Popular Techniques for Inventory Management

  September 24, 2018
Popular Techniques for Inventory Management

What are some of the more popular inventory management techniques used in the Philippines?

  1. ABC Analysis
  2. Just in Time (JIT)
  3. First-In-First-Out (FIFO)
  4. Economic Order Quantity

 

No successful company has probably ever disregarded inventory management. In the Philippines, most, if not all the businesses that rely on goods have their own inventory management system. It is something that cannot be absent in a modern business.

Inventory management is the act of managing your products that are for sale and products that are in storage. It includes all the processes between you, buying or manufacturing the product, putting it in storage, and then selling it. Every business that deals with any kind of physical selling undergo their own style of inventory management.
With that being said, inventory management is not a miracle process that is applicable to all companies. They may have their own or preferred style of managing their inventory, but it will all boil down to certain tried-and-tested techniques.

Over the years many inventory management techniques have come and gone. Some have become irrelevant, while others have improved and continue to be necessary to the commercial industry. Remember that your inventory is linked to your cash flow, so it would be best for you to think of inventory management as a means to save a lot of money for your company. In that regard—here are some of the most popular techniques for inventory management!

 

ABC Analysis

This inventory management technique divides your on-hand inventory into three categories. The items are classified based on the annual consumption, inventory value, and significance of cost that are placed on them. There are three classifications used in the ABC Analysis:

  • Class A items have high value (70%) yet are small in numbers (10%)
  • Class B items have moderate value (20%) and are moderate in numbers (20%)
  • Class C items have a small value (10%) yet have high numbers (70%)

These are the typical percentages used in each category, but it usually changes based on a company’s discretion.
Not every category needs the same amount of attention and effort. Prioritization is what makes the ABC Analysis a good technique—selective control and allocation of funds and human resources are very evident here.

 

Just in Time (JIT)

Just in Time (JIT)

This technique aims to reduce the volume of inventory that is on hand by pushing time and scheduling to the limits. This is a relatively risky technique because you allot very little time between the purchase of your inventory and the day it is needed for distribution or sale. It basically means you’ll get your inventory “just in time” for your next sales effort.

The good thing about JIT is that it helps organizations save a lot on inventory holding costs by keeping stocks levels relatively low. This removes the possibility of having deadstock sitting on shelves for a very long time.
To pull this off, however, you need to have a good understanding of customer buying habits, seasonal demand, and a very reliable supplier. It won’t guarantee flawless operations, but it would definitely reduce risks and mistakes.

 

First-In-First-Out (FIFO)

More of a principle than a technique, FIFO basically states that your oldest stock is the first one that gets sold. This is the technique that most food outlets use simply because food is a perishable product—any company with their right mind doesn’t want to sell spoilt food anyway.

To manage FIFO, you need to pay close attention to the packaging and the date of expiration of products in your storehouses. You always need to put the newer products in the back to prevent any one of them from wearing out. When a perishable good gets worn out, it would simply become obsolete — a complete waste of money and investment.

 

Economic Order Quantity

Economic Order Quantity

This is the least amount of inventory that you must have in order to meet peak customer demands without going out of stock or the possibility of getting obsolete inventory.

This technique keeps inventory as low as possible by simply reducing the inventory present. Although relatively similar to the JIT technique, this one has a formula in order to be calculated.

This technique makes use of three variables: demand, relevant ordering cost, and relevant carrying cost.

  • Demand pertains to the demand in units for the product for a specific time period.
  • Relevant ordering cost is to the ordering cost per purchase order; and
  • Relevant carrying cost pertains to the carrying cost for only 1 unit. Assuming that the unit is in stock for the time period used for the demand.

The ordering cost is calculated per order and the carrying costs are calculated per unit.

Below is the formula for the economic order quantity:

EOC = Sq. root of [(2 x demand x ordering costs) / carrying costs]

Unlike the JIT technique that relies on reliable suppliers and in-depth research on the target market which is usually prone to changes, the EOC technique uses relevant forecasted data which already ups its chances. This doesn’t mean that any one of them is better than the other, however, different people will probably have different opinions on the two.

 

Key Takeaway

Inventory management in the Philippines is a hot topic nowadays! With more and more shopping malls, and stores popping out and the demand for certain products skyrocketing, effective inventory management techniques will help businesses survive and push through the years!

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