, inventory is an asset for the business as it is the primary goods that are to be sold to earn revenue.
But interestingly, it is also considered a liability because it is an asset that comes with a price tag. The price tag is the cost of purchasing, storing, shipping and finally delivering it to the end customer in perfect condition.
Why Do So Many Businesses Lack Inventory Control?
Having said this, According to research by Wasp Barcode technologies, did you know that 43% of small businesses do not track their inventory or prefer to do it manually in the U.S.?
It is high time that small businesses start taking inventory control seriously if they really want to grow in this highly volatile market.
There is stiff competition out there. More major stores have finally started getting serious about ecommerce. This puts more pressure on existing ecommerce stores.
Inventory Control Techniques
First and foremost, the main objective of inventory control is to never run out of stock without paying for an excess of slow-moving stock.
The operations manager should maintain inventory levels in order to:
- Fulfill all customer demand
- Keeping inventory storage expenses as low as possible
An effective inventory control system can easily achieve this. A good inventory control system is able to track products, count stock count and also predict the demand of each product accurately.
Here are 5 important techniques for effective inventory control that an inventory control system can fulfill:
1. ABC Technique
Retailers and wholesales alike most commonly use this inventory control technique. This is due to its convenience and efficiency. This technique was invented by Vilfredo Pareto, an Italian economist.
So what is ABC? Simply put, it is an acronym that means “Always Better Control”. This method is also known as SIC (Selective Inventory Control) or SVA (Selective Value Approach) or PVA (Proportional parts Value Approach).
One of the reasons that this technique has so many different names is because ABC i.e. Always Better Control of the inventory can be achieved by various arrangements of the products.
Each of its alternate names describes the product categorization and arrangement.
An operations manager or warehouse in charge can select any of the following product arrangement approaches to achieve ABC as per business type and products stocked.
a. ABC or Selective Inventory Control approach
To begin with, the warehouse manager first classifies all the products into 3 main categories:
- Fast-moving products
- Slow-moving products
- Excess stock storage
For this, the manager needs to conduct a survey to know which products are fast and slow-moving.
The key here is stocking location. Products that are sold the fastest are placed near the shipping area for fast, easy access.
See the image above where ‘A’ is where the fastest moving products are stored.
‘B’ is the area where the products moving fast but not as fast as the ‘fastest moving products’ are located. However, even this rack of products is close to the shipping area for easy and quick accessibility.
Slow-moving items are stored in the ‘C’ area. Again the slow-moving products can be divided into categories – slow-moving products and slowest moving products.
Since slow-moving items are not frequently needed, they can be placed in the C1 area which is slightly closer to the shipping area. The slowest moving items are in the C2 area which is a bit further from the shipping space.
And lastly, store all the excess stock of items in the last rack or storage space.
This type of arrangement helps you in doing your picking activity quickly and efficiently without too much physical labor and also saves
b. ABC or Selective Value Approach or PVA (Proportional parts Value Approach)
In this approach, the products are again divided into the A, B, and C categories. But this time, the manager categorizes the products according to value so that the products that are costliest can be kept securely within the warehouse.
Group ‘A’ majorly consists of the products that are costly but are in demand and have the potential of usually earning 50% of the revenue for the business.
This bifurcation helps in exercising a greater control over protecting and preserving this product. Also, such costly products are kept in limited quantity so it might not really use up a lot of your warehouse space.
Group ‘B’ consists of the products that are expensive but not the costliest and they typically generate around 30% of the business revenue.
The stock of these items will be slightly more as compared to group A and therefore, it might occupy more space in the warehouse.
Group ‘C’ consists of items there are of low cost but are sold quite often. These products might take a good amount of space in the warehouse. But they do not require as much extra care in storage as the group A and B products.
However, that doesn’t mean these products are not kept carefully; they obviously are taken care of as a normal product.
The main advantage of this method is that it results in reducing storage expenses considerably while also preserving expensive products in a secure way.
2. FIFO and LIFO Technique
First In First Out (FIFO) is the most popular way of controlling inventory. The name itself is self-explanatory; any product that comes in first goes out first as the order for it arrives.
This is beneficial because all the old products will get sold first so that you don’t have to worry about gathering obsolete stock.
This method is convenient for vendors dealing in perishable products such as medicines with expiry dates, natural products, etc.
Last In First Out (LIFO) is not a popular method but is nevertheless in practice. It is beneficial to vendors using the latest inventory costs first, hence increasing their revenue.
In this method, the vendor disposes of the product that comes in last in the inventory. This is a good method to control inventory when the products are not perishable such as bikes, toys, mobile phones, etc.
3. Economic Order Quantity (EOQ)
This is the most practical technique of controlling the inventory, especially when using a perpetual inventory management system.
The Economic Order Quantity technique is when a vendor replenishes his/her inventory with a specific number of units with each order that is dispatched.
It is a continuous review inventory system that is possible with perpetual inventory management.
Take a look at the example of this technique I came across recently explained in detail on Inc.com. Look at that example to understand how EOQ is calculated.
This helps in minimizing the total cost of inventory such as holding costs, ordering costs and shortage costs. This is especially useful for small businesses.
They can save a significant amount of money in managing and controlling inventory while also keeping a tab on how many units to order at each reorder point.
Just-in-time (JIT) inventory management technique, as the name suggests, is a strategy to order the item only when it is going to be needed. It increases the efficiency while decreasing any waste of space, time and money.
JIT is all about having the inventory right at the time when needed to meet the demand. For example, the leading four-wheeler manufacturing company, General Motors uses the JIT inventory control system.
Vehicle parts ordered from other suppliers never arrive early or late but just in time to be installed in a vehicle.
For instance, orders for seats to be installed in trucks are placed so strategically that the seats arrive just in time to be installed. Hence, they don’t need to stock the seats at their plant, saving space and money in storing the inventory.
5. Two bin inventory control
This is by far the easiest inventory control technique. In this one, a vendor has two bins for the product. When the inventory or units in one bin is emptied, the vendor places an order for another bin while fulfilling the orders from the units kept in the second bin.
The vendor can keep track of when to replenish the stock of items he/she is selling. Technically, the second bin is supposed to stock enough products to cover all orders that come in until the new stock arrives.
Then the first bin is replenished again with fresh inventory. The second bin can therefore also be called a reserve bin.
This technique of inventory control is usually used for items of lower value and small size products. Let’s take a look at an example of a Two bin inventory control system,
Suppose a small-scale hardware vendor stocks various small items like fasteners, bolts, screws, etc. Under the 2 bin method, he will first calculate how much stock he needs to keep of the item.
For this he uses this formula:
(Daily usage rate * lead time) + safety stock
Another way to state this is:
(Daily usage rate = the number you need to stock to sell per day) x (the number of days it takes to get more stock) + (safety stock in case the new stock arrives late).
Now let’s assume that he sells approximately 800 fasteners per week with a lead time to restock of 3 days. Then he should roughly stock around 480 fasteners in bin #1 and the balance of 500 in bin # 2.
At times, with a prior understanding between the vendor and manufacturer, the manufacturer keeps a third bin reserved for the vendor at his own warehouse.
This serves as a safety stock in a way so that whenever the vendor requires more stock it is readily available.
Ready to Use Inventory Control Techniques?
Your bottom line can be improved immensely by practicing any of the inventory control techniques mentioned in this article.
However, there are many other techniques or inventory or stock control. They include High, Medium, Low Analysis (HML), Max Mini System (MMS), Vital Essential Desirable (VED), etc.
Every business person must choose which of these inventory control techniques is best for each business. They must consider the products being sold and the cost of storing them.
It is completely your decision which system you use and how. The art is to make sure you store just the right number of units required to have them:
- When you need them
- How many you need
The better you do this, the more efficiently and smoothly your business will run. Inventory control reduces costs and best of all, keeps your customers happy.
Do your best to avoid out-of-stock conditions that reduce your profits and could cost you repeat buyers.
Hoping this article helps you do just that. Happy inventory controlling to you!