6 Inventory Control Techniques
Inventory control is a complex business. There’s no one way to get it
right, and different inventory control techniques will suit different
businesses and situations. Here are just a few popular techniques and
aspects of inventory control to consider:
JIT (Just in Time)
This technique, pioneered by the Toyota auto company in the 1970s,
sees businesses holding the least amount of inventory possible. Rather
than buying in advance and keeping the products on your shelves, you
only purchase inventory when it’s needed—and the shipment arrives
“just in time” to meet demand.
This enables you to operate smaller warehouses (reducing overheads
and staff wages), spend less on inventory, and avoid the problems
associated with excess stock. However, you also run the risk of a
stockout if there are any delays, as you won’t have any safety stock as
a backup.
Bulk shipments
Buying and shipping goods in bulk is almost always cheaper, whether
you’re ordering them from a supplier or sending them out to your
network of warehouses, distribution centers, or stores. When buying
products in bulk, you need to be confident they’ll sell, or you’ll end up
with excess stock.
This method is best for items with stable demand and long shelf-lives.
It means investing more cash upfront, so check that this is offset by
the cheaper prices. Bulk shipments may also cost more in terms of
container space, but you’ll have fewer shipments to send out.
Dropshipping
Dropshipping is a way of saving money by cutting out the middleman.
Instead of receiving goods from a supplier or manufacturer and storing
them at your warehouse, you work with a partner (the dropshipper)
who delivers orders directly to your customers.
Your business is responsible for processing customer orders and
passing the details to the dropshipper, but you never actually see or
handle the products you’re selling. This reduces your overheads, but it
means you’re not in control of quality or delivery speed. And customers
will still complain to you if there’s a problem!
Consignment
Consignment is when you place an order with a supplier and they
deliver the goods to you, but you don’t actually pay them until the
goods have been sold. In this method, the supplier is referred to as the
“consignor” and your business is called the “consignee”.
If you end up not selling the items, you can send them back to the
consignor without being charged. It’s a good way to experiment with
new product lines when you’re not sure how well they’ll sell, without
tying up cash in a large upfront payment. It’s the consignor who bears
most of the risk.
Cross-docking
This is another technique that reduces the amount of inventory you
hold, or eliminates the need for storage altogether. At a dedicated
cross-docking facility, goods arrive from a supplier and are inspected,
sorted, and prepared for shipment. They are then loaded on to delivery
vehicles and sent out immediately.
If you operate your business entirely on a cross-docking model, you’ll
only need a small premises to carry out receiving and reloading. Or you
could use this technique only for certain products. For example, items
promised for same-day delivery or those with a very short shelf-life.
Cycle counting
Most retailers hate doing full stock takes. They’re tedious, they’re
time-consuming, and they divert staff away from other tasks. You
might even have to close your physical store for the day. Cycle
counting, where you regularly count small amounts of inventory, is
much more convenient.
By checking just one type of product at a time, you can verify that the
actual stock matches the numbers recorded in your inventory
management software. If it doesn’t, you’ll know there’s a problem and
you can perform a wider audit. Cycle counting doesn’t mean you
never have to do a full stock take—you can just do it less frequently.
1. Demand Forecasting.
Estimates future demand based on historical sales data where the company expects
customers will purchase according to estimate.
2. ABC Analysis.
ABC analysis is an inventory control technique that categorizes inventory items based
on their importance and profits.
This ABC categorization technique splits items into three categories and
controls inventories based on their importance:
1. Category A is the most valuable product contributing to overall
revenues.
2. Category B is the products between the most and least valuable
items.
3. Category C is the least valuable item, vital for general business
but doesn’t matter much individually.
3. Economic order quantity.
Economic order quantity (EOQ) is a formula for ordering an ideal quantity based on
factors such as purchase costs, carrying cost, holding cost, production cost, demands,
and other variables.
EOQ = square root of: [2(demand)(order cost)] / holding costs.
Annual demand:
Ordering cost per order:
Yearly holding cost per unit:
Calculate EOQ
4. VED Analysis.
VED Analysis is a popular inventory management strategy for small and medium-
sized manufacturers where some raw materials are vital but not easy to restock
quickly. This analysis helps to organize items for a production schedule.
According to their criticality, VED (Vital, Essential, and Desirable ) classifies
materials into three Vital, Essential, and Desirable.
1. Vital items: Vital items are required to continue the business.
Without these items, business becomes a stand-still. It is suicidal
to stock-out vital items. Some items will be crucial in your
business, and you cannot compromise on stocks for them.
Always maintain a safe amount of inventory of these.
2. Essential items: Essential items are those whose stock-out cost
would be very high. These items won’t shut your shop, but your
customers will expect you to have them. After vital items, make
sure enough stock of Essential items.
3. Desirable items: These are good to have and may not directly
affect your business. But they are adding more potential &
opportunities. Maybe drops some sales due to stock-outs, but it
is very nominal and easily recoverable.
5. Backordering.
A backorder is an order taken even if current stock is empty & takes steps like
purchase (from a vendor) or production start against sales orders. i.e. take sales orders
within a delivery time & purchase from a vendor or produce in the production process
within the delivery time.
The nature of the backorder and the number of items on backorder will affect the time
it takes before the customer eventually receives the ordered product. The higher the
number of items back-ordered, the higher the demand for the item.
6. Dropshipping:
Dropshipping is a way to sell products online without having to keep any inventory.
When a customer places an order, the seller simply contacts the supplier and the
supplier ships the product directly to the customer. This means that the seller doesn’t
have to worry about storing, packing, or shipping products, which can save a lot of
time and money.
Dropshipping is a great way to start an online business because it’s relatively low-
risk and low-investment. You don’t need to buy any inventory upfront, and you can
start selling products right away. However, it’s important to choose reliable suppliers
and to set up your business carefully to ensure that your customers have a good
experience.
7. The Just In Time Strategy.
A Just-In-Time (JIT) inventory model ensures supply when needed to reduce locked
capital and holding costs. When products are created based on a demanding schedule,
it ensures raw materials are delivered to the production house directly. There is no
need to store inventory in a warehouse for a long time. It ensures supplies are
delivered when needed.
However, just-in-time inventory is no longer as widely used as it once was. This is
because just-in-time inventory requires a high level of coordination between the
business and its suppliers. If there is any disruption in the supply chain, it can lead
to stockouts.
8. Just-in-Case Inventory Management.
Just-in-Case (JIC) inventory management is a strategy of keeping a large inventory on
hand to reduce the risk of stockouts. This is in contrast to just-in-time (JIT)
inventory management, which focuses on reducing inventory holding costs by
ordering only the necessary inventory when it is needed.
JIC inventory management is often used by businesses that experience
unpredictable demand or that have long lead times for their suppliers. It is also
common in industries where stockouts can have serious consequences, such as the
healthcare and food industries.
9. Vendor Managed Inventory.
Vendor Managed Inventory (VMI) is an inventory management model where a
vendor, supplier, or manufacturer manages their seller’s or retailer’s inventory. Here
the vendor takes full responsibility for maintaining inventory & inventory
management decisions of their sellers or retailers based-on demands and other related
factors.
Vendor-managed inventory (VMI) is a supply chain agreement where the upstream
agent is responsible for the inventory of the downstream agent. This is also known as
managed inventory, continuous replenishment program, or supplier-assisted
inventory replenishment.
Vendor Managed Inventory works like below.
1. The downstream agent’s data is shared with the upstream
agent.
2. Focus on demands, safety stocks, reorder points, and lead
times.
3. Vendors or suppliers or manufacturers manage supply and
inventory.
4. Continuously review the VMI system, identify
improvements, and works together upstream and
downstream agents.
10. Consignment Inventory.
If you’re like most small business owners, you probably don’t have a lot of extra cash
sitting around to invest in inventory. That’s where consignment inventory can be a
lifesaver.
Consignment inventory is inventory that is owned by someone else but is being
stored at your business location. You generally only pay for the inventory once it’s
sold, so it’s a great way to keep your inventory levels up without having to front the
entire cost.
Of course, there are a few things to keep in mind if you’re considering consignment
inventory for your business:
1. You’ll need to have enough space to store the inventory.
2. You’ll need to be comfortable with someone else’s inventory
being stored on your premises.
3. You’ll need to be sure that you have a sound system to
track the inventory and sales.
11. Cross-Docking.
Cross-docking is a shipping method where products are delivered from suppliers
directly to retail stores or to distribution centres for further distribution. This
eliminates the need for warehousing and can help to reduce inventory levels and costs.
Cross-docking can be used for a variety of products but is most commonly used for
perishable items or items that are time-sensitive. This shipping method can help to
reduce spoilage and ensure that products are delivered fresh.
Cross-docking can be a beneficial shipping method for both retailers and suppliers. It
can help to reduce costs and increase efficiency.
In a Cross-docking inventory management system, products are delivered from
suppliers to directly retail stores or to distribution centres, eliminating middle-term
warehousing and reduced inventory levels and costs.
12. FIFO and LIFO.
FIFO(First In First Out) means first-out(sales), the stocks which come first. First in,
First out, ensures the older inventory is sold first. FIFO is an intelligent way to keep
inventory fresh.
LIFO, or Last-in, First-out, means the newer inventory is sold first. LIFO helps
prevent stock from going bad or expiring. Effective for food & beverage items where
several stocks will be expired & damaged, customers get fresh items.
13. First Expire, First Out (FEFO):
First Expire, First Out (FEFO) is an inventory management technique that ensures that
products with the shortest expiry dates are sold or used first. This is important for
businesses that sell perishable goods, such as food and beverages, as well as for
businesses that sell products with limited shelf lives, such as pharmaceuticals and
cosmetics.
FEFO can be implemented in a number of ways, but the most common approach is to
store products in chronological order, with the oldest products at the front of the shelf
and the newest products at the back. This ensures that the oldest products are sold or
used first, before they expire.
FEFO can be a complex inventory management system to implement and maintain,
but it is essential for businesses that sell perishable goods. By using FEFO, businesses
can reduce the amount of waste they produce and ensure that their customers receive
fresh, high-quality products.
14. Batch Tracking:
Batch tracking refers to the process of monitoring and managing a collection of
products or items that share common characteristics like a production date, lot
number, or expiry date. These products are either manufactured together or received
together.
The main objective of batch tracking is to enable businesses to keep a record of
inventory movements and easily identify the specific batch of products in case of any
quality issues, recalls, or regulatory requirements.
Batch tracking is extensively used in industries like food and beverage,
pharmaceuticals, and electronics, where product traceability and quality control are of
utmost importance.
