Friday, 20 February 2015

Inventory Management Techniques

What is Inventory Management?
Inventory management is a process of managing and supervising the procurement, usage and maintenance of inventory (purchases and stocks) for benefit of the business. It is not a simple observance but includes efficient control and streamlining of the purchases, issues and storage of the goods with prudence and smart decision making skills.

Inventory management involves application of some efficient tools and techniques for a better control of the inventory.

So let us have a look at some of the most important tools and techniques employed in inventory management.

Employing Economic Order Quantity technique
I have already discussed about this method- what is the definition and method of applying this technique through the calculation of Economic order quantity as an equation of EOQ= square root of [{2DS} / H ] 
So, you can refer to that article for detailed understanding of this technique.

Applying ABC Analysis of Inventory technique
This is another popular method of inventory management. It is a kind of Pareto analysis applied in any type of business or studies conducted to categorise suppliers, customers, staff, places or activities into different groups of importance for dealing with them accordingly. ABC analysis of inventory implies the following steps and features.

  • In this technique, all items of inventory are categorized into 3 major groups of A, B and C according to their importance and significance for the business.
  • "A" group items are of most important significance as they constitute mostly costly and critical items for the running of business. 
  • C group of items are of least important and of very low cost items. 
  • B group consists of medium importance of items for running the business.
  • Once all items are categorized into these three groups, the top management can concentrate more on the A group of inventory and other groups of inventory can be managed at lower levels of supervisors.
  • This will enable more efficient control of inventory and thus minimise the costs and losses.
  • Generally "A" group items may constitute 10% to 20% of total number of items in quantity or to identify in value they may be about 60% to 70% of the total value of inventory.
  • "C" group items can be of 70% in number to the total quantity of items and may value less than 10% of the total inventory value.
Fixed Order Quantity technique
This fixed order quantity model technique can be applied mostly for high costly items like most important spares for plant and machinery without which your plant will stop running. So, you need to keep some stock of these items for emergency purpose. You may study the past trend of consumption for such items and estimate your requirement for a particular period, say one year. Then you will place order for these items irrespective of immediate requirement and keep them in stock.

Fixed Time Order technique 
When fixed time period inventory model is applied, you will be periodically placing orders at given intervals of time without waiting for requirement indents placed from departments. You will be fixing the intervals according to the consumption levels per week or month of these items, which mostly constitute general regular usage items of small values. These items will constitute mostly of tear and wear or use and throw items.

Cycle Counting technique
This is one more popular technique applied for better management of inventory. Popularly known as cycle counting in inventory management, this method employs physical counting of inventory items in small groups at various places of a ware house or stores of the business establishment instead of counting all inventory on a single day so as to facilitate normal running of the business activities.

In this process, goods are stored in small groups at different places with proper records maintained of receipts and issues. Periodical checking are done by counting the items and tallying with records. This will ensure efficient management of inventory without hindering production or business functions.

When to place purchase orders?
Placing purchase orders for replenishment of goods is one of the key factors of inventory management which needs to be prudently applied by inventory management. The inventory managers should be mostly efficient in calculating the correct time of when to place purchase orders.

  • A deep analysis of the consumption and purchase statistics of your business during a period of last 2 or 3 years can give you a correct picture of what are the requirements during a certain month or period for running the business. You can estimate how much is consumed during a certain interval of time.
  • So, you can frame up the quantity required of each item for a certain week or fortnight or a month as the case may be.
  • Now, you may enquire about the delivery period of these items and the time taken by the consignments in reaching your place. These details can be easily obtained from your suppliers and transporters or from your previous experiences.
  • Further, you must be able to calculate some extra grace period required in case of failures in systems of transportation or due to weather conditions and other factors that may occur. 
  • You may have to provide for sudden spurt in demand for your products thereby increasing your consumption of inventory.
  • You may have to think of shortages in stocks with suppliers or any other problems of suppliers that can affect your purchases being delayed.
  • So, when you will have to place an order depends on all these circumstances. You should add all these points to calculate your ordering times.

To sum up, an efficient inventory management involves great abilities of the inventory managers in foreseeing all factors that can affect your procurements and stocks and needs prudent and smart decision makings. So, efficient inventory manager will employ and consider combining all good points of all of the above mentioned techniques of inventory management to obtain maximum benefits.

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