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Inventory Management: Inventory Management Techniques

November 19, 2020

To many business owners, inventory management can seem like a complicated and tedious task. But it doesn't have to be!

There are many options for managing your inventory to limit costs and maximize profits. All you need are the know-how and tools to get the job done.

From product kitting and bulk shipping to inventory analysis methods, we've compiled the best inventory management techniques you can use to lower costs and increase profits. We'll start with some warehouse and shipping models and end with some analyses and measurements that can give you insight into your inventory.

Product Kitting Inventory Model

Product kitting is an inventory management technique where individual, but related, products are assembled and put into a single package for shipment. Kitting can save a company time and money while streamlining their warehouse and shipping operations.

It is particularly popular with businesses like furniture manufacturers and large ecommerce sites like Amazon. It is also used by subscription box services where underperforming products are bundled together based on a theme.

Who Should Use It?

Kitting is used by a broad range of businesses throughout the entire supply chain. Manufacturers use it to organize and assemble parts and reduce costs, streamline shipping, and track their inventory. Warehouses use this model to lower overhead and make better use of their limited storage space. Customer-facing retail businesses use it to bundle SKUs that they have an excess of or aren't selling as much as forecasted.

Ecommerce fulfillment companies are the biggest proponents of the model. These third-party companies gather multiple goods ordered by a customer and combine them into as few shipments as possible. This lowers fulfillment and shipments costs and gets products in the customers' hands as quickly as possible.

How to Use It

Product kitting is best implemented, tracked, and controlled by the use of a specialized program or service. These programs can track individual SKUs as well as create and track new SKUs for kits. They also monitor inventory levels and calculate the number of kits that can be assembled with the parts on-hand. Optimizing workflows and the usage of warehouse space are all made simple with digital applications.

There are many options for kitting software on the market, so you can easily find one that works for your business.

Bulk Shipping Inventory Model

Bulk shipping is a form of mass shipping where large quantities of goods are transported via shipping vessels. It’s responsible for the movement of millions of goods around the world every day.

What Kind of Goods Can I Ship?

Bulk shipping can be used for nearly any type of good with a decent shelf life. Manufacturers in particular can benefit greatly from the use of this shipping method to move raw materials and finished goods.

Bulk shipping goods are classified as either dry or liquid bulk goods. Dry goods are shipped in large, corrugated steel containers and include items like electronics, plastics and minerals, and finished goods like automobiles. Liquid goods are piped into specialized tanks and vats in a ship's hold and include anything from liquid chemicals to milk.

The Costs and Benefits

Bulk shipping rates are standardized across the industry with minor variations based on the shipping company used. Weight, density, freight class, and shipping distance all affect the rate you pay for shipping. Current shipping rates are tracked online, so you can stay up-to-date on any fluctuations in the market.

How to Use It

There are many options when seeking to use bulk shipping. You can ship with a small private company, a large conglomerate, or a federally-owned shipper. Find the company that offers the best rates, shipping destinations, and additional services for your company. There's no one-size-fits-all option.

Dropshipping Inventory Model

Dropshipping is an inventory management technique where the goods you sell are shipped directly from the supplier to your consumer. Unlike the standard inventory model, you never come in contact with these items or stock them in your warehouse. This technique eliminates costs associated with inventory purchasing, storage, and warehouse staff salaries.

How to Dropship

The most important part of dropshipping is to partner with a reputable supplier. Stick to one that has all the goods you need and can handle large orders quickly. This will limit the chances that you will leave your customers waiting for too long if they place an order.

How Does the Model Work?

The dropshipping business model works by partnering with a supplier to fulfill orders you take through your storefront. This model can cover your entire store's offerings or only some of your product selection. The suppliers have their own warehouses built specifically for packing and shipping these orders, so the retailer only handles the marketing and sales portion.

It’s Very Common

Dropshipping is used by a wide variety of businesses across many industries. Most of the large online ecommerce sites, many large brick-and-mortar businesses, and entrepreneurs use it to lower their inventory costs. In fact, profits in the industry are routinely in the billions. The growth of ecommerce is directly tied to the growth of dropshipping.

What About Cross Docking?

Cross docking is similar to dropshipping, but there are differences. It involves supplies that are shipped to your warehouse, sorted, then put onto trucks for shipping to their final destination. This minimizes the time they spent in the retailer's warehouse and saves money.

It is also more popular because the retailers can inspect and handle the goods before delivering them to the customer, adding a layer of quality control. However, it is more expensive than dropshipping and requires at least some warehouse space and staff.

Just in Time Inventory Model

Just in time inventory is an inventory method where stock arrives in your inventory only as you need it for production or sales. Standing stock is intentionally kept low. Instead, you have a much smaller rotating stock and the inventory cycle is minimal. Stock is ordered to be used immediately upon arrival and spends as little time as possible on your premises.

Origin of JIT

Just in time inventory has been around in some capacity since the 1960s. However, the major proponent that made it popular was the Toyota Motor Corporation. Toyota used JIT to cut costs in their warehouses greatly and streamlined the workflow skyrocketing them to become a leader in the auto industry. To this day, many automobile manufacturers use this model.

How JIT Works

Just in time inventory management is built around agile ordering and manufacturing. It requires planning and forethought to avoid supply shortages if demand increases.

Here are the main components of a just in time inventory model:

  • Small batches of goods delivered more often. Items are received from the supplier daily or even hourly to ensure production continues at a regular pace.
  • Flexible worker roles and production areas. Employees are cross-trained to limit their downtime and keep staff costs low. To make this possible, production areas are also utilized for multiple processes.
  • Quick shipping upon completion of goods. Products are shipped out as quickly as they are brought in, minimizing the warehouse space needed for storing goods.

JIT Inventory Management Benefits

Just in time inventory management can offer many benefits to a business. Production runs are very short since storage space is limited. This means you can focus on only your best products and avoid any losses if demand suddenly shifts.

Warehouse spaces don't need to be large or contain multiple rooms. All inventory moves through quickly and workers can use the same space for multiple steps in the production process. Material costs are also minimal since excess items are never ordered and very little is wasted.

Consignment Inventory Model

Consignment is an inventory model where a retailer (consignee) sells products on behalf of a supplier (consignor). Consignment requires a contract between the consignee and consignor outlining the rights and responsibilities of both parties.

The supplier in this model maintains ownership of the products until they are sold. Upon sale, the retailer pays the supplier for the item and keeps the additional profit. This model allows retailers to sell a wide range of products without taking on any excess costs related to inventory management.

How Does It Work?

Consigned inventory is stored in special warehouses owned by the supplier. These consignment warehouses are built on or near the retailer's property. This allows the retailer to quickly and easily access the goods without taking up space in their own warehouse.

These goods are always considered the property of the supplier and appears on all their inventory and accounting documents. The retailer never accounts for these items until they are sold. At this point, money is received by the retailer, and they pay the supplier.

Inventory Benefits

Consignment inventory offers many benefits to both the retailers and suppliers. First, the relationship between the two parties is much stronger than in other inventory methods. Both businesses have to work in sync to sell the product and neither gets paid unless there is a sale to a customer. It also minimizes certain costs on both sides.

Retailers minimize their inventory costs since they are not responsible for the warehouses nor any waste or shrinkage. Suppliers save money on unsold goods since they keep an eye on all sales trends and can react quickly to resupply the retailers.

Consignment or Vendor Managed Inventory

Vendor managed inventory (VMI) is a similar inventory management relationship between a retailer and supplier but doesn't offer the same benefits.

In a VMI relationship, the supplier controls the flow of goods and warehouse operations for the retailer, but they do not own the product. This means the retailer has to pay for the goods up front, but does not have control over the good at any point. If you're looking to avoid the high costs associated with buying stock, consignment is a better choice.

Backordering

Backordering is when a customer places an order for a good, material, or service that can't be filled at the time of purchase. Backorders are a very common occurrence in the world of inventory management.

They can be either intentionally or unintentionally on the part of the retailer. These goods are not on-hand at the time of sale, but are expected to arrive at some point in the future.

How Long Does It Last?

The length of time items are on backorder depends on many factors including changes in demand or supply and problems with manufacturing or shipping.

This means the orders could be processed anywhere between a week from ordering and a few months. If done intentionally, most will be fulfilled within a month from the date of purchase.

There is also the chance that a customer's order is only partially on backorder. In this case you can fulfill it as the goods come in or hold all items until the final product arrives. Both are viable options and can keep a customer happy.

Backordered Item Benefits

When done intentionally, backordered items have many benefits to a business. These items can help a business grow sales and satisfy customer needs.

These items are often of a higher value to a business than in-stock items. Scarcity affects product value and a business can make many sales for a good that is not in stock if the demand is high enough.

Backordering also cuts storage costs since the goods sold aren't in storage at all. They'll also immediately be sent to the customer upon arrival. Lastly, the sale of these goods provides data on customer purchasing trends. This lets a business pivot their focus to products that are of a higher value. Proper usage of this technique can be done easily using the BlueCart Digital Storefront.

Avoid Unplanned Backorders

Backordering that isn't done intentionally is a signal that a business has done something wrong and comes with drawbacks. Customers can get upset if items aren't available in a timely manner and it can impact sales of other goods.

To avoid this, focus on demand forecasting and safety stock. Demanding forecasting is taking data on sales trends and ordering products specifically to meet projected demand. Safety stock is additional goods purchased and stored in the warehouse in case demand surges.

Cycle Inventory

Cycle inventory, or cycle stock inventory, is the part of a retailer's inventory that they work through to fulfill regular orders. This is a part of a business's standing inventory and is used and replaced on a regular basis.

Cycle inventory management can make or break warehouse operations. If inventory comes in or goes out at an unacceptable pace, operations can become stalled or overwhelmed. This means sales are missed and revenue takes a direct hit.

Inventory Cycle Time

Inventory cycle time is how quickly you have to replace, or turn over, your inventory. For retailers, this is the amount of time it takes between when the goods arrive and you sell them. For manufacturers, it is the length of time from the start of production to finalization.

This measurement determines how often reorders should happen and is directly impacted by shifts in demand and consumer behaviors.

Inventory Cycle Count

Inventory cycle count is a type of inventory auditing where a sample of products are counted and checked against the full inventory count.

Cycle counting is used on goods that have a high turnover rate or are of high value. This is done to ensure inventory records are accurate and to catch any discrepancies as soon as possible. It is a useful alternative to physical inventory counting for many reasons.

First, it takes far fewer hours and resources than inventorying your entire warehouse. This saves money and lets you focus on making sales.

Second, it prevents large variances since you're getting new inventory counts regularly rather than waiting upwards of two to four weeks. Lastly, it allows businesses to remain open while doing inventory counts.

Physical counts take so many resources that all other operations cease, but cycle counting can be done quickly and efficiently.

ABC Inventory Analysis

ABC inventory analysis is an inventory management tool where products are grouped by their dollar value and importance to the business. ABC inventory analysis is easy to do if inventory is taken consistently and provides insight into sales trends and product worth.

Like cycle counting, ABC analysis gives business owners insight into inventory value and sales. It also highlights areas where too little or too much time is being spent.

How This Analysis Works

ABC inventory analysis requires three steps. First, calculating the value of each good you sell then compiling that data to discover your total inventory value. Then, you find the percentage of that total value that each item is worth. Lastly, you use the Pareto principle to establish buckets. This states that 80% of inventory cost comes from just 20% of inventory.

You can categorize use as many buckets as you'd like, but we recommend sticking to A, B, and C. The 'A' bucket will hold the items with the most value and accounts for about 80% of sales. The 'B' bucket will consist of medium-value items that equal 15% of your sales. Lastly, the 'C' bucket will hold the majority of your goods which only contribute 5% to your total sales volume.

Why to Do It

ABC analysis is used by businesses across all industries from retailers to wholesalers to manufacturers. Data gathered in the process provides insight into inventory value. It also lets you direct the majority of your focus on inventory items with high inventory cost.

These goods should be watched more closely than others so that you can always meet demand and make the most profit. Reordering and backordering plans can be made by watching sales trends on these items. Workloads can also be adjusted to optimize these goods and save money.

Those Are the Best Inventory Management Techniques

Whether you choose to use a new inventory model or analyze and optimize your current operation, BlueCart can help. Just request a BlueCart demo and we’ll get you on top of your inventory management. Warehouse inventory management techniques can benefit any kind of business and let you put more time and energy into making sales and increasing profits.