Why is inventory management important?
Inventory management helps reduce operating costs
Enterprise daily operating costs include the staff salary, warehouse rent, storage cost, logistics cost, and so on a series of spending. Inventory management techniques can help you minimize losses.
Inventory means that you store a valuable and limited resource in the warehouse, and you can make it cash only by selling this resource.
For the following types of inventory you need to sell in time:
Products with shelf life that are prone to spoilage: food, medicine, cosmetics, etc. If these products are not sold in time, they will deteriorate and need to be discarded in time.
Outdated products: Outdated phone covers, clothing, or shoes that were popular last year, etc. Such slow-moving goods will occupy a certain amount of inventory space for storage.
To minimize storage costs, you can take certain measures and technologies to achieve efficient inventory management and lower inventory levels.
Effective inventory management techniques are listed below:
First In First Out (FIFO)
First in first out (FIFO) is an inventory management method widely used worldwide. This method means that the first batch of goods entering the warehouse is also the first batch of products sold.
For example, supermarkets or some small shops will place the latest date of yogurt at the end of their shelves.
But what are the limitations of this technology?
Some products are not suitable for this inventory management technique. For example, red wine. Retailers like to store this kind of goods because they do not have strict shelf-life requirements. Although FIFO can better and more accurately value the inventory on the balance sheet, products such as wine are not so accurate.
ABC inventory management
ABC classification is also a commonly used inventory management technique, which usually divides inventory resources into three categories:
Class A inventory control is the most stringent and requires accurate records,
Class B inventory control is slightly strict and appropriate records,
Class C inventory control is the simplest and least record.
What are the benefits of this inventory management technique?
ABC analysis is a method of identifying inventories that have a significant impact on the overall inventory cost. There are different controls for each type of inventory.
In other words, each inventory does not have the same value. Dividing inventory into categories A, B, and C can help you determine their respective importance to your business.
First, Class A stocks are critical, often high-value and high-margin items that require regular and frequent inspections; B is next; Class C belongs to the lowest value, so you just need a little attention. First, Class A stocks are critical, often high-value and high-margin items that require regular and frequent inspections; B is next; Class C belongs to the lowest value, so you just need a little attention.
So, how to allocate A, B, C inventory?
There is no clear ratio, everything depends on the goals and standards you set.
According to the Pareto principle, 20% of products bring 80% of revenue. The ratio of ABC’s three inventory is rough as follows:
Class A inventory—accounting for 30% and 60% of total revenue
Class B inventory—accounting for 50% and 30% of total revenue
Class C inventory—accounting for 20% and 10% of total revenue