Managing your inventory is no easy feat! Sometimes it seems that no matter how much time and effort you put into it, you end up with inefficiencies. However, your solution could come in the form of an inventory management system. One common inventory management system is ABC inventory analysis.
Stay tuned to learn more about this type of inventory management system and other types that you can implement to build your brand effectively.
What Is Inventory Management and Why Does It Matter?
Inventory management relates to the process of monitoring and tracking the ordering, storage, and carrying costs of the different products produced by a business. This system helps you keep track of your stock to better manage supply and demand.
Here are some of the reasons why inventory management should matter to your business:
- Inventory management can help you avoid excess stock that can quickly cut into your profits by wasting money in carrying costs.
- Inventory management provides you with valuable insights that allow you to act proactively about your stock rather than just reacting to issues as they occur.
- Inventory management helps you save money by investing in the right products. You don’t want to invest money into a product that simply isn’t selling. Through inventory management, you can see what your best-selling items are and adjust resources accordingly.
- Inventory management systems allow you to save time by doing all the hard work for you. These systems automate and optimize all the intricate details involved in inventory management and allow you to focus on important aspects of your business.
What Is ABC Inventory Analysis?
ABC inventory analysis involves placing your products into different groups based on what sells and what doesn’t.
For example, the best-selling item is labeled “Item A.” The worst-selling item is labeled “Item C.” Finally, a middle-ground item is labeled “Item B.” This inventory management system works best for companies who earn a majority of their sales from a minority of their products.
The Pareto Principle
This is quite common in the business world. Take the Pareto Principle, for instance. This concept states that 80% of your inventory costs come from just 20% of your inventory. These would be your “A” items. Your “B” items, on the other hand, would make up 15% of your inventory costs from 30% of your items. Finally, your “C” items would make up 5% of your inventory costs from 50% of your items.
To calculate the necessary information to conduct ABC inventory analysis, you need to multiply the number of items sold by the cost per item to get the annual usage value per product. From there, you can set your A, B, and C groups.
Applying ABC inventory analysis to your inventory management can provide you with a whole host of benefits. For starters, it can help you optimize your inventory management practices so that you can better stock your high-demand products while wasting fewer resources on the less popular ones.
It can also help you better forecast demand for your products so that you can produce an adequate supply. Finally, it can provide you with insight into product life cycle management in order to properly track and anticipate demand and supply.
What Are the Other Types of Inventory Management?
While ABC inventory management analysis has its strengths, it also has its weaknesses. For instance, you may need to frequently reassign items to different categories that can result in confusion and inefficiencies throughout the inventory management process. It’s also an incomplete system that can’t properly account for new product launches or seasonal products.
Finally, value and popularity aren’t everything — there are other factors you should keep in mind throughout the inventory management process that ABC inventory management analysis neglects to consider.
There are other types of inventory management systems out there for you to explore. Here are a few of them to consider implementing within your business.
Periodic inventory
This inventory management system involves taking a physical inventory at specified intervals of time—for example, inventory at the end of an accounting period — or every few months.
This type of inventory management system is relatively easy to implement, run, and manage — as a result, it also comes at a lower cost. This inventory management system can lead to errors in estimation, significant adjustments, and the inability to scale.
Perpetual inventory
This inventory management system involves consistently maintaining your inventory counts throughout the entirety of the production and fulfillment processes. This type of inventory management system provides you with real-time, up-to-date information on your inventory that allows you to make informed business decisions based on this data.
Perpetual inventory management is more in-depth than periodic and can come with more up-front costs in terms of implementation and management. This is a more efficient system that can save you money in the long run.
Consignment inventory
This inventory management system involves working with a manufacturer that only charges for products and businesses once sold to a customer. This unique system requires a strong relationship between the manufacturer and business due to increased risk.
Just-in-Time inventory
This inventory management system involves ordering materials and manufacturing products only to meet demand. For example, you only manufacture products once you have received an order for that exact amount.
While this inventory management system allows you to cut down on inefficiencies and surplus, it can greatly increase the time from order to fulfillment since you have to actually manufacture the item rather than simply ship an already-made item from your warehouse.
How to Best Practice Inventory Management for Your Business?
Inventory management can be beneficial for your business, but only if you do it correctly! Here are some inventory management best practices to help you effectively and efficiently implement these systems into your business:
- Practice rigorous quality control throughout the entire process to check for signs of damage, cohesive products, and correct prices.
- Optimize your pick and pack process to quickly fulfill new customer orders through methods like discrete order picking, batch picking, wave picking, or zone picking.
- Establish your inventory key performance indicators (KPIs), including inventory carrying costs, write-offs, write-downs, turnover, cycle time, and fill rate.
- Work with experts familiar with the inventory management process to help you choose the best methods and practices for your unique business structure and future goals.
- Invest in a cloud-based inventory management system that will handle the entire process for you from start to finish.
Conclusion
There are several different inventory management systems to choose from. The right option for you will depend on your unique business needs. It’s important to go with a system that can easily grow along with your business, rather than stunt its growth by being too complicated or inefficient.
As always, if you need any assistance when it comes to omnichannel growth and performance marketing strategies for your business, feel free to reach out to us here at Greg Gillman.
Sources:
Why Is Inventory Management Important? | Business.org
