Inventory Optimization Techniques for Your Business

Proper inventory management is important for any successful business. There are many reasons for this, for example, it is important to manage inventory well so as to not have neither too much nor too little product available. Also, it is important to manage inventory well because you need to know what to buy, where to buy it and when to order it. Additionally, we can add that proper inventory management can also help in increasing working capital, which in turn has a positive effect on liquidity.

As we have said, proper inventory manage is important. And since it is such a critical part of your business if not properly managed sooner or later it can become a very large issue.

So, ask yourself, what can I do with my business to avoid these problems? Well, today we will discuss just that and provide a few suggestions on inventory optimization techniques.

Establish a Re-Order Level

It is important to keep in mind that inventory always fluctuates and there is nothing worse than loosing out on the opportunity of doing business because of insufficient product in inventory.

So, what do you need to do? Well to avoid this problem you will need to set up a re-order point for each of the products that you keep in inventory.

To do this you need to for each product calculate the average daily amount of sales. Then, you need tp estimate the average lead or shipping time. Finally, you need to set up a safety or minimum stock amount for each product.

In practice this usually works out so that by the time the re-order point is reached and a order is placed the order arrives just as the items in stock are reaching the safety stock amount.

Now, establishing a re-order lever for products will take some time. It will be necessary to have an understanding of not only daily sales of each product, but also the amount of time it takes suppliers to fulfill orders, so as a recommendation keep track of this information and be willing to make adjustments as necessary.

Use FIFO

We have mentioned FIFO before. In previous articles it was mentioned as a method of inventory cost flow management for accounting purposes, but that is not what it is only good for.

What do we mean? We mean that it is also very practical when managing inventory. Remember, FIFO stands for First In – First Out, which in relation to inventory means that the first items that go into inventory will be the first ones sold, in that order.

This is practical outside of accounting purposes because not all inventory can just sit and wait for however long it takes for it to be sold. Usually it is in the best interest of the business owner to sell older inventory first. For example, a business that sells perishables would want to sell all of its product before it expires instead of based on market value, such as is the case with LIFO, Last in – First Out.

Another example would be a business that sells shoes or clothing. This business would also be interested in using the FIFO method because over time not only do these items in storage deteriorate but they also go out of style.

Have Good Relationships with Suppliers

The final point really isn’t a technique per se as much as it is just good to do.

What we mean by this is that your suppliers can either make or break your business. So, try your best to be a good client and a good person to do business with, because there may come a time when you need a quick delivery, to return a defective order or order more of a product.