You may think that managing inventory is an easy job. But, as your manufacturing business continues to flourish and the demand for your products skyrockets, you will find yourself dealing with difficulties.
Inefficiencies and inaccuracies in inventory management aren’t just harmful for your manufacturing business, but can also affect your entire business process and ultimately lead to customer dissatisfaction.
Manufacturers can avoid those problems by implementing these proven inventory management strategies.
1. Set up Minimum Inventory levels
Make inventory management easier by setting up “par levels” or the minimum amount of inventory necessary to be on hand at all times. When certain items reach or approach predetermined minimum levels, you know it’s time to reorder.
Ideally, you will order items in a sufficient amount to exceed the minimum levels. The minimum inventory levels will vary by product, depending on how quickly the product sells and how long it takes to get the product.
The best way to maintain inventory levels is to take advantage of inventory management software that enables you to set up minimum inventory levels and turn on alerts that notify you whenever your supplies are running low.
2. Conduct Demand Forecasting
In order to find out the amount of inventory that should be on hand at all times, avoid unnecessary procurement, overstock and stockouts, you need to forecast the demand for your products.
This can be done in several ways by involving internal and external factors such as:
- Market trends
- Sales data of the previous year
- This year’s growth rate
- Overall economic conditions
- Upcoming promotions
- Expenditures for planned advertisements
When you use historical sales data, it is important to make sure that the data generated is complete and accurate, so there are no mistakes while performing forecasting. A sophisticated inventory management system has a forecasting feature that allows you to generate forecasts that help you make the right decision for future purchases
Read the related article: Manufacturing Tips: How to Optimize Your Production Planning
3. Use FIFO Method
First-in, first-out (FIFO) is a critical principle of inventory management. It means that your oldest stock (first-in) must be sold first (first-out), instead of your latest stock. This is especially important for easily damaged goods so you will not end up with unsaleable items.
The FIFO principle can also be implemented on non-perishable products. If the same items are always put at the back, they tend to get obsolete faster. You certainly don’t want to sell something that’s outdated or not worth selling.
To apply the FIFO principle, you need a well-organized warehouse. This can be realized by adding new products from the back, or making sure your old products stay at the front.
4. Audit & Conduct Regular Inventory Inspections
Reviewing and conducting regular inventory audits is the best way to find potential problems before they occur. Ideally, this is done every month to cover your entire base.
The easiest way to validate your data is to rely on inventory management software and generate reports to find out how many products you actually have. However, it is important to ensure that the quantities recorded by the system matches the physical count of goods on hand.
There are several inventory audit methods you can use:
Physical inventory means counting all your inventory at once. Many businesses do this at the end of the year because they are related to accounting and filing income tax.
Physical inventory can be very disruptive to business processes even though it is usually done once a year, so it is considered to be less efficient compared to other methods. If you find a discrepancy, it may be difficult to identify the issue, since you have to look back at an entire year.
If you do a full physical inventory at the end of the year and you often experience problems, or you have too many products, you might want to start spot checking throughout the year. This means choosing a product, calculating it, and comparing the number calculated to what it’s supposed to be. This does not need to be done on a schedule and is supplemental to physical inventory.
Instead of doing a complete physical inventory, some businesses perform cycle counting to audit their inventory. Rather than doing a full count at the end of the year, you can conduct cycle counting to reconcile the number of products listed on the system and the actual number of products throughout the year.
Cycle counting can be done whenever needed; every day, week, or month. Different products are checked in turns according to the specified schedule. There are various methods of determining the number of times a product has to be counted, however, higher value products are usually counted more frequently.
5. Use ABC Analysis
Some products need more attention than others. Use ABC analysis to prioritize your inventory management. Separate products that require a lot of attention from those that don’t. Do this by reviewing your product list and adding each product to one of the following three categories:
A – high-value products with low sales frequency
B – moderate value products with moderate sales frequency
C – low-value products with high sales frequency
Products in category A need more attention because the financial impact is significant, but the sales are unpredictable. Products in category C require less supervision because they have a smaller financial impact and they are constantly turning over. Products in category B fall somewhere in between.
6. Manage Good Relationships with Suppliers
Establishing good relationships with suppliers is a great way to keep your inventory under control. This way, your suppliers will be more willing to work with you to solve any problems related to your inventory management.
Having good relationships with your suppliers will be very helpful. Minimum order quantities can often be negotiated. Don’t be afraid to ask for a lower minimum so you don’t have to keep as much inventory. Find out how to negotiate with suppliers here.
A good relationship is not just about being friendly. It’s also about good communication. Let your suppliers know when you’re expecting an increase in sales so they can adjust the supplies to your production planning. Ask them to tell you when there are certain products that they cannot deliver quickly, so that you can delay the production and promotion time for the product.