Various types of inventory management are used in business to ensure goods are on hand to meet customer demand. Inventory management is the function of understanding the stock mix of a company and the different demands on that stock.
Understanding the different types of inventory management methodologies commonly used can help you decide which is best for business. Here are the 18 basic types of inventory management that can be used in business.
Stock Review
Stock review type of inventory management is usually particularly appealing for small businesses. Because, it involves regularly analyzing the goods that you have in stock versus what you project your future needs to be. While automated stock reviews can define a minimum stock level, this method does require regular inventory inspections; and goods must be re-ordered to meet the minimum required levels. While this method can be effective, it also creates room for human error and can be labor-intensive.
ABC Analysis
With ABC analysis of inventory management process, you divide the inventory into groups based on the value and cost significance of the products. Category A represents goods that are high-value and low-quantity; B represents goods that are of moderate value and quantity; and C represents goods that are of low-value and high-quantity. Further, an inventory management system then manages each of these different categories separately.
With the ABC analysis methodology, you need to know which products are your best sellers so you can assure you have extra stock on hand. One of the main advantages of this approach is that you gain better control over your high-value goods. That said, it can also require considerable resources to continually analyze the levels of the different categories. Particularly if you have a large warehouse with a high number of goods.
Just-In-Time (JIT) Methodology
Just In Time methodology, allows products arrive as they’re ordered by customers. Thus, allows customer demand to be met without keeping quantities of the products in stock and available. This approach involves researching buying patterns, evaluating location-based factors that help you determine what goods are needed during certain times and places and analyzing seasonal demands. The risk with this type of inventory management is that you could misread market demand or experience challenges with suppliers, resulting in out-of-stocks.
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Economic Order Quantity
Economic order quantity (EOQ), is a formula for the ideal amount of inventory a company needs to purchase. Accordingly it includes a set of variables such as demand rate, total costs of production and other factors. The purpose of the formula is to identify the greatest number of product units that need to be purchased to minimize buying.
Minimum Order Quantity
MOQ or Minimum Order Quantity type of inventory management applies specifically to suppliers and refers to the smallest amount of stock they’re willing to sell. The retailer must be selling to purchase the minimum order quantity in order for the supplier to agree to the sale.
Bulk Shipments
Bulk Shipments method is focused on reducing the cost of shipping. For that reason, you palletize your inventory to ship more products at once. Thus saving costs and optimizing shipment and freight charges by taking advantage of the bulk shipments.
Safety Stock Inventory
With this method of inventory management, extra inventory is ordered beyond what the retailer expects demand to be. This technique is used to prevent out-of-stocks that are caused by unexpected changes in consumer demand.
Reorder Point Formula
This inventory management technique is based on the company’s purchase and sales cycles and will vary according to the product. Specifically with this formula, the reorder point is usually higher than the safety stock number, as it allows extra lead time for reordering.
FIFO and LIFO
FIFO stands for first in, first out and LIFO stands for last in, first out. With FIFO, the older inventory is sold first to keep the entire inventory as fresh and new as possible. LIFO is used to prevent the inventory from going back and the newer inventory is sold first.
Perpetual Inventory Management
In perpetual inventory management keeps continual track of your inventory balances. Updates are automatically made when you receive or sell inventory. Purchases and returns are immediately recorded in your inventory accounts. Perpetual inventory management is the most basic type of inventory management technique and involves counting your inventory as soon as it reaches your warehouse.
Batch Tracking
With batch tracking type of inventory management, the company groups and monitors stock with similar traits. This method is beneficial for tracking expired inventory or tracing defective products back to their original batches.
Consignment Inventory
With this type of inventory management, the vendor or wholesaler agrees to give the retailer their goods without an upfront payment. The vendor maintains ownership of the goods and the retailer pays for them when they sell.
Drop Shipping
With this type of inventory management, the store doesn’t keep the goods that it sells in stock. Instead, when a consumer purchases a product, the store purchases the item from a third party and has it shipped directly to the consumer. The retailer never handles the product directly.
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Cross Docking
Cross docking is an inventory management method where a truck unloads goods directly into outbound trucks. Using this technique, there is very little or even no storage between the deliveries.
Six Sigma
Sig Sigma is a methodology that focuses on improving the overall performance of businesses, increasing their profitability while decreasing the increase in excess inventory.
Lean Six Sigma
Lean six sigma methodology uses the tools of Six Sigma but focuses on improving the flow of business and increasing word standardization.
Demand Forecasting
With Demand Forecasting methodology, companies review historical sales data to determine an estimate for what customer demand will be. In order words, the company estimates the number of goods that they expect customers to purchase and then uses this information to determine the amount of inventory they should order.
Lean Manufacturing
Lean Manufacturing methodology specifically impacts a company’s management practices. The goal of lean manufacturing is to eliminate waste and activities that don’t add value.
By understanding these different types of inventory management methodologies decide which is best for your business and follow it. All the Best!
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