Inventory Management Techniques to Follow for Business Growth

What do you mean by Inventory?

Inventory is defined as stock, products ready to sell including store of goods, items, merchandise, and packaging materials, in short, all raw materials used to make products that are held by a business for selling in the market to earn a profit.

Thus for businesses at every scale once knowing the basic meaning of inventory, the very first thought that comes to mind is to earn an optimum profit, What quantity of Inventory should we possess? For any business managing cash flow, improvement in sales and thus gaining knowledge about the products, methods, and processes become a prioritized task to boost profit.

This discussion on Inventory Management comes as a highlighted point. Let us begin with Inventory Management and its techniques.

What Do You Mean By Inventory Management?

Inventory Management is the technique of maintaining the inventory size at the optimum desired level keeping in mind the best economic interest of an organization.

Thus Inventory management consists of:

• Keeping track records of stocks -
• Keeping track records of their cost.
• Keeping track records of demands.

Balancing between too little and too much and keeping track of inventory is the necessary process that is done by Inventory Management.

Thus we can say that Inventory Management is all about the management of stock for any business in such a way that supply meets demand by helping to manage the right stock at the right time, manage multiple warehouses, and multi-channel sales, and track shipments.

Discussion on Inventory management now develops an interest to know its importance, as in that What actually would be the problems that are faced if Inventory management is not done properly or not implemented.

Importance of Inventory Management

By managing inventory well you can

1. improve cash flow
2. Increase sales
3. Boost Profit 

If Inventory Management is not implemented properly many problems leading to degradation of the revenue may arise.For example:

Imagine you are running a company where you don’t have a system implemented that keeps records of products ready to sell along with raw materials required to manufacture that product. Neither it has a record of knowing the number of products and raw materials that it should possess nor does it possess analytical reports stating which products and raw materials for manufacturing can be categorized as premium ones generating the highest revenue. Inability to manage these records and thus inventory too keeps the business blindfolded of key point actions important for maintaining the highest profit.

The loss in profit is surely going to happen because of running out of stock or overstock, investing in wrong products due to lack of knowledge about the classification of products based on revenue generation, lacking control over stock volume, incapable of optimum utilization of resources by not implementing a proper Inventory Management system.

Thus a proper implementation of the management process for inventory is the critical point that should be implemented into business even on a small scale as a manual method of such management is impossible and if anyhow implemented it consumes unnecessary time along with human error data.

Thus with no doubt in mind investing in an Inventory Management System instead of sparing time and money on the manual processes is only the best solution available.

Proper selection of Inventory Management System leads to the following processes at ease:

• Protection against fluctuations in output
• Better use of men, machines, and material
• Protects against fluctuations in supply
• Control of stock volume
• Control of stock distribution
• Maintain inventory accuracy
• Effective use of working capital is possible
• Manages planning and forecasting by analyzing data trends
• Helps to manage demand forecasting

There is a lot that goes into inventory management, and it has a massive influence on the outcome of your business.

Implementing inventory management reduces error, making your company more effective, more productive, and better prepared to support your customers.

A thought now that comes to mind is How actually Inventory Management works?

Inventory Management Techniques

Keeping all Inventory management points in mind various techniques are designed and implemented. Some techniques use formulas and analysis while some rely on the procedure. The main aim of all methods is to improve accuracy. The techniques a company should use and implement depend on its needs and stock.

Various Inventory Management Techniques are designed keeping in mind some of many following Inventory control points;

• Annual consumption Value.
• The unit value of consumption.
• Criticality of the inventories.
• A pattern of issues from stores.
• Technology deciding when to order products or raw materials?
• Availability of items
• Value of Inventory of material actually held in stores at a given time.

Keeping these Inventory Control points in mind, various Inventory Management Techniques that are designed are as below:

• A-B-C Analysis
• • The ABC analysis classifies an organization's inventories by importance, with A indicating the most critical items, while B and C represent items of average importance and the least vital items respectively. 
  • This strategic categorization enables effective inventory management by prioritizing attention and resources based on the significance of each item.
    
• X-Y-Z analysis 
• • The XYZ analysis is performed on the current inventory stock, aiming to categorize items into three classes based on their inventory values. 
  • X represents products constituting 70% of the total inventory, Y represents items making up 20% of the total inventory, and Z represents the products accounting for 10% of total inventory.
    
• V-E-D analysis
• • In VED analysis, V stands for vital items, E stands for essential items, and D represents desirable items. In this technique, items are categorized based on their critical attributes.
  • It helps businesses prioritize inventory management efforts, ensuring focus on crucial items for optimal operation.
    
• F-S-N analysis
• • FSN analysis examines inventories based on movement and transaction frequency, categorizing them as fast-moving (high consumption, frequent replenishment), slow-moving (low consumption, infrequent replenishment), and non-moving (least consumption, occasional or no replenishment).
    
• ABC-XYZ analysis 
• • The ABC XYZ classification serves as a framework to enhance inventory management strategies, categorizing products based on both their sales volume (ABC analysis) and uncertainties (XYZ analysis). 
  • This comprehensive approach enables businesses to develop refined strategies tailored to the specific characteristics of their inventory.
    
• FSN-XYZ analysis
• • FSN-XYZ analysis in Inventory Management is a dual classification system where FSN categorizes products based on consumption patterns into Fast-moving (F), Slow-moving (S), and Non-moving (N) categories. 
  • XYZ analysis provides insights into the investment status of inventories, creating a comprehensive framework for effective inventory control and strategic decision-making.
    
• H-M-L analysis
• • HML analysis categorizes items into high, medium, and low based on their annual consumption value. 
  • This analysis helps in focusing resources on high-value items while ensuring efficient management of the entire inventory.
• S-D-E analysis
• • This inventory management technique classifies items into scarce, difficult, and easy based on their availability. 
  • This method assists in planning and optimizing inventory control by addressing the challenges posed by the scarcity and difficulty of obtaining certain items.
• S-O-S analysis
• • SOS analysis focuses on Stock-Out-Situation identifying items prone to stockouts. 
  • It aids in preventing disruptions in supply chains by prioritizing efforts on items critical to preventing stockouts.
• G-O-L-F analysis & many more.
• • GOLF analysis categorizes items into categories based on their importance, akin to the game of golf - Green (essential), Orange (moderate), and Low (least important). 
  • It offers a playful metaphor to prioritize inventory control efforts, helping businesses focus on managing items based on their varying degrees of importance.

Based on the needs of the type of Inventory Control in your business choose Inventory Management techniques wisely.

Conclusion

Effective Inventory Management is vital for businesses of all sizes, optimizing profit, cash flow, and sales. Investing in a reliable Inventory Management System is essential for tracking stocks, analyzing demands, and ensuring a balanced supply and demand. Choose the right system to enhance resource utilization, accuracy, and overall efficiency in managing your inventory.

Explore our ABC Sales Analysis Report and Advance Inventory Reports app for comprehensive sales and inventory insights.