How you manage your inventory has a big impact on how you run the rest of your business. That’s why I’d like to explore four inventory control methods to help you figure out which one will work best for your business.
This is probably the simplest way to manage your inventory. Basically, you set a maximum amount and a minimum amount of inventory to keep on hand. When the inventory level reaches its minimum, you order more, though you’re careful not to exceed the maximum amount.
This system works well for many types of companies. If you’re a retailer and you sell a lot of inexpensive products, you can use the Minimum-Maximum System just as well as a manufacturer who uses a lot of small parts to build their end products. It’s also a good fit for businesses with a lot of perishable items, like food and medicine, and they want to cycle through them as quickly as possible.
The Two-Bin System has two stockpiles of products: one for normal operations and one for backup use only. Normally, you go to the primary bin to find the product you’re looking for to fill a customer order. But once that bin is empty, you use the backup bin while you wait to receive an order of more products to replenish your primary supply.
If you face supply problems or demand for your products is sporadic, the Two-Bin System may be a good inventory system for you. This may not work so well for food producers or hospitals, since you’ll basically be setting aside some products that can’t be sold until all the others are gone. That increases the risk of spoilage. However, it could be a good system for retailers, wholesalers and manufacturers of electronics, books, toys and other products that are less prone to decay.
With ABC Analysis, you divide products into three categories to make it easier to reorder them and figure out how many you need to keep on your shelves. These categories include one for small, cheap parts and products; one for somewhat larger and more costly products; and one for very large, expensive products.
Companies that sell products in a wide variety of categories and sizes should probably use this inventory control method. These include supermarkets, office supply stores, home improvement warehouses, wholesalers and more. Some of these companies have a hard time organizing such a vast array of products. ABC Analysis simplifies this process by letting you know how much leeway to give yourself for reordering certain products based on how much they cost and how difficult it is to ship and store them.
The Order-Cycling System is different than the other systems because it doesn’t rely on constant inventory updates. Instead, a warehouse manager simply looks at his inventory levels once a week or month (or whatever timeframe they wish) and decides how many products the company will need from that time to the next inventory check.
While the Order-Cycling System might seem like a good way to save time, it’s actually really risky and it could lead to product shortages or overstock if it isn’t done right. It could work for companies that specialize in big, slow-selling products, like pianos, refrigerators, caskets, etc. You probably won’t have a huge order come in every day, so you can spread out your inventory counts and focus on other parts of your business.
Implementing Your Inventory Control Method
There you go. These are some ideas of how to make these four main inventory control methods work for your company. See which one fits best with your needs and then try it out. You might even find that some of them work better at different times of year or for certain parts of your business.
If you would like to implement these methods quickly, be sure to use advanced inventory control software, like Fishbowl Inventory.