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6 Kinds of Inventory Control That Work Best
Properly managing inventory may sound like tedious, draining work, especially when there are so many other seemingly important tasks to tend to, but doing so is key to a business’ financial health. Just take a look at how much care
large companies put into its inventory tracking system. Because of their size, these companies can’t take a chance using
manual processes (such as Excel spreadsheets) and risk a disorganized inventory management system that can result in misplacing goods, disappointing customers, ruining their reputation and losing sales, like
Walmart did in 2013 when its inventory grew faster than its sales and $3 billion went down the drain.
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Instead, big companies think carefully about advanced solutions to help them monitor inventory across stores, warehouses and even websites. They use automated inventory management systems equipped with
barcode and barcode scanners to manage stock, track low and high sellers, which allows for better long-term strategizing and an overall healthier balance sheet.
How do they do it? Below are some examples of big companies that do it well:
Amazon
At the world’s largest online retailer, organization is all about a
method called chaotic storage. How does it work? Basically, in order to take up every inch of physical space on the company’s rows and rows of shelves in its giant warehouses, products aren’t categorized into certain areas, like they are in a retail store. Instead, products are scanned with barcodes and placed on shelves with matching barcodes. What’s key is the sophisticated, automatic database system that’s able to identify, track and monitor every item that comes through the warehouse. It’s not an employee’s responsible to learn a product’s place, but rather the database reveals where the products can be picked up and shipped out.
IKEA
IKEA strictly follows an inventory management tactic that cuts down costs-per-touch as much as possible. The idea being that the more hands that touch a product, the higher the costs associated with that particular product, whether that means employees had to touch, shift or move the product from shelf to shelf. Hence, customers obtain products themselves in the warehouse below every showroom floor. For this process to take place effectively, and it does as IKEA sells roughly about 9,500 products and raked in
$36.3 billion in sales as of May 2016, stock needs to be stored strategically.
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In its
328 stores in 28 countries, IKEA separates products into what’s called high-flow and low-flow facilities, with the former being products that are 20 percent of SKUs that make up 80 percent of the store’s volume and the latter holding products that are slower selling.
Automated software is used in high-flow facilities for accurate tracking and optimization. Additionally, IKEA uses
barcode scanners to replenish inventory in a process developed by the company called “minimum/maximum settings.” The minimum settings maintain the minimum amount of products available before reordering can occur and maximum settings are the most products that can be ordered at one time. The idea is to replenish products often enough to satisfy customer demands without killing the company’s balance sheet by having too many items sitting on shelves.
Apple
Similarly to IKEA, Apple keeps
tight control over its supply chain with the aim to have as little inventory as possible in its few warehouses. It also follows the idea that moving inventory, costs-per-touch, only ups the costs of producing a product, so stock is moved as little as possible, often not until a product is ordered. Additionally, Apple strives to keep its inventory low as technology transforms rapidly and new unveilings can easily disrupt sales of existing inventory.
Nordstrom
The Seattle-based retailer utilizes two key measures to keep an
optimal level of inventory in place. The first tracks how often items are sold and replaced while the second monitors how long items are sitting on shelves before selling. The company’s inventory management system makes any item easily tracked, so purchases can be picked up from various locations, even if the customer purchased the item online. To make it work, inventories between stores and distribution centers must accurately match what’s in the database.
So, what are the specific inventory control systems that work? Below are popular ones that are utilized by the big companies mentioned above:
The
ABC Method is when inventory is classified based on its turnover levels. For instance, items with higher margins, the 20% of products contributing to 80% of total sales, is classified as Category A with tight inventory control to cut down on sales loss. Items classified as Category B are still important to the retailer, but less so than Category A and Category C are products contributing the least to sales. Typically, they’re kept around solely because customers have requested them or sales are continuous, even if low.
The
Two Bin Method happens when items are stored in two locations, or bins, in warehouses and the first bin is replenished by the second bin after it’s empty. Stock is reordered when the second bin is empty. Similarly, the
Three Bin Method just adds an additional bin to the Two Bin Method and the third bin is stored at the supplier’s location.
Fixed Order Quantity happens when only a fixed quantity can be ordered at one time to keep a tight control on inventory. Typically, a minimum number is set in the database and once inventory hits that number, a maximum number of goods is reordered.
Fixed Period Ordering is when there is a fixed time interval in between when goods can be reordered. This method is used in smaller establishments, like family-owned grocery stores.
Vendor Managed Inventory happens when SKUs are managed directly by suppliers and goods are reordered based on sales or time duration. This kind of inventory control system is popular with businesses where the retailer provides the physical space for goods, but the vendor is charged a consignment rate when products are sold.
Based on the tight reins the big companies mentioned above have on inventory, it’s clear that properly managing goods is directly linked to a business’ sales and profitability. With so much riding on the need to control and manage the movement of inventory, accurately and efficiently doing, often with
barcode and barcode scanners, is essential to long-term growth and the financial health of any company.
How could one of these methods be adapted to work for your small business?
