Implementing an effective inventory control and planning solution or system is only the first step in optimising your inventory management. Another vital component of this process is the set of rules you establish to speed up inventory control and make it more effective.
These decision rules for inventory control are designed to eliminate the uncertainty around the economic environment. Whether you are a small or large business, there must be positive control over inventory to maintain profitability. The inventory decision practices a company establishes will determine its ability to meet customer expectations. What results is higher customer satisfaction, which we all know is key to a company’s ability to generate sales and profits.
It is important to note that there is no simple strategy for making the right inventory decision all the time. For example, a small, specialised eCommerce store and a large local retailer both aim to streamline inventory control and maintain optimal stock levels, however, they may use different decision rules to achieve their goals. So, we believe it is more beneficial to think of decision rules in terms of objectives, variables and restraints as guiding factors for decisions rules to greater inventory control.
The primary objective of inventory control is to reduce ordering costs to the lowest possible level, as well as to control the costs related to keeping inventory on the shelves.
Essential inventory rules for all businesses include reducing ordering costs, controlling inventory costs, and selling inventory at the right price to factor in for ordering and holding costs.
An effective inventory system is called the ABC Classification system. This set of rules groups inventory by the yearly volume of sales, and identifies the items that produce the highest level of sales and the products that are essential for the company’s profitability.
Use a good inventory management software (preferably cloud-based) so that you can manage your business in real-time. Having easy access to this data allows inventory decision-makers to quickly determine whether ordering, shipping, or moving certain stock is profitable or not.
Variables are another crucial factor when it comes to inventory decision rules. Inventory variables include the time needed for each product to cycle through the system and the level of safety stock that must be maintained to protect against supply chain risks.
An effective approach that many companies adopt for dealing with these variables is to develop just-in-time (JIT) inventory rules, which aim to reduce inventory costs. Decision-making can be simplified by using automated rules that order new stock once the existing stock levels fall below the minimum threshold, as defined by previous demand data.
To set up effective decision rules, it’s equally important to consider inventory restraints which include storage costs, handling costs, damage to goods, age of inventory and spoilage. Identifying your biggest inventory restraints and dealing with them becomes easier when inventory systems are engineered to automatically order new products on a predetermined cycle. If the system operates correctly, inventory handling costs will be reduced, and products are less likely to be lost to spoilage and obsolescence.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.