With inventory management, there really isn’t a one-size fits all methodology. Every business is at least slightly different from the others, so it is important to tailor your inventory management to suit your business’ specific needs. Here, we will discuss some of the most common inventory management techniques – but it’s important to remember that these are just a starting point and you might need to try several approaches (or even mix and match) before it becomes obvious what’s right for you.
Perhaps counter intuitively, some businesses approach inventory management by doing away with stock altogether. Businesses who drop ship do not hold any inventory reserves, and generally never touch the products they sell. Rather, drop shippers enter into contracts with wholesalers who handle storage, logistics and order fulfillment. While some drop shippers are reasonably transparent, the usual practice is to conceal the fact that the business is drop shipping by using tailored shipping information and packaging.
Despite not having a warehouse with stock on hand, drop shippers still face some inventory challenges. It can be difficult to keep track of the stock that wholesale partners have on hand and to keep this information updated on your own online store. While most wholesalers use inventory software that will integrate with your own, it can sometimes be difficult to make sense of the data – if a wholesaler has 10,000 units in stock, this could either be a little or a lot depending on how many other retailers are selling that product – information that a drop shipper generally won’t have.
Just In Time Inventory
Just in Time inventory management (JIT) involves procuring inventory only when it is needed – and never before! In practice, businesses that implement JIT inventory run on the leanest possible inventory, including not holding safety stock. Although this approach can seem alarming, holding very low inventory levels ensures that only the minimum amount of capital is tied up in stock at any one time – this is particularly useful for growing businesses, who can reinvest more unused capital back into the business. JIT also minimizes inventory-carrying costs such as warehouse rent and insurance.
On the other hand, JIT creates an element of risk for a business, as there is much less room for supply chain error. When something goes wrong, the downstream impact on the business can be extreme. This means that attention to detail is crucial; to minimize the chances of a costly mistake, businesses that implement JIT should use inventory management software to keep track of every detail, big or small.
Bulk Inventory Methodology
Buying stock in bulk can provide an illusion of safety – it is difficult to run out of inventory when a business has large reserves of safety stock. However, it is important to consider the potential for stock to become deprecated, to sell slowly and to be damaged or stolen. Bulk inventory also involves a large financial gamble; a business commits significant capital to purchase inventory, but then has to store it safely. If a product moves more slowly than expected, the extra inventory carrying costs can very quickly eat into any bulk purchase discount.
This inventory management methodology involves splitting all of your business’ stock on hand into three broad categories:
- High value stock held in small quantities.
- Moderate value stock held in moderate quantities.
- Low value, bulk stock.
Category C stock generally requires relatively little active management (keeping inventory carrying costs in mind, of course). Category A stock, on the other hand, requires a lot of attention. Not only are the financial risks higher, the risk of running out of stock is also high as a small number of orders can clear your inventory. Intuitively, managing category B stock is somewhere in between.
It is worth noting that these techniques can overlap – as ABC categorization shows, different management methodology will often work better for certain products, even within the same business.