Warehouse inventory optimization is a concern for every warehouse. Businesses wish to achieve a perfect balance between understocking and overstocking to maximize profits without negatively impacting customer satisfaction levels.
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In this article, we will discuss the importance and benefits of warehouse inventory management and some techniques for increasing productivity.
Why is Warehouse Inventory Management Important?
Warehouse inventory management lets you maximize productivity, lower costs, and increase accuracy by handling inventory in the most efficient way. When inventory is not correctly managed, it can lead to a few things: understocking, overstocking, theft, and slow fulfillment. A well-managed warehouse inventory system can help prevent these warehouse problems and bear benefits, which we have listed below.
Benefits of Inventory Management
1. Increased Sales
Properly managed inventory can increase sales by providing accurate data. For instance, if the inventory recorded is less than the actual stock, the system will decline an order, which leads to a loss in sales. Conversely, if the inventory recorded is more than the actual stock, the system will accept an order even if the stock is insufficient. Therefore, having an accurate inventory that matches your records allows you to properly accommodate orders and increase sales.
2. Shorter Lead Times
Warehouses can decrease the time to fulfill orders by applying different inventory management strategies, such as integrating proper re-ordering plans and sales forecasting.
3. Improved Information Transparency
Managing your inventory well can help you gain visibility across your supply chain. It helps businesses know when products are received, picked, packed, shipped, etc. Additionally, it enables you to accurately determine if you are under-stocked or over-stocked.
4. Increase in Customer Loyalty
Applying inventory management practices can increase customer loyalty by fulfilling their orders accurately and efficiently. This could result in higher customer satisfaction and repeated sales.
Customer Service is what you and your organization provide. Customer Loyalty is the result of the service.
Source: Shep Hyken
5. Decreased Stock Outs
Inventory management refers to finding a balance between understocking and overstocking. If you stock too little, then you might experience stock-outs. This can be prevented by implementing inventory management techniques such as tracking low inventory levels through regular audits and setting up reorder levels. In addition, using predictive analytics could prepare you to estimate the best rate of replenishment based on previous months.
6. Lower Costs
A well-managed inventory can help a warehouse lower its inventory holding, purchasing, or processing costs. Removing obsolete inventory, setting up automatic re-orders, and avoiding excess safety stock can help decrease these costs.
Warehouse Inventory Management Techniques to Help Increase Productivity
1. ABC Analysis:
ABC analysis is an inventory categorization technique used in warehouse management. This approach is similar to the Pareto principle, which states that 80% of your inventory consumption comes from 20% of your products. It involves sorting inventory into three categories:
- Category A: Best-selling items that account for 80% of the revenue or 20% of the total inventory.
- Category B: Inter-class items that account for 15% of the revenue or 30% of the total inventory.
- Category C: Lowest consumption items that account for 5% of the revenue or 50% of the total inventory.
Advantages of the ABC Approach
- Once the stock is categorized based on demand, you can allot the time accordingly and have better control over the important items.
- Categorizing items when using the ABC analysis helps you forecast more effectively.
- Strategic pricing can be set for products based on demand in the market.
Disadvantages of the ABC Approach
- The ABC system clashes with the traditional costing systems as it does not meet the Generally Accepted Accounting Principles (GAAP) requirements.
- Categorizing the inventory based on its sales could lead to missing trends just starting out.
- The ABC analysis system requires more resources than traditional costing techniques because a constant process of data collection and measurement is needed.
2. Just-In-Time
The JIT inventory system is a warehouse inventory technique in which the items are manufactured or procured just before they are needed. This technique aligns production schedules and orders from suppliers. Warehouses utilize this technique to increase efficiency and reduce inventory holding costs and decrease wastage. JIT can be used for extremely agile businesses that are equipped to handle short production cycles.
Advantages of JIT
- Due to the faster turnaround of inventory, warehouses require less storage space.
- JIT is suitable for small companies as it requires smaller investments for the stock, which can help them maintain a healthy cash flow.
- Procuring low levels of inventory prevents goods from becoming obsolete. This helps companies save on inventory costs.
Disadvantages of JIT
- When JIT is followed, warehouses risk goods running out of stock as it relies on a consistent flow of goods at specified intervals.
- JIT is heavily dependent on suppliers, which means if they don’t deliver on time, it can hugely impact the subsequent processes.
- Since minimum stock levels are maintained, the JIT system has little room for error.
3. Economic Order Quantity
Economic Order Quantity is the ideal number of units a company should maintain to minimize inventory costs. If achieved, a warehouse can reduce inventory costs such as holding, shortage, and order costs. The EOQ system helps calculate the appropriate reorder level and optimal reorder quantity.
To calculate your EOQ, here is the formula:
EOQ = √(2DS / H)
Legend:
S: Ordering Cost
D: Annual Quantity Demanded
H: Holding Cost
Advantages of EOQ
- The EOQ model is business-specific, as it designates the most economical number of units per order for the business to re-order, and the number of orders.
- The storage and holding costs are lower for businesses, as this model helps determine the most economically profitable quantity to procure in one order.
- The negotiating capacity of businesses increases as buying a fixed amount every time can make them eligible for discounts.
Disadvantages of EOQ
- The EOQ model does not consider seasonal or economic fluctuations, as it assumes none.
- The model also assumes that consumer demand is constant throughout the year, which can lead to ordering extra inventory.
- Businesses need continuous monitoring as they need to order as soon as they reach the minimum reorder level.
4. Material Requirements Planning (MRP) Method
The MRP method is an inventory management model that estimates quantities of raw materials and schedules deliveries after considering the sales forecast. It works best for companies with mass production and long assembly lines. It will provide answers to the following questions: What is required? How much is required? And when is it required? The MRP method consists of three steps: cycle counting, identifying the items to order, and then scheduling the purchase.
Advantages of Material Requirements Planning
- Due to bulk ordering, the per-unit cost of production is reduced.
- When using the MRP approach, the amount of capital tied up in the inventory reduces considerably.
- MRP enhances tracking and forecasting as detailed data for customer trends and suppliers is extensively available.
Disadvantages of Material Requirements Planning
- The implementation time and cost for the MRP system is generally extremely long.
- It provides accurate output only when it receives error-free input.
- It does not take into account delivery problems and material shortages, which makes it a potential hazard for production slowdown.
5. Drop-Shipping
Drop-shipping is an inventory management model that allows a warehouse to sell and ship products that it doesn’t own and doesn’t stock. It is mostly used by eCommerce companies to maintain their budget. The process starts with receiving the order and forwarding it to your supplier, who then fulfills the order.
Advantages of Drop Shipping
- The start-up cost is low, as there is no investment in the stock.
- As capital isn’t blocked in inventory, it makes it easier to sell long-tail items.
- Drop-shipping can test products and provide variety without purchasing them or allotting valuable space.
Disadvantages of Drop Shipping
- The warehouse doesn’t have control over anything except your prices and the products offered.
- It does not guarantee profits as many variable costs are involved.
- Many warehouses have seen increased customer service issues as they face quality control and order fulfillment issues.
Summary
Properly managing your inventory can create multiple positive impacts on your business. Some benefits are lower costs, increased sales, and better customer satisfaction. We hope that the inventory optimization techniques we have provided can help you achieve these results and lead to a more efficient and profitable business.
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