8 Inventory management techniques for manufacturing
Thank you for downloading and happy choosing the perfect inventory management methods for your business!
Are you struggling to keep inventory stocked at an adequate level?
It could be that increasing demand has you on the back foot, and your lead time is slowly increasing with each fulfillment. Or maybe you have some finished goods stocked which aren’t selling so well and are taking up space. If these issues sound familiar to you, it’s time to audit your inventory management practices.
In this article, you’ll learn all the essentials to adopting inventory management techniques, with a choice of eight to get you started on this path.
What is inventory?
Inventory refers to the company’s goods and materials in production or sales.
An accurate inventory is essential for businesses to manage their resources effectively and efficiently. Inventory accounting involves recording and tracking information such as quantity, value, and stock location. This information helps businesses make decisions about production, purchasing, and sales.
Techniques of inventory management is the process of overseeing and controlling inventory levels.
This includes activities such as order planning, warehousing, and transportation. Effective inventory management ensures businesses have the right stock level to meet customer demand. It can also help to minimize waste and optimize production processes.
The most appropriate method will depend on the type of inventory and the business’s accounting needs.
Inventory is a key asset for businesses and can significantly impact financial statements. For this reason, it is important to have accurate and up-to-date records of inventory levels. Regular stocktaking can help to ensure that inventory levels are correct in accounting records.
What are the methods of inventory management?
Modern methods of inventory management include tracking and managing stock levels to ensure businesses can meet customer demand. Businesses can use various methods to manage their inventory, such as:
- FIFO — first in, first out
- LIFO — last-in, first-out
- JIT — just-in-time
- Economic order quantity
- Average costing
- Cycle counting
- ABC analysis
- Perpetual inventory system
Each method has its own advantages and disadvantages, so it’s important to choose the right one for your business based on your specific needs.
Choosing the right method for your business will depend on various factors, including the type of products you sell, your customer demand, and your budget.
Inventory management is an important part of running a successful business. Using the right techniques of inventory management can minimize carrying costs, reduce waste, and increase efficiency.
8 Inventory management techniques for manufacturing
Now that you know everything there is about handling stock in general, here are eight inventory management methods to get you started.
1. FIFO — first in, first out
FIFO is one of the most common Inventory management techniques used in manufacturing.
This system helps ensure that the oldest products are used first and reduces the chance of spoilage or obsolescence. FIFO is an inventory valuation method in which assets are sold, used, or disposed of in the order in which they are produced or acquired. This method is often used for accounting purposes, providing a more accurate picture of an organization’s inventory levels and costs.
2. LIFO — last-in, first-out
LIFO (last-in, first-out) is one method used to calculate the cost of inventory for the cost of goods sold.
As the name suggests, the LIFO inventory valuation method sees that the last items placed into inventory are sold first. This results in higher costs being assigned to goods sold in periods of inflation because the most recent purchases have been made at the highest prices. LIFO can lead to lower taxes because the IRS allows businesses to deduct the higher costs of inventory from their taxable income.
Pro tip: Undecided about which is best for you? This article on FIFO vs. LIFO will help clear up any confusion.
3. JIT — just-in-time
Just-in-time (JIT) inventory is a system where businesses only order enough stock to meet current customer demand.
This system minimizes holding costs and ensures that businesses always have the products they need on hand.
JIT is a system where businesses align their raw material orders from suppliers directly with their production schedules. Businesses can avoid the high costs associated with maintaining a large inventory by ordering the necessary materials and components when needed for production. JIT can help businesses to improve their overall efficiency and profitability.
But this technique can be difficult to implement and maintain.
Pro tip: JIT can be unreliable as it’s susceptible to supply chain disruptions. Be sure to equip your business with purchase order management software to help you mitigate any unforeseen emergencies.
4. Economic order quantity (EOQ)
Economic Order Quantity (EOQ) models help businesses determine the optimal order quantity for their inventory.
This method considers various expense factors, such as holding and ordering, to help businesses find the most cost-effective way to manage their stock levels. The EOQ is the optimal order quantity for a company to minimize its total costs related to ordering, receiving, and holding inventory. The EOQ model considers the trade-off between the cost of ordering inventory and the cost of carrying inventory.
There are a few different ways to calculate EOQ, but the most common is the EOQ formula developed by economist Harold A. Hotelling in 1931. This formula is:
Q = √[2(DK/H)]
5. Average costing
To use the average cost, or weighted-average method, a manufacturer assigns a cost to items in inventory based on the total cost of goods purchased or manufactured in a period, divided by the total number of items:
Average cost Formula = Total cost of production / Number of units produced
Under this method, each unit in stock is assigned a cost equal to the average of all costs incurred to acquire or produce the units available for sale.
The average cost per unit is computed periodically, usually at the end of each accounting period — and all units in inventory are then valued at this average cost.
Pro tip: Some ERP solutions on the market automatically calculate the average inventory in your business. Such as Katana, which uses the moving average cost.
6. Cycle counting
With cycle counting, inventory checks and balances are confirmed with physical inventory counts to match records.
To do this, manufacturers need to perform a regular stocktake and record adjustments of specific products. Cycle counting has many benefits, including reducing the need for annual or quarterly inventory counts, catching errors and discrepancies early, and providing accurate data for decision-making purposes. In addition, cycle counting can help identify areas where processes need to be improved to prevent future mistakes.
When done correctly, cycle counting can be an extremely helpful tool for managing inventory.
7. ABC analysis
ABC analysis, or ABC inventory management, determines the value of your inventory based on the item’s importance.
ABC ranks items based on demand, cost, and risks and groups items into classes.
ABC analysis can be used to decide which inventory items to stock, how much to stock, and when to order more.
The hierarchy of ABC inventory:
- High-value items are in high demand and have a high cost
- Medium-value items are in moderate demand and have a moderate cost
- Low-value items are in low demand and have a low cost
8. Perpetual inventory system
Perpetual inventory systems, or live inventory management software, automatically record sales, purchasing, and inventory usage through computerized POS systems or ERP manufacturing software.
This system provides businesses with up-to-date information on their inventory levels, allowing them to make more informed decisions about ordering and selling products.
Perpetual inventory systems can be implemented in several ways, depending on the needs of the business. For example, some businesses may choose to install point-of-sale systems in all of their retail locations, while others may only implement them in certain locations or for certain types of products. Enterprise asset management software can also be used to track and manage inventory levels across multiple locations.
Perpetual inventory systems offer many benefits over traditional tools and techniques of inventory management. Perhaps the most important benefit is that they provide real-time information on inventory levels, which can help businesses avoid stockouts and lost sales. Additionally, perpetual inventory systems can help businesses reduce overall inventory costs by improving visibility into stock levels and turnover rates.
If you are considering implementing a perpetual inventory system in your business, there are a few things to keep in mind:
- You will need to determine what type of system will best meet your needs
- You will need to choose the right software and hardware for your implementation
- You will need to train your employees on how to use the new system
A perpetual inventory system can be a valuable tool for any business with careful planning and execution.
Inventory management is a critical part of manufacturing operations. These eight methods can help you optimize your inventory control and reduce waste. Choose the method that best fits your manufacturing needs and start improving your production.
Katana ERP manufacturing software for optimizing inventory management
From your shop floor or Timbuktu — if a problem arises, you can easily access your inventory from anywhere with Katana ERP, a cloud-based perpetual inventory system.
Running low on raw materials? Or maybe one of your sales locations needs more inventory to fulfill orders? Simply log into Katana and make purchase orders or perform stock adjustments from anywhere, just if you have a connection to the internet.
Complete inventory control at your fingertips.
Katana makes stock taking a breeze, saving you time and money with:
- Reorder point management
- Real-time overview of inventory movement and operations progress
- Integrations with your favorite e-commerce and accounting software
- Omnichannel sales and locations management
- A smooth, stress-free workflow from purchasing to manufacturing, and sales
Try it for yourself.
Katana gives users a 14-day free trial, so you can implement ERP software and optimize your inventory management techniques with the power of automation.
So, now you know all about the modern methods of inventory management, you can take your business to the next level.
And until next time, happy inventory management.
