STRATEGIC INVENTORY
MANAGEMENT TOOLS
AND TECHNIQUES
Inventory Management
• Inventory management is a step in the supply chain where inventory
and stock quantities are tracked in and out of your warehouses.
• Goal of inventory management system is to know where your
inventory is at any given time and how much of it you have in order to
manage inventory levels correctly.
Various Tools And Techniques
Economic Order Quantity:
Economic Order Quantity is the lowest amount of inventory you must
order to meet peak customers demand without going out of stock and
without producing obsolete inventory.
The purpose is to reduce inventory as much as possible to keep the cost
of inventory as low as possible.
Economic order quantity = square root of [(2 x demand x ordering costs)
÷ carrying costs]
The formula is used to identify the greatest no. of product units to order
to minimise buying.
Minimum Order Quantity:
Minimum Order Quantity is the lowest set amount of stock that a
supplier is willing to sell.
The purpose of MOQ is to allow suppliers to increase their profits
while getting rid of more inventory more quickly.
If retailers are unable to purchase the MOQ of a product, the suppliers
won’t sell it to you.
ABC Analysis:
ABC Analysis of inventory is a method of sorting your inventory into 3
categories according to how well they sell and how much they cost to
hold.
A – items: Serves as your most valuable products that contribute the most
to overall profit.
B – items: The products that fall somewhere in between the most and
least valuable.
C – items: The small transactions that are vital for overall profit but don’t
matter much individually to the company altogether.
Just – In – Time Inventory Management:
JIT inventory management is a technique that arranges raw materials
orders from suppliers in direct connection with production schedules.
It minimise the costs.
Reduce waste and increase efficiency.
Maintain healthy cash flow.
Safety Stock Inventory:
Safety stock inventory is a small, surplus amount of inventory you
keep on hand to guard against variability in market demand and lead
times.
Safety stock = (Max daily sales * Max lead time in days) – (Avg daily
sales * Avg lead time in days).
FIFO and LIFO:
First In First Out is an inventory accounting method that says the first
items in your inventory are the first ones that leave.
Last In First Out is an inventory accounting method that says the last
items in your inventory are the first ones that leave.
Reorder Point Formula:
Reorder point formula tells you approximately when you should order
more stock that is when you have reached the lowest amount of
inventory you can sustain before you need more.
Reorder point = (Avg daily unit sales * Avg lead time in days) + safety
stock.
This equation can help you consistently order the right amount of
stock each month.
Batch Tracking:
Batch tracking is sometimes referred to a lot tracking, and it’s a
process for efficiently tracking goods along the distribution chain
using batch numbers.
From raw materials to finished goods, batch tracking allows you to
see where your goods came from, where they went, how much was
shipped and when they expire if they have an expiration date.
Perpetual Inventory Management:
It is also known as continuous inventory system.
Perpetual inventory system track sold and stock inventory in real
time; they update your accounting system whenever a sale is made,
inventory is used or new inventory has arrived.
Drop shipping:
Drop shipping is a business model that allows you to sell and ship
products you don’t own and don’t stock.
Your suppliers – wholesalers or manufactures – produce the goods,
warehouses them and ship them to your customer for you.
Process is simple:
• You receive an order.
• You forward the order to your supplier.
• Your supplier fulfils the order.
Lean Manufacturing Systems:
Lean manufacturing is a system for maximising product value for the
customers while minimising waste without sacrificing productivity.
The proponents of Lean Manufacturing believe this inventory
management technique can produce the highest-quality products while
increasing your revenue and productivity.
Six Sigma:
Six sigma is a data – driven process that seeks to reduce product defects
down to 3.4 defective parts per million or 99.99966% defect free product
over the long term.
Goal is to produce nearly perfect products for your customers.
The first and most used method in Six Sigma is a 5 step process called
DMAIC which is,
• Define
• Measure
• Analyse
• Improve
• Control
Lean Six Sigma:
Lean six sigma is the fusion of lean manufacturing with six sigma to create
a complete system that removes waste and reduce variation for streamlined
manufacturing and optimal product output.
Cross - docking:
Cross – docking is an inventory management technique whereby an
incoming truck unloads materials directly into outbound trucks to create JIT
shipping process.
There is little or no storage in between deliveries.
Future Trends in Inventory Management
1. Better Data Analytics.
2. Embracing an Order Management System.
3. Real – time data of inventory.
4. An Omni – Channel Shopping Experience.
