Inventory Management Best Practices
To succeed a business should focus its efforts into an efficient allocation of its resources. Such business activities as storing, tracking and insuring inventory also require an adequate treatment in order to assure the financial stability of a company.
Inventory management is the practice overseeing and controlling of the ordering, storage and use of components that a company uses in the production of the items it sells. Inventory management is also the practice of overseeing and controlling of quantities of finished products for sale (Investopedia, n.d).
The nowadays’ challenging business environment require even more attention to this process in order to survive the market competition given the fact that even a small mistake can result in big loses for a business. So, let’s look at several good examples of inventory management practices that companies are incorporating in their daily operations.
Have a solid inventory control system
There are two common control systems: periodic and perpetual. A periodical system updates the information about inventory on a periodic basis (weekly, monthly, quarterly), while a perpetual system updates inventory after each sale or adjustment. In nowadays environment, the use of Radio Frequency Identification (RFID) for locating individual products, components and their respective quantity/quality monitoring becomes more and more used, which allows businesses to have control over their inventory at any moment in time.
An important factor to take into account for international companies is the lead time, which is the amount of time from the point that an order has been placed and until the finished goods are actually received by the facility. This measure should also account for supply delays and reorder delays (the extra days needed to create another order for that inventory). This concept is illustrated in the image attached below.
Implement quality control
Quality control is extremely important in the process of inventory management since it directly affects customer satisfaction, thus, the growth of the business. Therefore, a company should keep focus on this aspect in order to have a healthy long run performance. This process should check for signs of damage in a product, and also control the product’s characteristics in accordance with the customer’s requirements.
Have a proper inventory ordering system
A business should focus on creating an inventory management which will fit the best its business characteristics. For that, the company should track important data for the business in question such as seasonality, sales patterns, stock levels, stock cycles, and past financial indicators. By analyzing such data, a business can derive meaningful information which will allow it to make more educated decisions about future strategy.
Demand forecasting
An efficient demand forecasting allows a business to have a clearer economic outlook and business trends. This, in turn, allows to better plan the inventory needs and maintain appropriate inventory levels, thus, avoiding additional costs associated with inventory keeping.
Company example: IKEA
Besides classical inventory approach, companies have been developing their own know-how of managing their inventories in an efficient way. Let’s take a closer look at IKEA’s strategy, for example. In order to reduce storage costs and delivery time, IKEA’s stores also partially perform the role of warehouses. Most products are placed within close reach for the customer, so that warehouse employers are involved only with very big or bulky items that the customers can not load themselves. This approach is also in line with the cost-per-touch inventory tactic. As a rule of thumb, companies find that the more hands touch the product, the more costs are associated with it, which is why IKEA mostly relies on customers selecting the furniture and retrieving the packages themselves.
Another management instrument of the company is the usage of high-flow & low-flow warehouse facilities. IKEA’s store operations are supported by high-flow facilities (focused on the 20% of SKUs that account for 80% of the volume) and low-flow warehouses that account for the remaining 80% of not so demanded SKUs. In its high-flow warehouses, IKEA employs automatic storage and retrieval systems to drive down its costs-per-touch. The low-flow facility relies mostly on manual processes. These strategies have helped IKEA becoming the world’s most successful furniture retailer by cutting unnecessary costs. This allows the company to stay competitive in the industry as it continually seeks more advanced methods to streamline supply chain management.
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