No company becomes successful overnight. The efforts needed to turn into a large and stable company start with the most basic of things. To the dismay of many, one of those basic things is inventory – keeping, monitoring and controlling it. For a business selling the ubiquitous widget, problems can arise from overstocking, and sitting on more product than selling it. But for a business that specializes in perishable goods, such as pharmaceuticals, the issue gets much more complex and vital. That’s where effective inventory management strategies come in.
There should always be an emphasis on the management of products. By making sure that the flow of inventory is as smooth as possible, a company will have an easier time with all other facets of the business. The following are four effective inventory management strategies. Each is a means of taming the wild beast of inventory management and ensuring that products will always be in their best condition. Because at the end of the day, improving inventory management means improving business.
Improving Inventory Management Through ABC Analysis
This effective inventory management strategy focuses on classifying inventory into three categories. Classification depends on how well the products sell and how much they cost to keep in stock. These can be described as follows:
- Class A Items – Best selling items that take very little space in your warehouse.
- Class B Items – Mid-ranged items. They sell regularly but are costlier than Class A Items to keep in warehouses.
- Class C Items – All the other items in inventory that makes up the bulk of inventory costs while contributing very little to sales.
The primary function of ABC Analysis is that it helps to keep working capital costs as low as possible. It makes it easier to identify which items are needed to reorder more frequently and which of them don’t necessarily need to be in stock that often. When done correctly, it can reduce obsolete inventory and optimize the rate of inventory turnover.
One company that can attest that ABC analysis is useful is Chrysler Corporation. This company adopted ABC analysis in 1991 and still using this inventory management strategy.
Safety Stock Inventory: For Adapting to Market Changes
Safety Stock Inventory, or SSI, refers to a rather small surplus amount of inventory kept on hand to guard against unforeseen circumstances. This efficient inventory management strategy helps to protect from variability in market demand and lead times. The companies that make use of safety stock inventory benefit from it in a variety of ways. That includes the following:
- Protection against unforeseen spikes in demand
- Avoidance of stockouts
- Compensation for inaccurate market forecasts
- Emergency buffers for extra-long lead times
In essence, safety stock inventory is used to make sure that a company is safe from any loss of revenue or loss of customers and market share.
The Consignment Inventory Management Strategy
This effective inventory management strategy is primarily a business arrangement where a consignor (or wholesaler) agrees to give their goods to a consignee (or retailer) without any payments up front. The consignor still owns all the products provided and the consignee will only pay for them once they sell.
This technique tries to create a mutual partnership between suppliers and retailers as long as they’re both willing to share the risks and rewards.
Making use of this strategy provides many benefits to both vendors and retailers. First, vendors gain exposure to new markets for their products. They will also experience a decrease in their inventory carrying costs.
Retailers will have a slight decrease in ownership costs and an even more notable improvement in their cash flow. The exposure to minimal risks is lessened thanks to the nature of their agreement!
One good example of this inventory management strategy is Heritage Auctions. Since it is an auction business, they are very keen in terms of how the consignor will benefit from the products consigned. This company always looks for ways to acquire interesting items through consignment.
Minimum Order Quantity: The B2B Go-To
The Minimum Order Quantity (MOQ) strategy refers to the lowest set amount of stock that a supplier is willing to sell. Basically, if a business can’t or doesn’t want to buy the MOQ of a product, the supplier will not sell to them. The purpose of minimum order quantities is to allow suppliers to increase their profits while letting go of inventory faster.
The minimum order quantity is set based on the total cost of inventory and any other expenses that have to be paid before getting any profit. MOQ is an effective inventory management strategy that helps wholesales stay profitable and maintain healthy cash flow.
This type of inventory management strategy is mostly applicable in business-to-business types of companies like Alibaba.com from the Alibaba Group. Alibaba.com is a wholesale marketplace for global traders where they supply products in huge bulk. The use of MOQ makes it more cost effective.
Key Takeaway
The importance of inventory management in a company lies in the notion that it keeps the money flowing. Ultimately, it doesn’t matter if the strategy is ABC, SSI, Consignment or MOQ. Optimizing the process is key. By choosing an efficient inventory management strategy, a business ensures that it will eventually be successful.
