Inventory control techniques to help optimise your inventory management.
There are numerous blog posts on inventory control that cover organising warehouses, tracking goods and picking and shipping efficiently. So we wanted to focus on the best inventory control techniques to help you manage your stock well and ensure stock availability. Effective inventory control techniques are at the heart of efficient supply chains, ensuring that products are in the right place at the right time to meet demand.
What is inventory control?
Inventory control is the process of managing and controlling the procurement, storage and distribution of inventory. Inventory control is a key function of supply chain management, ensuring that inventory is available in adequate quantities to meet customer demand.
What is inventory optimisation?
The goal of inventory optimisation is to have the right products in the right place at the right time – and to do so as efficiently and cost-effectively as possible. Inventory optimisation plays a key role in leveraging inventory control techniques.
The trick is to ensure stock availability while reducing inventory costs and minimising the risk of overstocking. This is done by forecasting demand and managing replenishment parameters while dynamically adjusting inventory policies.
We all know that inventory takes up valuable warehouse space and ties up capital. That’s why it’s important to invest money in products that sell so you can optimise inventory turnover and warehouse space.
6 Inventory Control Techniques to Optimise Your Inventory Management
- Understand your demand
Our first inventory control technique is about demand forecasting. The wrench to controlling your stock levels is knowing what products need to be in stock to meet demand. It is critical to invest time (and capital if necessary) in implementing advanced inventory forecasting models that produce accurate demand forecasts. It is not enough to look at last year’s sales figures and expect them to follow the same pattern this year! Effective forecasting should take into account the following:
Product life cycle:
Each item in your warehouse is at a certain stage of its product life cycle. Each life cycle stage affects the demand pattern of the item and therefore needs to be taken into account when calculating forecasts.
Identify any products in your portfolio that have seasonal variations in demand. It has proven useful to separate the seasonal demand factors from the base demand calculations. This keeps the data clean and makes it easier to use for future forecasting.
Product demand is influenced by fashion, technology, social, economic and legal factors. Look for such trends in your historical demand data and adjust your forecasts accordingly.
Add any qualitative forecasting factors to your data, such as promotional activities, competitor activity or external market events.
- Know your top products!
ABC inventory analysis is a good technique to segment your inventory by the value it has to the business. Each item in your warehouse has a different value in terms of how much it brings to the business. There are many ways to define ‘value’, such as by turnover, profitability, sales volume or annual consumption value. Decide on a method that suits your business. Then divide your inventory into categories A, B and C. A represents those items that are critical to the success of your business and C represents those that are least important.
ABC classification is a simple way to identify your most important products so you can focus your time on inventory control and management. It also allows you to set more targeted parameters for inventory control (see next point!).
However, this is a very simplified framework that does not take into account the variables of supply and demand. For more complex inventory classification, you should use inventory optimisation software that performs multi-dimensional item categorisation. Segmenting SKUs based on their demand, inventory turnover and profitability will give you much better insight into how to control your inventory levels.
- set inventory policies
Stock guidelines ensure that you have the right goods in stock in the right quantities – a must for good stock control in the warehouse. Make sure you have a set of “rules” for each SKU you carry. Inventory classification, such as ABC analysis, will help you with this. For example, you should set different service levels, safety stock levels and reorder parameters for each category.
Don’t forget to develop a strategy to reduce excess inventory and eliminate obsolete items. Excess inventory has a negative impact on inventory turnover and eats into working capital, but if it’s obsolete, moreover, it also gnaws away at your profits!
We’ve only mentioned six points in this post, so here’s point 3.2 – set useful stock KPIs! This may sound obvious, but it’s worth reviewing your current KPIs to ensure they are helping to achieve your business goals and improve efficiency, customer service and profitability.
- Introduce service level targets to optimise inventory.
A target service level measures the likelihood that the right quantity of an item will be in stock when demand arises, which then leads to a fully fulfilled order.
When setting service level targets, consider your customers’ expectations for availability and lead times. For example, if a lead time of seven days is acceptable to your customers, you may be able to reduce your stock levels and rely on smaller order quantities to reduce capital commitment, or you could place orders on call with your suppliers if they have short lead times.
Remember: providing a higher level of service than necessary costs your business money. However, if customers’ expectations are not met, this can lead to lost sales and a bad reputation. So you need to find a balance!
Service level also affects the turnover rate of your stock: Aim for higher service levels on fast-moving items and lower them on lower-demand items to keep turnover rates high and avoid tying up capital unnecessarily.
- fine-tune your stock replenishment strategies
You can only optimise stock levels if you have sound purchasing practices.
Most companies either order on a fixed date or when stock falls to a certain level – the defined reorder level. The quantity that is reordered is usually either a fixed amount or variable to achieve a minimum or maximum storage capacity. Many ERP and WMS systems use one of these approaches. However, if these methods result in out-of-stock or overstock scenarios, you need to look for a smarter approach to replenishment. A more informed or dynamic approach is to consider the following variables:
Supplier lead times
Cost-effective order quantities
- maintain safety stock to reduce the risk of shortages.
Safety stock, also called buffer stock, is the stock held to prevent shortfalls and back orders when forecasts fall short or delivery is delayed. Safety stock minimises disruptions caused by interruptions in demand, supply chain or order fulfilment, while investing as little capital as possible in inventory.
Many companies (WMS and ERP systems) still use a simple days-in-stock model to calculate safety stock, i.e. they calculate the number of days (or weeks) of demand and add sufficient buffer stock to compensate for any discrepancies – for example, 4 weeks of cycle stock and 2 weeks of safety stock.
But this one-size-fits-all approach assumes that all items in the warehouse have similar demand patterns and behave in the same way. As we have already discussed, this is certainly not the case. The more accurately you can calculate safety stock, the less likely it is that there will be shortages or overstocks. The most important factors to consider when calculating safety stock are:
The target service level
Supplier lead time
It is time to review your inventory control methods
It is impossible to optimise your stock levels without considering the parameters of supply and demand. Effective inventory control techniques therefore rely on inventory optimisation strategies.
Many companies use standard ERP or WMS systems to perform their inventory control, while others still rely on spreadsheets. However, both approaches have their limitations in terms of functionality. More and more companies are therefore turning to inventory optimisation software to automate their processes and increase efficiency. Inventory optimisation tools use advanced algorithms that are simply not available elsewhere to make inventory management calculations more accurate and faster.
This may sound costly, and it’s true that enterprise-level inventory management software is prohibitively expensive for many smaller businesses. However, EazyStock is a best-in-class solution – evolved from a leading enterprise inventory management solution (Syncron), but now designed specifically for businesses of all sizes. It is affordable yet offers sophisticated, dynamic functionality.