Do you have expired inventory sitting on your warehouse shelves? Do you have more stock than sales? Or do you always run out of stock when the customers come to buy? Then it is time to put in some strategies to manage your inventory well so that it is less of a burden on your business.
STRATEGY 1: First in, first out (FIFO)
As the name suggests, this is when the first item you bought is the first item you sell. One of the advantages of this method is that goods with expiration dates will not be left on the shelf and become unsellable because they have expired. Another advantage is that it will keep your inventory rotating. As for your taxes, you will have an accurate account of what inventory you have in stock.
STRATEGY 2: Last in, first out (LIFO)
In this strategy, the last item that has been entered into your inventory is the first item to be sold. You need to be careful about using this method with perishable goods as you may be left with expired goods. This method is good for tax and accounting purposes as you will have sold high-cost goods and your taxable inventory will be low.
STRATEGY 3: Selective inventory control
This method focuses on those inventory items which produce the best return on investment. In this strategy, inventory items are treated differently throughout the inventory management process. The advantage of this is that your customers have a better experience because you will have the most requested items readily available. Next, you will have improved resource management and forecasting, and lastly, you will be able to optimise your inventory.
Before implementing these strategies, we will need a clear understanding of inventory management. Let’s look at the four parts of inventory management.
PART 1: The types of inventory
There are four types of inventory to be aware of. Some businesses may have all four forms of inventory while other businesses will only have one form of inventory.
The four types are:
- Raw materials: These are the base materials you use in the manufacturing of the goods you sell. For example, if you are a bakery, these would be flour, milk, eggs, butter etc.
- Works in progress: These are the materials which are partially built or made, and need additional work done before they can be sold. They would also need to be stored and managed during the creating process.
- Finished goods: These are the items you sell. They are displayed in your brick-and-mortar store or they are listed on your website. But they are ready to be bought by other businesses or customers.
- Maintenance, repair and operating supplies: These are the materials to ensure that your business tools and machines can work effectively. They are the items which ensure smooth operations in your business. Back to our example of a bakery, it may be an extra hook for your mixing machine which you might need if the other hook breaks.
Every part of inventory needs to be kept track of to ensure the smooth function of your business and to ensure that your customer service is good.
PART 2: Relationship maintenance
There are many articles on how to improve and maintain customer service but your relationship with vendors and suppliers is also crucial. By building positive, transparent and healthy relationships with your vendors, they may be more willing to help you to succeed. You need to ensure you have good communication with your vendors and give them enough warning if you are going to place a large order. You should also be a student of how they operate so that you can plan their lead-time into your business processes. Lastly, never burn bridges with a supplier. You never know if you will need to use their services again in the future.
PART 3: Process map creation
Do you have an intimate knowledge of your inventory management process? You will need to write down every step of the route your inventory takes from being received into your warehouse to sending it out to your customers and also if they return items. By mapping out the whole process you will get a clearer idea of which inventory management strategy would work best with your business. If you work with drop-shipping companies or third-party storage companies, you will need to consider how they integrate into your process.
By working on these three parts, you will be able to better manage your inventory and ensure less money is lost due to spoilt goods or missing inventory.
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