If you’re trying to get on top of your inventory management, but struggle with the many unknowns involved with inventory control, you’re not alone. It’s difficult to predict demand and how the economic environment will impact your business. It changes how you buy and reorder your stock.
Deciding whether you want to reorder stock can be a time-consuming process, especially if your inventory is full of different products and you sell to a variety of consumers. Not only can this take up time, but it becomes harder to let employees manage aspects of inventory control. That’s where decision rules come into play. They can guide your decision making and decrease your inventory uncertainty.
What is a decision rule?
Decision rules assist inventory managers and warehouse owners with their inventory control. They look at objectives, variables and restraints in order to streamline inventory control and make sure your stock levels are healthy. Decisions rules are put in place to discern what inventory is necessary in order to meet customer’s demands and expectations. With solid decision rules in place, your inventory will be healthy, and you’ll end up with happy customers. Let’s see how the protocol for decision rules is laid out.
The main objective that underpins inventory control is to keep ordering and inventory costs low. You don’t want to overspend on stock and then find out that you can’t sell it for your anticipated price, or you can’t sell it at all due to lack of demand. By reducing your ordering costs and keeping warehouse stocking costs low, you should be able to stay on top of your inventory.
A commonly used inventory system in the ABC Classification system. This ranks items as being the most valuable items down to the least valuable ones, tagging them as A, B or C. This system identifies critical, valuable items for inventory managers and makes sure they are focusing on moving the product that is costing the business the most.
Inventory control variables consider how long each product needs to go from the supplier and arrive at your warehouse. Sometimes there are delays, weather events, or factory shutdowns, as seen with the recent coronavirus. You need to have minimal safety stock levels to account for variables in the shipment of your stock. Some variables are more extreme than others, but if you can aim to be prepared for most changes, then this will be significantly helpful.
If you’re using real-time inventory management, it will be easier to factor in variables. You can use the just-in-time inventory method where stock arrives just as your count is getting low. This helps reduce inventory costs and can be automated by an online inventory management system. This automates orders so shipments don’t arrive too early or too late. However, you still need to have your safety stock around in case demand surges or there are variables from your supplier.
When it comes to inventory control restraints, you need to consider handling costs, inventory storage costs and the age of your inventory. If you have hundreds of boxes of product that is simply not selling, it is costing you money in storage costs.
With restraint rules, you can decide if this product needs to be dropped. In addition, you can switch to fast-moving, expensive products and remove slow-selling goods. The slow-moving product was your restraint, so it’s important to identify this so you can move on.
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.