Inventory control is the process of managing the supply, storage, and distribution of stock. Inventory control is a key function of supply chain management. It maintains appropriate quantities of stock to meet customer demand.
The ultimate goal of your inventory control is to maximize a firm’s use of inventory. When you maintain proper inventory levels, you can be assured knowing that your capital is not unnecessarily tied up in your inventory. If you are in manufacturing, inventory control also protects production, in case there are problems of congestion in a production system.
Here are the common aims of manufacturing inventory control to keep in mind:
1. Improve the accuracy of your manufacturing and order fulfillment cycle;
2. Keep your inventory organized, using space to its full effect;
3. Cut down on waste like inventory carrying costs and transport time; and
4. Save time and money by improving organization and lowering production time.
In this post, we’ll look at 6 inventory control techniques that will show you how to control your stock levels. It will help you optimize your inventory and maximize profits.
1) Understand your demand
Demand forecasting is the primary tool for manufacturers to accurately determine the optimal supply rate and build resources accordingly. This is done in order to reduce expenses, to minimize them. It is the process of making estimations about future customer demand over a defined period.
Here are the typical inputs for demand forecasting:
- Historical sales trends: 2-5 year period is used to analyze sales activities.
- Supplier forecasts: To know supplier trends to flexibly adjust to any situation.
- Seasonal changes: There are some seasons that sales are higher, or lower than other periods in a year. Therefore manufacturers need this information to develop a suitable production plan.
- Constraints or business rules: To re-examine and re-determine the constraints that impede the manufacturing process, such as warehouse space limitation to consider what level of production is suited best.
It’s critical to invest time (and money if required) in setting up advanced inventory management models that produce accurate demand forecasts. Demand planning software provides businesses with forecasting solutions that help them prepare for future customer demand. Businesses implement demand planning tools to plan and manage future inventory and production.
2.) Know your star products!
Use ABC Inventory Analysis
This method of management divides the items into three categories A, B, and C; where A is the most important item and C the least valuable.
Items categorized under A are goods that register the highest value in terms of annual consumption. The raw material required most and cost most all year by any manufacturing firm comes in this category. Therefore, it is crucial to prioritize these items.
Items categorized under B have a medium consumption value. These amount to about 30 percent of the total inventory in a company. It accounts for about 15 to 20 percent of annual consumption value.
The items placed in category C have the lowest consumption value and account for less than 5 percent of the annual consumption value that comes from about 50 percent of the total inventory items.
The annual consumption value is calculated by the formula:
(Annual demand) × (item cost per unit)
However, this is a very simple framework and it doesn’t into account supply and demand variables. For more complex inventory classification, use inventory optimization software. It can carry out multi-level categorization easily.
3) Set stock level control policies
Inventory policies ensure you’re stocking the right goods in the right quantities. It is a must for good inventory control in the warehouse. Make sure you have a set of ‘rules’ for every SKU (Stock Keeping Units) you carry.
Inventory classification like ABC analysis will help with this. For example, you should consider setting different service levels, safety stock levels, and reordering parameters for each category.
Don’t forget to have a policy for reducing excess stock and removing obsolete items. While the excess stock has a negative impact on stock turnover and eats into working capital, if it becomes obsolete it’ll also gnaw away at your profit margins too.
Also, set useful inventory KPIs! While it might sound obvious, it’s worth reviewing your current KPIs to ensure they’re helping to add value to your operations. Ensure that they help in meeting business objectives, improving efficiency, customer service, and profitability.
4) Introduce Service level targets to optimize stock
A target service level measures the probability of having the correct quantity of an item in stock when it’s requested for delivery, leading to a completely fulfilled order.
When setting target service levels, consider your customers’ expectations in terms of availability and delivery times. For example, if a seven day lead time is acceptable to your customers, then you might be able to lower your inventory levels and rely on smaller purchase quantities, reducing tied-up capital, or you could place on-demand orders with your suppliers if they have short lead times to you.
Remember – providing higher service levels than required costs your company money. Failing to meet customer expectations, however, can lead to lost sales and a damaged reputation. So you need to find a balance!
Service levels will also influence your stock turnover rate. Aim for higher service levels on faster moving items and lower them for those with less demand. Therefore you can keep your turnover rate high and avoid tying up capital unnecessarily.
5) Carry safety stock to reduce the risk of stock-outs
Safety stock, also called buffer stock, is an extra quantity of a product that is stored in the warehouse to prevent an out-of-stock situation. It serves as insurance against fluctuations in demand and minimizes problems caused by, supply chain, or fulfillment problems. It achieves this while investing the lowest possible amount of capital in inventory.
The more accurate you can make safety stock calculations, the less likely you are to experience out-of-stocks or overstocking situations. When calculating safety stock, the most important factors to consider are:
- The desired service level
- Forecasting accuracy
- Lead time (or delivery variation)
6) Fine-tune your stock replenishment strategies
You can only optimize stock levels when you have informed inventory purchasing practices. Most businesses will reorder either when they hit a fixed date or when the stock drops to a specified level (reorder point). The amount they reorder is usually either a fixed amount or variable to meet a minimum or maximum stock capacity. However, if these methods are leading to stockouts or excess stock scenarios, you need to look for a smarter way to renew the stock. A more ‘informed’ or dynamic approach is to factor in the following variables:
- Demand forecasts
- Supplier lead times
- Cost-effective order quantities
After you have visited all the objectives above, the answer should be clear. Inventory control is the process of ensuring you get the right quantities of raw material flowing into your warehouse. When choosing an inventory solution, determine these things:
- Types of raw materials and products you work with.
- Features you need in the solution.
- Budget for possible investment.
TranZact is an affordable inventory solution that lets you track all your raw materials and products in your warehouse. It is the best choice for SMEs because of its seamless integration with Tally, Google Sheets, and dozens of other solutions. Also, it provides an enormous library of training and support resources 24*7.
Make a wise choice!