8 Inventory Management Techniques to Help You Optimize Your Budget

Having a well-managed inventory is one of the keys to achieving a successful business. When products are properly stocked, tracked, and sold, it substantially increases the company’s revenues, sets the bar for better decision-making, and improves customer services.

However, optimizing your inventory management system isn’t easy. It requires diligence, skill, and a lot of counting. For this reason, several businesses invest in specialized software and programs that can streamline inventory operations.

No matter what system or software your business is using, there are effective methods you can use to efficiently manage your inventory and optimize your budget. Here are a few techniques you can use to bolster your inventory management system.

Regular Auditing

The importance of regular auditing can’t be stressed enough. It’s essential that the data in your system matches the number of physical goods in your inventory. Inaccurate data can lead to dead stocks (unsellable merchandise), extra labor, and significant losses for the company. To avoid this, make sure to schedule an audit—whether it’s weekly, monthly, or yearly, depending on the needs and the size of your inventory.

Par Levels

Par levels refer to the minimum amount of stocks that you should always keep on-hand. By setting par levels for all of the products you’re selling, you can easily determine when it’s time to reorder a specific item from suppliers.

However, par levels differ for each kind of product. This is because each item differs in how fast it’s manufactured, delivered, and sold. Identifying the right par level for each item requires extensive research, but it will significantly help you with inventory management.

Safety Stocks

Similar to how you always store extra supplies in times of emergency, it’s good practice to always have safety stocks in your inventory. To determine the number of safety stocks you should have, follow this formula:

Safety stock = (Maximum daily usage x Maximum Lead Time) – (Average Daily Usage x Average Lead Time)

That way, in case anything unforeseen comes up—such as an accident or sudden increase in demand—you have stocks to sell.

Batch Tracking

This method helps control the quality of stocks in your inventory. As products are delivered by batches, knowing which batch a specific merchandise comes from is handy for ensuring product quality. For example, you can set up promotions for a batch that is nearing its expiry date. This method is also handy for tracking down defective items and having them returned to suppliers if needed.

Just-In-Time (JIT) Method

The JIT method is useful in minimizing extra costs and steering clear of dead stocks. In this technique, companies maintain the lowest inventory level possible before reordering. Simply put, you order on an as-needed basis to avoid overstocking.

That said, keep in mind that this method can be risky. Without a solid understanding of the supply chain and an accurate forecast, you risk running out of stock and delaying orders.

Prioritize by ABC Analysis

The ABC analysis is an inventory management technique that helps you identify products that significantly contribute to your company’s profits.

• Category A — These are the valuable products that sell well and will always have to be on hand. They contribute to 80 percent of the company’s profit.
• Category B — Stocks in this category fall between the most and least valuable goods. They contribute 15 percent to overall revenue.
• Category C — While useful, these items are considered the least valuable and comprise 5 percent of the company’s revenue.

By knowing these categories, you can easily identify the right par levels for products and properly schedule reordering to keep up with demand, maximize profit, and avoid storing items for too long.

First In, First Out (FIFO)

The logic behind the FIFO technique is simple: the first products that go in your inventory should be sold first. This is especially the case for perishable goods like food and beauty products. The wrapping and packaging on non-perishable items deteriorate over time as well, so it’s best to sell them as soon as possible.

Reorder Point

The reorder point is a technique that helps you know when to order products from your supplier again. This method factors in the order’s lead time and the safety stock that you have on hand. The formula to remember for this technique is:

Reorder Point = Lead Time + Safety Stock Level

By using this technique, you can ensure that the new batch of orders will arrive without having to touch the safety stocks.

There are several ways to manage an inventory, and it differs for each type of business and company. To effectively compete in a saturated market, however, it’s crucial to maximize all traditional and technological resources, such as inventory management software.

As your business grows, consider reaching out to a reliable company solutions provider such as ANSI and take your inventory management system to a whole new level. ANSI is a leader in ERP and inventory management solutions in the Philippines. Contact us and learn more about our services here.