If manufacturers want to maintain the flow of their supply chains and manufacturing processes, they must precisely monitor and control inventory levels. Their objectives, the industries they engage with, and the goods they sell will all influence how they choose to manage their inventory. The following inventory control techniques help reduce waste and missed opportunities while increasing efficiency.
- Just in Time (JIT) Inventory Mangement means a manufacturer has enough stock in place to produce only what is needed to meet customer demand. This “lean” strategy reduces production and carrying costs. It also requires a manufacturer to work with reliable, responsive suppliers. The main “gotcha” with this strategy is a supply chain disruption that disrupts the flow of goods.
- First in First Out (FIFO) is a strategy in which the oldest inventory is used in production first. This method is most applicable to manufacturers of products that have a shelf life, such as batteries and medication.
- Last in First Out (LIFO is the opposite of FIFO: The last products added to a manufacturer’s inventory are the first to be used. Manufacturers choose this strategy under the premise that newer inventory costs more, especially during periods of inflation, so they can recoup their investments sooner. LIFO also offers tax benefits, due to the higher cost of goods sold, which decreases the manufacturer’s net income.
- Economic Order Quantity (EOQ) helps manufacturers determine the ideal order size for every item they buy so as not to have too much or too little on hand. This strategy — most useful for manufacturers with consistent inventory requirements — takes into account annual demand (in units), order cost (including discounts) and annual holding costs (per unit) to calculate how much inventory to order.
- Weighted Average Cost(WAC), also known as weighted average inventory costing, averages the cost of all inventory, rather than the per-unit cost. This helps the manufacturer manage and mitigate the impact of fluctuations in costs by spreading it across their entire inventory, which in turn keeps pricing stable for customers.
- Cycle Counting is used to ensure that the manufacturer’s amount of physical inventory matches its inventory records. An important part of the auditing process, this inventory management method involves counting select batches of inventory on a regular basis — even daily — and resolving discrepancies, for both accounting purposes and to investigate errors.
- ABC Inventory Analysis prioritizes inventory based on the item’s importance to the manufacturer, in terms of demand, cost and risks. Inventory in the “A” group is considered to be the most valuable so is therefore prioritized above the “B” and “C” groups when the manufacturer is deciding which items to stock, how much and when to reorder. This method is also useful for cycle counting.
- Consignment Inventory management is a strategy in which a consignor (the manufacturer) provides goods to a consignee (the customer, such as a distributor or retailer), which takes possession of the inventory, though no money changes hands at that point. The consignor continues to own the inventory until it’s sold and then gets paid by the consignee. This method reduces the manufacturer’s carrying costs, among other benefits.
- Cloud based Digital Inventory management relies on technology to support the previous strategies, by means of a centralized platform that is accessible 24/7. For example, a cloud-based digital inventory management system can automatically track inventory in real time, ensuring that manufacturers have enough stock to meet customer demand and notifying them when inventory levels have dropped below a certain threshold. The system can also calculate EOQ and WAC, forecast product demand and enhance collaboration with suppliers.