What are Best Practices in Inventory Management? Do you want to achieve more Sales and Profit? Let’s focus on Best Practices in Inventory Management to accomplish the tasks of Increase Sales and Profits!
Inventory Management is a huge responsibility within a company. Your inventory is a large asset in the company. Inventory is converted into Sales. Sales provide Gross Profit. Gross Profit leads to Profit. Because Inventory is so important, all companies should have Best Practices in Inventory Management.
Manufacturers, Wholesalers, Distributors, Retailers, and Service-based businesses will have inventory. Since Inventory is within 95% of businesses, I am outlining Best Practices for Inventory Management.
Best Practice in Inventory Management – Accurate Forecasting
The definition of “forecasting” is to predict or estimate something in the future.
If you have a product that sells the same every day, every month, the forecast is not difficult. But that is not usually the case. There are summits and valleys in sales. The summits and valleys are also referred to as product seasonality.
Now, we can add the Marketing component to the formula. Marketing campaigns will have a positive or negative effect.
With these variables in mind, time to forecast! haha. I know this can be difficult and seems like a useless exercise. But forecasts can help ensure that you have the right amount of inventory at the right time.
Safety stock
Maintaining safety stock can help protect against unexpected increases in demand or unexpected disruptions in the supply chain.
How do I compute Safety Stock? There are several ways to compute Safety Stock.
Average Demand Method. This method calculates Safety Stock using the average demand for a product over a given time period, along with the lead time for that product.
Average usage during the lead time x (Lead Time + 10%)
Maximum Usage = 2,000 units per week
Average Usage = 1,000 units per week
Max Lead Time = 6 weeks (42 days)
Lead Time = 4 weeks (28 days)
1,000 x (4 weeks)
= 1,000 x 28 days
= 28,000 units
Average to Maximum Method. This method will review the Maximum and Average Usage for a product.
[Maximum Daily Use x Maximum Lead Time] –
[Average Daily Use x Average Lead Time]
[2,000 x 6] – [1,000 x 4]
12,000 – 4,000
8,000 units
There are other ways to compute Safety Stock. In many of these ways, you are computing against the standard deviation of this or that point. This is someone trying to earn a math award. Your safety stock should be easy to compute. Safety Stock is on my list as a Next Level Best Practice in Inventory Management.
Best Practice in Inventory Management – Reviewing and Adjusting
Having the Right Inventory at the Right Time is important. How do we accomplish this? Reviewing and Adjusting Inventory Levels is one of the keys.
This method deals with Cycle Counting. Here we are a huge supporter of Cycle Counting. Cycle Counting can uncover issues with receiving, shipping, invoices, stocking, ordering, year-end counts, etc…
This is one of the reasons why I consider Cycle Counting as a Next Level Best Practice in Inventory Management.
Optimal Order Quantities
Determining the optimal order quantity for each product can help reduce the costs associated with holding and managing inventory.
The most common formula used is the Economic Order Quantity (EOQ). The variables needed are Annual Unit (D)emand, (O)rder Cost Per Purchase, and (H)olding Cost Per Unit. The formula is the square root of ([2DO] / H).
D = 100,000 O = $50 H = $0.10
= square root ([2 x 100,000 x 50] / 0.10
= square root ([10,000,000] / 0.10)
= square root (100,000,000)
= 10,000
In this calculation, as the Order Cost increases per order, the Economic Order Quantity will increase. However, the opposite is true with Holding Cost. As the Holding Cost per Unit increases, the Economic Order Quantity will decrease.
Best Practices in Inventory Management – Vendor-managed inventory
Vendor-managed inventory systems can help reduce the amount of inventory you need to hold by allowing your vendors to manage your inventory levels.
Back in the day, the supplier would take the inventory of the items/parts provided to the manufacturer/distributor. When the inventory level fell below the safety stock level, the supplier would process a replenishment order.
Today, it is more complex. Usually, you have a direct downward link to customers and a direct upward link to suppliers. A supplier will have the capability to see future orders from the customers. With the ability to see production and inventory on hand from the manufacturer, the supplier can increase or decrease their production for the manufacturer. Yes, this is a sophisticated system, but it can happen. Imagine a manufacturer that reduces its overhead costs by purchasing at the right moment. With this system, the purchasing department is more administrative than executive.
Inventory Visibility
Implementing systems to improve visibility into your inventory levels can help you make better-informed decisions about when to reorder products and how much to order.
Many new companies cannot afford a computerized system for their business. I understand. A Legal Pad and Pencil is usually the first system you will have. This is actually good. With a legal pad and pen, you can understand how each operation works.
The next step is the computerized system. Depending on your needs will determine your class of services needed. Remember this; the computerized system will help you with ordering, receiving, inventory, shipping, invoicing, and collection. Don’t ask for the cheapest product. Ask for a product that can fit your needs effectively and efficiently.
Four more Best Practices in Inventory Management that should be included.
Consignment inventory systems can help reduce the amount of inventory you need to hold by allowing you to only pay for inventory that has been sold.
Drop shipping can help reduce the amount of inventory you need to hold by allowing you to have products shipped directly to your customers from the supplier.
Cross-docking can help reduce the amount of time that inventory is held in warehouses by delivering it directly to its final destination.
Just-in-time (JIT) inventory systems can help reduce the amount of inventory you need to hold by ensuring that materials and products are delivered just in time for production or sale.
Do you agree with these Best Practices in Inventory Management? What Inventory Management Practices do you use that are helpful? If you are having inventory issues, let me know in the comments. Our team would enjoy working with you. Don’t hesitate; click here now.
