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Strategies to Manage Inventory

The idea is to have the right inventory at the right levels to satisfy the demand from your customers, and if you tried this you know it’s never easy. Most of the times is either more than you need and it costs you money, and sometimes it happens that you have to tell your customers that you simply don’t have a particular item that you offer in your stock.

There are 4 main strategies to manage inventory:

  1. fixed quantity – fixed frequency strategy which means that you order same quantity on a scheduled basis. This might involve the minimum order imposed by the supplier to cover ordering-processing costs – an administrative cost measured in time, effort, and technology. This is the simplest strategy, other rely on reorder point logic and are based on tracking inventory and reordering when a certain level is reached.
  2. periodic review method (P system) or min-max approach is variable in terms of quantity ordered but fixed in terms of timing and implies that companies establish reorder points and tend to carry a little more inventory and risk more risk of stock-outs. Many companies today carry real time inventory monitoring to avoid having too much or too law a stock
  3. fixed-quantity strategy or Q system involves ordering in fixed quantities as needed (eg Economic order quantity – EOQ) but even this is not flexible enough when demand in quantities varies greatly.
  4.  just-in-time strategy (JIT) implies that neither the order quantity nor timing is fixed. This is commonly associated with automotive industry, and it takes a lot of focus and discipline to carry it out, but this is used by more and more companies. JIT companies resort to small order batch sizes and high frequencies and sometime use visual signals of inventory consumption and need for replenishment.

One thing to mention is that lean thinking  being focused on eliminating all forms of waste from business considers inventory one of the wastes to eliminate. Therefore the question is what strategy is the best and how to calculate optimum levels of inventory, and the truth is that the answer depends on many variable. Most of the companies have different strategies for different items in inventory.

The ABC Method – offers a system of classifying items on inventory and a way to plan inventory replenishment by categorizing items by volume of sales, margins obtained per unit and customer preferences.

  • A Items – sell in high volumes, earn high margins and are sold to the company’s best customers (new products in this category also) should always be on inventory.
  • B Items – somewhat lower priority than A items, fading in popularity, easily substituted and ordered by less important customers, should be on stock but ordering them can wait more time.
  • C items -unprofitable, costly to keep, becoming “dead stock” – this items should be quickly eliminated from inventory by any mean that is effective from an economic standpoint.

Transition between categories can be quick (eg. less than 1 year with mobiles) and this system can be detailed to even more categories to suit the need of each company, but this is still extremely complicated and the hope is on RFID (Radio frequency identification) to track inventory as it flows and simplify inventory management.

There is active RFID – a small device attached to each product (eg. transport of large items – containers, and passive RFID, or barcodes on steroids which can hold much more data and assumes that  hundreds of items scanned at every moment, but this is still expensive to implement despite firm commitment of large companies to use it on a large scale.