Inventory is a precarious aspect of every company. The need to assess demand and supply curves is critical in advising the need for inventory in manufacturing and warehousing, hence the need for inventory planning to address these and other top inventory concerns.
Types of Inventory
An appropriate and effective inventory plan starts by factoring in the different types of inventories and their characteristics.
- Raw material – The inventory you need to manufacture products
- Unfinished products – WIPs that are not ready to be sold
- Finished products – goods stored in the warehouse ready for shipping and selling
- GIT – Products in transit to the final consumer
- Cycle inventory –Products shipped from a manufacturer or supplier to business for immediate disbursement to customers.
- Anticipatory inventory – Excess products in anticipation of a spike in sales
- MRO goods –Inventory that supports the production process.
- Decoupling inventory – Parts, supplies, and products set aside in anticipation of a slowdown or cease in production.
- Buffer inventory – Also called “safety stock.”
Why is Inventory Planning Important?
As of 2017, up to 43% of small businesses used a pen and paper to track their inventory. It goes to show how undervalued inventory planning is despite being a crucial aspect of the success of any business.
Some of the consequences associated with inadequate inventory planning include:
- Customer dissatisfaction
- Excesses and/or shortages in storage capacity
- The tension between the company, its suppliers and its customers
- Frequent back-ordering
- Obsolescence and excess inventory
- Out of stocks and inventory shortages
To put the consequences of inadequate inventory planning into perspective, 34% of businesses ship late because they sold a product that is out of stock.
On the flip side, having an effective and well-executed inventory plan and management can improve various business aspects, including:
- Better and efficient organization of the warehouse
- Save on time and money by preventing the need to recount, eliminating slow-moving products, and acquiring extra resources as a result of over-ordering.
- Improved efficiency and productivity of both the manufacturing plant and the software by eliminating the lengthy manual processes.
- Increased customer satisfaction.
What are the Best Inventory Planning Techniques?
Inventory planning and management isn’t what it once was. There are management tools and software that you can use to increase efficiency and prevent loss of time and money in correcting mistakes and disposing of overstock.
How you use your inventory management software will be influenced by the type of inventory you’re managing and your business’s requirements. The right inventory control technique you use is determined by the type of inventory you have and your business line.
EOQ
For companies that have inventory with a set of variables like total cost of production and demand rate, EOQ is the best formula for inventory control. This technique helps to minimize related costs by identifying the greatest number of product units to order to minimize buying frequency.
The technique also considers the number and costs of units in delivery and storage. Using this technique, you can free up more operating capital.
Minimum order quantity
MOQ is an ideal approach for suppliers. Using this technique, suppliers can make financial sense of their production processes. Products with a high production cost have a low MOQ, while cost-effective inventory has a high price tag.
ABC
This inventory management technique classifies inventory according to their monetary value. It’s ideal for small businesses that offer multiple products. This technique requires the classification of inventory into three tiers:
- Category A – Features the most valuable products with the highest overall profit.
- Category B – For intermediary products. They are not of the highest or the lowest value.
- Category C – Products with small transactions. These are vital for the overall profit, but individually, they don’t matter that much to the business.
Just-In-Time
Perfect for businesses that order inventory only when it’s needed. With this technique, you can cut storage costs, mitigate wastage, and increase efficiency.
In JIT, you only purchase inventory when you get an order from a customer. It works for businesses handling products manufactured and supplied on short notice, have reliable suppliers, and predictable buying patterns and customers.
FIFO & LIFO
This inventory management technique relies on the production date of the stock. FIFO is best for businesses handling perishable goods. It dictates that the business sells the oldest stock first to prevent the accumulation of old inventory. LIFO is the opposite of FIFO and demands that the newest stock is sold first. It’s most suitable for businesses handling non-perishable goods. LIFO also presents some tax advantages because it shows a lower profit on your income statement.
After all, new stock is more expensive than the old stock.
Other inventory management techniques include:
- VED analysis –For businesses that manage inventory based on spare parts. It categorizes the parts based on their importance.
- Minimum stock level and Safety stock – Works for small businesses. It’s the most basic inventory management technique. It requires ordering of new stock when the current inventory reaches a pre-determined minimum level.
Which is the Best Program for Inventory Management?
The best inventory management program depends on your kind of inventory, your business’s size, and your market’s tendencies. The best way to tell if an inventory program will work for you is by assessing its features and how they mesh into your business. These are some of the most vital features to look into:
Control forecasting and projection
The whole idea behind inventory planning is in controlling the flow of stock, forecasting surges and slowdown, and projecting future needs. A sound inventory management system should have a robust SKU item master file, forecast and projection features, easy and streamlined analysis, and purchasing functions.
Barcoding and scanning
Barcode scanning is the easiest way to add your inventory into your management system. Barcode scanning opens up the system to many functionalities because the barcode can contain the SKU, lot number, purchase order, or a customer shipment. Barcode and scanning features make the software efficient and accurate when stock-taking.
Actionable inventory analysis
There are multiple data elements that inventory management systems can process. It’s important to consider what the software offers that fit your business out of the box. Does it monitor key metrics like inventory turnover by SKU or GMROI?
Even more important, is the data the system is providing actionable and informative? All these are pain points that a good inventory management software can remedy.
Configurability
Using this feature, the system can cater for two different businesses using a personalized approach. It’s more important to understand what the system allows you to accomplish using this feature.
Integration and UI
Can you integrate the system to other ERPs or WMS systems? Are there other add-on systems required with the system? These are the key aspects to consider when considering an inventory planning tool. Most importantly, the interface should be easy to use, relaying essential data quickly and efficiently. Final Thoughts
Inventory planning is critical to the success of the business and its association with stakeholders. Choosing the right techniques and inventory management tool with the right features can go a long way in easing the pain of handling inventory and improving your business’s efficiency. You can contact us for more information on how to improve your StockIQ.
