Inventory Management Techniques in Operations Management

Inventory Management Techniques to Streamline Your Operations

Various inventory management techniques in operations management are available to you. The different techniques, tools and methods vary in complexity, time commitment and accuracy. Many of these strategies can help you optimize your stock levels and reordering schedules based on mathematical formulas. With so many possible approaches to improve stock management, every company that manages inventory must find the right blend of strategies and methods that work best for their particular industry, company size and unique way of doing business.

For example, third-party logistics providers (3PLs) may have more need for warehouse and inventory handling methods since they manage inventory across many locations for many clients. Meanwhile, businesses in the health and beauty market or the food and beverages industry may need to track their inventory by expiration date. Therefore, they need to prioritize strategies to move their inventory quickly. Consumer electronics brands, with their complex manufacturing and assembly procedures, require a method for tracking raw materials, works in process and finished goods.

These factors can contribute to very different methods for managing inventory — each one specialized to the particular business.

The Need to Be Strategic With Inventory Management Techniques

Inventory management is a precise discipline that relies on keeping just enough inventory to cover demand without holding so much that it unnecessarily increases costs. You must balance the risk of overstocking against the risk of understocking. Also, consider the cost of shipping items from your supplier versus the costs of holding them in your inventory. To manage inventory effectively, you need good data to forecast demand and a reliable system for prioritizing how you divide your time and resources when applying your inventory control and handling methods.

Some of the benefits of strategic inventory management include:

• Better warehouse organization: Good warehouse and stock handling techniques lead to a more organized warehouse. For example, by preventing overstocking, you’ll have more room to dedicate to your highest priority stock. Better warehouse organization contributes to better inventory management, too. When the warehouse is organized, you’ll keep better track of your stock and be less likely to lose or damage products.
• Saved time and money: The right inventory management strategies, especially paired with tools like inventory control software, save you time and money. You’ll spend less time counting physical stock, tracking down inventory discrepancies and working through preventable challenges.
• Improved customer satisfaction: Having stock when customers want to make a purchase is good for the customer experience. It also prevents you from having to cancel customer orders or place shoppers on waitlists. Adequate stock levels and an efficient inventory handling method also help you meet customers’ expectations for faster shipping.

What Are the Inventory Management Techniques You’ll Learn About?

This guide will provide an in-depth overview of the various methods of inventory control, such as:

• Setting safety stock levels and reorder points.
• Managing relationships with key vendors.
• Planning for contingencies and stock challenges.
• Auditing your stock regularly.
• Using ABC analysis to prioritize stock.
• Forecasting and planning for future demand.
• Managing inventory accounting with the average costing method.
• Reordering stock just in time.
• Managing raw materials and finished product inventory with material requirements planning.
• Calculating optimal stock quantities using the economic order quantity formula.
• Analyzing and prioritizing stock using fast, slow and nonmoving inventory analysis.

We’ll explain these techniques and show you how to implement them in your own inventory management operations. Through this guide, you’ll gain a wealth of resources for how to improve your inventory management system. If you’re looking for a flexible, customizable software solution that can help you manage your inventory more effectively with some of these methods, contact the Finale Inventory team or get started with your free trial today.

Chapter 1: Safety Stock, Par Levels and Reorder Points

Calculating your safety stock and par levels or reorder points are crucial inventory stocking methods. According to a study by Harvard Business Review, a staggering 72% of stockouts in retail stores result from issues with reordering and replenishment. Let’s discuss the mathematical formulas for safety stock, par levels and reorder points to ensure you always have enough supply to meet your regular demand.

What Is Safety Stock?

Safety stock goes by many other names, including buffer stock or “just in case” inventory. Safety stock is a special type of inventory to help a business mitigate the risk of stockouts. It is extra merchandise in addition to what you plan on selling in a given period. Safety stock also helps cover your business if there’s a sudden increase in demand. By tracking your sales velocity in real-time and using accurate forecasting, unexpected increases in demand place less of a burden on your inventory.

What Is a Par Level?

Par level is a similar concept. It represents the minimum amount of inventory you should have on hand to meet your expected demand between replenishments. Your par level is like a soft floor before your quantity reaches zero. When your inventory levels dip below par levels, it is time to reorder. Reordering at the par level gives you enough time to receive and process new orders from your supplier before your current stock runs out.

What Is a Reorder Point?

While a par level focuses just on the quantity of stock in the warehouse, a reorder point introduces some additional factors. A simple reorder point setting allows you to set minimum and maximum thresholds for your stock. Taking all these variables into account, your reorder point calculation will give you an exact date and quantity to reorder.

How Do You Set Safety Stock and Par Levels?

Determining an appropriate level of safety stock for each of your products takes some thought. You’ll first want to consider how often you want your regular inventory to last and how much you typically sell per day in that time frame, along with typical supplier delays. To calculate your safety stock, use the following steps:

• Multiply your maximum daily unit sales by your maximum lead time, in days.
• Multiply your average daily unit sales by your average lead time, in days.
• Subtract your average from your maximum.

The basic safety stock formula is (maximum daily sales X maximum lead time) – (average daily sales X average lead time) = safety stock quantity.

How Do You Calculate Reorder Points?

To calculate your reorder point for a given product, multiply your average daily unit sales by your average lead time and add safety stock. Keep in mind that the lead time should be the length of time from when you reorder to when items become available for you to send to customers. Use the following formula to calculate the reorder point:

• Reorder point = (average daily unit sales X average lead time) + safety stock

Reorder Point and Safety Stock Example

Let’s say you sell an average of 30 bottles of sunscreen every day. One time, you sold 75 in a single day. When you reorder from your supplier, it typically takes 5 days to receive and process the delivery. Let’s insert these numbers into the basic safety stock formula:

• (75 X 15) – (30 X 5) = 675

So, your business needs to keep 675 bottles of sunscreen on hand as buffer inventory.

How Finale Inventory Leverages Reorder Points to Manage Your Safety Stock

Your reorder points and safety stock levels probably require frequent adjustments. Finale Inventory tracks your sales velocity in real-time and factors your current sales trajectories into a dynamic reorder point calculation. Our software also monitors your inventory levels in real-time, making it one of the best inventory tracking methods available.