Inventory Management Techniques for Business Success

Sarah Leung
July 13, 2015

Though it may seem obvious that effective inventory management techniques are vital to a successful wholesale distribution business, many companies large and small still struggle with the process of preventing stock-outs and overages, achieving maximum throughput, and keeping costs down. Indeed, according to a survey conducted by the Aberdeen Research Group, 56% of supply chain professionals participating reported that improving inventory management was a top priority. The process of determining which items to stock, how many to keep in each warehouse, and when to order more from suppliers involves several functions, including physical inventories and effective inventory planning and optimization. There’s no one-size-fits-all approach, and therein lies the challenge. There are, however, common inventory management techniques to build from, and we’ll cover several of them in this post.

Inventory Management Techniques: Inventory Counting

Whether it’s as simple as doing periodic inventory counts in a small warehouse or as complex as digitally tracking the real-time receiving, stocking, and moving of inventory, conducting physical inventory counts is a crucial component of any inventory management workflow.

1. Perpetual Inventory Counts

Common among larger companies, perpetual inventory counting is exactly what it sounds like. Inventory numbers are constantly tracked as products come in and are shipped out every day.

2. Cycle Counting

Cycle counting is often used in conjunction with perpetual systems to maintain inventory accuracy. It involves specifying a subset of inventory to physically count each day and reconciling the results against existing records. Any discrepancies can be further investigated, new procedures can be put in place if needed, and the system can be updated with numbers from the physical count.

3. Annual Physical Inventory Counts

Companies may also also choose to conduct an annual physical inventory in order to validate existing numbers. These full physical inventories are much more disruptive than cycle counts, as they involve shutting down daily operations while all items are being counted.

Inventory Management Techniques: Planning & Optimization

In addition to regular counts, there are also techniques that involve planning and optimization procedures that coordinate with fluctuations in demand. Rather than just gaining an accurate understanding of how much stock is in the warehouse, these procedures are about leveraging that data to make sure the right products (in the right quantities) are in that warehouse to avoid stock-outs and stock overages.

1. Maintaining Minimum Stock Levels

One of the most basic forms of control, this process involves ordering new stock when existing inventory has reached a predetermined minimum level. This works well for smaller businesses. Say, for instance, a boutique brand selling candles sets a minimum stock level of 50 case packs for their lavender candles, and those particular candles sell at an average rate of 125 case packs every five days. If at the end of day three, inventory reaches 50 case packs, the warehouse would get new stock.

2. Keeping Safety Stock

Keeping safety stock is another basic method of inventory control, which involves carrying an additional amount of inventory over normal levels to protect against uncertainties in consumer demand, supplier delivery, or product availability. The downsides to this method are the carrying costs associated with excess inventory, as well as the risk of being unable to sell it through. It can actually do more harm than good for smaller businesses.

3. “Just In Time” (JIT)

The “Just In Time” method of inventory management involves delivering items “just in time” for production and/or shipment to the retailer. The item may be ordered some days in advance, depending on the lead time specified by the supplier. This method, while common, is extremely dependent upon a supplier’s ability to make good on their promises. It’s important to consider the distance between the supplier’s manufacturing facility and the warehouse, and the potential risks of delivery delays.

4. Accurate Response

The accurate response method involves more intense demand forecasting––using data analytics to make more accurate predictions of how much stock you’ll need at a particular point in time. Certain products can also be classified as more volatile in terms of demand, and can thus be managed separately. It’s important to remember with all of these techniques that effective inventory control can involve multiple methods in use at the same time. Do you have a great mix of inventory management methods to share that you find effective in your own business? Or perhaps some that we didn’t cover in this post? Let us know in the comments.