8 Best Inventory Management Techniques

Zeeshan Riaz August 12, 2022

Inventory management is the most influential part of e-commerce business strategy. After the pandemic, supply chain disruptions negatively impacted the revenues and business operations of e-commerce sellers. Solid inventory management techniques can help you eliminate supply chain management problems.

Inventory management techniques

Inventory management techniques help control and track your flow of goods from the supplier side to the customer end. However, ineffective inventory management can lead to severe problems like increased storage cost, waste of resources, supply chain disruption, customer dissatisfaction, etc.

Therefore, inventory management is an important aspect that cannot be ignored. This article will communicate the best inventory management techniques in practice.

Different Inventory Management Techniques

Multiple inventory management techniques help manage your inventory system. Let’s discuss them in detail.

ABC Analysis

Those who know about e-commerce inventory management must have heard about ABC analysis, which stands for Always Better Control analysis. It’s a vital technique used for inventory management. In this technique, the inventory products are classified into three categories: A, B, and C.

Expensive inventory items are included in the A category which can be less in numbers but high in pricing. The B category contains inexpensive items compared to the A category and is moderate in numbers. In both categories, the control level is relatively reasonable.

In the C category, the number of items is relatively high, but their prices are low, so the overall control is least in this category.

Just in Time Method (JIT)

In the JIT method, the companies only keep the amount of stock that is needed during the production process. This technique is favorable for saving storage costs and insurance expenses.

The company only orders the inventory when the available stock is close to restock. However, this method is a little risky because if the supplier delays the order of new inventory, it can halt production operations.

It requires exceptional planning and effort if you want to adapt this technique to your inventory management to save financial resources. Moreover, your relationship with suppliers should be excellent for the timely delivery of orders.

Backordering

Have you ever heard about backorder? It’s a method where the company takes orders and receives payments for items that are out of stock. It can be a dream for most sellers and a nightmare if something goes wrong with your supply chain management.

When there is only a single order for an out-of-stock item, it seems reasonable to place a new order for the item and notify your customer about its delivery when the order arrives. However, the problem arises if you get hundreds of orders for out-of-stock items.

However, enabling backorders allows you to conduct more sales, which is an attractive opportunity for most sellers. Suppose you are a small seller, then it’s not a feasible option for your business. The alternative way to cover this is by labeling the option of “Buy now” as “Pre Order. “So, the customer expects the product arrives at a specific timeframe.

The technique is helpful for businesses that want to increase their sales and minimize their inventory holding costs. However, it can sometimes prove fatal in terms of dissatisfying your customers when the delivery takes a long time to appear.

Material Requirements Planning Method (MRP)

In the MRP method the business owner orders inventory after considering the sales forecast. MRP system provides valuable data about inventory forecasting. Based on data, the business will instantly place an order to the supplier for the new inventory.

MRP method improves the need for inventory requirements to meet future demand for business goods. Without having forecast information, companies can face significant inventory problems like:

  • Placing orders of excessive inventory can increase the storage cost and minimize the profit margins.
  • Unable to meet customers’ demand results in lost sales and revenues.
  • Disrupting the overall supply chain structure that can lead to business failure.

E-commerce businesses heavily rely on MRP systems to meet the demand of existing and future customers. Therefore, it helps businesses to create a balanced supply and demand structure.

Economic Order Quantity Model (EOQ)

EOQ helps companies decide about ordering the inventory when needed at any specific time. In this method, the manager instantly orders the inventory when it needs restocking.

EOQ method is favorable for saving the ordering and carrying costs. In addition, this technique allows companies to order the right quantity of inventory when needed.

VED Analysis

VED analysis is a crucial inventory management technique that classifies inventory based on its functional status. It categorizes the inventory into three depending on its importance to the business. VED stands for Vital, Essential, and Desirable.

Vital elaborates on the necessary items for the company to process its business operations. The shortage of these items can badly impact your business revenues and operations. Hence, it’s vital to replenish such inventory.

The essential category is also somehow parallel to the vital part because they both are necessary for the proper flow of production operations. The Desirable category is of minor importance compared to the other two categories, and it can be restored after a short time interval without heavily impacting the business operations.

Minimum Safety Stocks

In this method, the organization tries to avoid stocking out. The new order is placed when the inventory is at estimated minimum levels.

For instance, if the total inventory of a company is 20 thousand units, they place a new order when inventory approaches 12 thousand. Thus, 8000 units of inventory consumption are nominated as the minimum safety stock level.

Fast, Slow- and Nonmoving Method (FSN)

Among different inventory management techniques, one is the FSN method. In this method, all the inventory items are used in different orders. As a result, some of those inventories are required often, and some aren’t required at all.

FSN method classifies inventory into three categories:

  • Fast moving inventory
  • Slow moving inventory
  • Nonmoving inventory

The required order is placed depending on the usage of inventory.

In the End

Inventory management is a fundamental part of any business. If your inventory management system is effective, you can avoid huge expenses like extra storage costs, ordering costs, etc.

These savings can be added to your profits. In addition, it improves the supply chain of your overall business. Therefore, organizations should take all the necessary steps to develop an effective supply chain management system.

FAQs

What are the 3 major inventory management techniques?

  • Just in Time Method
  • ABC analysis
  • VED analysis

What are the 4 types of inventory management?

  • Raw materials
  • Works in process
  • Maintenance, Repair, and Operations

What are the various techniques to improve inventory management?

  • Have a deep understanding of your business supply chain
  • Setting minimum stock levels
  • Getting flexible with your SKUs
  • Minimize Shrinkage

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