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11 Inventory Management Best Practices Every Business Should Follow

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Effective inventory management is necessary for businesses to maintain an optimized cash flow and avoid high storage costs. It ensures that you have just the right amount of inventory on hand to meet customer demand without overspending on extra stock. 

Implementing best inventory management practices helps businesses work more efficiently, cut expenses, and generate more profits. This article sheds light upon the importance of inventory management and some top best practices to make the process smoother. 

What do you mean by best practices in inventory management?

Best inventory management practices are strategies and guidelines that let businesses manage and control materials, parts, and consumables used in their production process.  

These practices help businesses maintain optimum stock levels by simply avoiding overstocking and understocking. Having a set of best practices streamlines operations and decision-making according to industry-approved standards and guidelines.    

Best practices guide an optimized inventory management process – crucial for any business to maximize profits as the purchase, organization, and use of inventory items have a substantial effect on the bottom line. 

Top tips for effective inventory management

Here are eleven key inventory management practices that every business should adopt for streamlined operations:

1. Batch tracking

Assigning unique batch numbers or codes during the receipt of goods enables smooth tracking of inventory by specific batches and purchase orders. This identifies the date of manufacturing and expiration and facilitates targeted recalls or quality control for batches with issues. 

Batch tracking allows specific batch traceability and permits the FIFO method to be implemented. It also links inventory sub-ledgers, purchase orders, and material batches for end-to-end tracking.

2. Implement FIFO

Using oldest inventory items first, based on receipt dates, reduces losses from product expiration and obsolescence. 

This stock management tip also helps you maintain the freshness of perishable goods in inventory. Following FIFO results in the most accurate valuation of inventory for accounting purposes. FIFO should be combined with batch tracking for easy identification of receipt dates.

3. Conduct regular audits

Performing periodic wall-to-wall physical inventory counts and comparing the quantities counted to the balances in the inventory records helps identify discrepancies and variances. Regular cycle counts highlight inventory losses due to damage, expiration, theft, or errors for write-offs.

It ensures that the inventory management system reflects the actual stock available on hand. Conducting audits also provides an audit trail that helps prevent inventory misplacement.  

4. Use inventory management software

A centralized digital system to manage inventory, orders, shipments and other transactions provides real-time visibility into stock levels across the supply chain.

Inventory management software automates routine processes which minimizes errors and delays. It generates insightful reports to enable data-driven decision making around inventory. A unified system integrates accounting, sales orders, procurement and other functions for smooth information flow.

5. Do ABC analysis

ABC analysis involves classifying inventory into A, B, and C categories based on annual consumption value. Tight controls and focus needs to be applied to A-items that account for 70-80% of the total inventory value. 

B-items warrant less oversight and get medium level attention and resources. C-items require the least management attention as they make up a small portion of the total value. This targeted approach concentrates resources where they provide maximum impact.

6. Safety stock management

Determining optimal safety stock levels provides a buffer to handle uncertainties in demand as well as variability in supply delivery lead times. Historical sales patterns and demand forecasts help set up the required safety stock levels. 

The aim is to avoid stockouts but not to overstock either. Replenishment cycles can be derived from the agreed-upon or projected order frequency and lead times.

7. Manage supplier relationships

Strategically developing partnerships with reliable suppliers enables negotiating long-term contracts that provide assured supply and stable pricing. Involving suppliers early in product design as well as in inventory and production planning allows better coordination. 

Sharing demand forecasts further facilitates synchronized strategies. Inventory costs can be optimized through approaches like vendor-managed inventory.

8. Categorization of inventory

Segmenting inventory into raw materials, work-in-progress, finished goods, and returnables, allows tailored management practices to be applied that are best suited to the characteristics of each category. Efficient inventory categorization helps develop efficient operations. 

For example, finished goods may need demand forecasting and sales order tracking, while raw materials focus on replenishment times and supply lead times. With smooth categorization, you can manage office inventory efficiently as well and ensure that you have ample supplies to meet the daily office demand.  

9. Continuous process improvement

Regularly reviewing and refining inventory management processes using approaches such as the lean, and just-in-Time models and advanced automated tools helps identify problem areas. Areas of waste or non-value activity can be addressed and eliminated.

 Improving workflows, storage layouts, procedures, and key metrics boosts overall inventory performance. Small enhancements done consistently over time lead to significant efficiency gains. It also ensures inventory practices keep pace with evolving business needs.

10. Improve warehouse layout

A good warehouse layout improves inventory traceability, space utilization, order fulfillment and inventory accuracy. By designing warehouse layouts based on inventory velocity or frequency of access, material movement and picking efficiency can be improved. 

Faster-moving items should be stored nearer to shipping areas, while slower items can be in zones further away. 

Standardizing logical layouts within and across warehouses is key. Ensure inventory labels and signages are highly visible.

11. Set inventory KPIs 

Setting inventory KPIs includes defining goals to give a direction to your business activity. Some KPIs could be: maintaining a minimum stock level, having a stable inventory turnover ratio, and reducing revenue shrinkage. 

These are data-driven KPIs that help reflect and monitor the efficacy of your business operations. It helps identify metrics that are not performing well, so corrective actions can be taken. This way you can conduct a detailed analysis of your inventory trends and patterns, and generate deeper insights into inventory procurement and consumption. 

Best inventory management practices

Benefits of following best practices in inventory management

Following best practices in managing inventory is critical for several reasons:

1. Optimized inventory costs

To reduce needless carrying expenses, inventory levels must be optimized. Keeping extra inventory that isn’t used takes up working capital and increases costs associated with handling, storage, insurance, taxes, and other costs. 

By closely coordinating inventory procurement with real consumer demand, you can prevent overstocking. Businesses can reduce inventory carrying costs by as much as 20% by putting best practices into effect, claims Deloitte. 

Leveraging automation in inventory management minimizes overall inventory carrying costs. Modern cloud-based inventory management software provides businesses with real-time inventory visibility so they can keep stock quantity at optimum levels. The ability to keep stock quantity at optimal levels frees up working capital for other business purposes.

Statistics on inventory management

2. Actionable data

Inventory analysis provides valuable insights that can help fine-tune stock management approaches across procurement, production and fulfillment. Tracking key metrics helps assess inventory turnover rates, and identify slow-moving stock that needs markdowns, determine optimal reorder points and order quantities, etc. 

Adopting best practices allows data-driven decisions to continuously improve inventory operations. Real-time inventory tracking through modern technology solutions further enables informed data-based management.

3. Improved customer service

Proper demand forecasting combined with optimum safety stock levels guarantees that there is enough inventory on hand to fulfill client orders and reduce backorders. When orders cannot be completed promptly, stockouts resulting from low inventory lead to lost sales opportunities and unhappy customers. 

Carrying appropriate levels of inventory provides the ability for quick production  fulfillment and enhances customer satisfaction and loyalty. 

4. Increased efficiency

Implementing standardized processes like batch tracking, unique SKU numbers, and automatic identification and data capture streamline warehouse workflows and inventory management operations. 

Automation and optimized warehouse layouts drastically reduce the time staff spends on routine inventory maintenance, counting, and picking activities. Workers freed from repetitive manual tasks can focus their time and energy on value-adding activity. 

5. Easy identification of gaps and improvement areas

Performance metrics generated from automated inventory management software highlight specific processes that may need enhancement or refinement. Detailed data analysis aids fact-based review of current practices across the inventory lifecycle to discover issues, gaps and opportunities for improvement. 

Management can then use actionable insights to take timely corrective actions whenever needed. Continual assessment and enhancement of inventory management practices enables sustaining optimal performance over time.

Benefits of effective inventory management

Increased efficiency with strategic inventory management 

In a nutshell, implementing inventory management best practices is vital for efficient business operations, optimal use of resources, and boosting profits. It helps implement robust processes and develop a higher inventory control

The best practices for inventory management covered in the article provide a solid foundation for assessing and improving current inventory management approaches. While specific techniques may vary, adhering to these core principles enables smooth inventory operations.

Frequently Asked Questions

1. Why is real-time inventory tracking important? 

Real-time inventory tracking is important because it offers up-to-date visibility into stock levels throughout the inventory lifecycle  This enables informed decision-making to avoid stockouts or excess inventory. Real-time data allows dynamic adjustments to purchasing, production, and fulfillment. It also improves customer service with inventory accuracy and order status visibility.

2. What are the benefits of accurate forecasting in inventory management?

Effective inventory management requires accurate demand forecasting. With the aid of modern inventory management tools, accurate projections of expected sales allow inventory policies to be better aligned with demand predictions. 

Quality demand projections enable companies to precisely size and control inventories to optimize revenue. They also provide critical data to increase efficiency in planning and inventory control.

3. Which is the best inventory management tool? 

EZOfficeInventory is a cloud-based inventory management software, designed to serve businesses of all sizes. With the support for multiple warehouses, barcode scanning, inventory forecasting tools, purchase order automation, mobile access, and reasonable pricing plans, EZOfficeInventory is one of the top inventory optimization tools out there.

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