6 Inventory Management Techniques

It’s easy to say that the word ‘inventory’ is almost synonymous to money. It is, after all, your money in goods. It has cost you money to acquire your inventory but it may make you almost double that money once you sell it. So, it is only right to make sure that your inventory management is topnotch and ticks all the important boxes: that you have control over your inventory, that it is stored and handled in a safe and proper manner, and that you are getting the optimum value out of your inventory.

Your inventory management can make or break your business. Effective inventory management ensures that you are avoiding common inventory mistakes that a lot of businesses seem to make, such as running out of valuable stocks due to lack of monitoring, improper stock storage and handling leading to damage or spoilage, spending too much on inventory storage costs, unexplained inventory loss, and the buildup of the undesirable dead-stock. All these inventory management mistakes boil down to wasting money. To avoid that, here are some inventory management techniques that you can use for your business.


ABC Method

This may be the most well-known inventory management technique. The ABC method, which stands for Always Better Control, is used for analyzing and classifying items in your inventory according to the value per unit and volume.

There are three categories under this method:

Category A – items of high value with low volume

Category B – items of moderate value with moderate volume

Category C – items of low value with high value

The principle of the ABC method is to impose better control over items under Category A because loss or damage of these items can cause a significant financial impact to your business compared to the other two categories.


First-In, First Out (FIFO) Method

This inventory technique applies best to perishable products. Basically, the oldest stock (first-in) must be put in display first and must get sold first (first-out). This is to make sure that all your products do not go past their expiration date, thus avoiding unsellable spoilage. Non-perishable products can also benefit from the FIFO method. It ensures that the products you are selling are up-to-date and its packaging are not worn out or dusted due to the long amount of time in storage.


Setting Par Levels

Inventory management does not need to be too complicated by using this technique, which is to set ‘par levels’ or minimum levels for your stocks. You will have a much easier time monitoring and replenishing because you already have predetermined stock levels for each item in your inventory. However, before you adapt this technique, you first need to do serious research and keep updated as some par levels may need adjusting from time to time.


Forecasting Method

You can also stock the exact amount of items based on forecasting the upcoming market demands. Some elements that may help you with forecasting demand are market trends, sales trend of your business over the years, affordability, guaranteed sales (such as with pre-orders and subscriptions), and more. Make sure that your forecasting is as informed as it can get to avoid any inaccuracies.


VED Method

VED stands for Vital – Essential – Desirable. This method analyzes and prioritizes the items in your inventory based on its importance to the production. The stocks for the vital parts must be maintained at the highest level; essential parts must be maintained at a moderate level; and desirable parts may be maintained at a low level.


Fast, Slow, and Non-Moving (FSN) Method

Another way to classify the items in your inventory is by analyzing their frequency of sales. Fast-moving items means that they have higher levels of sales frequency and so must be monitored and restocked more often compared to the slow-moving items. Non-moving items may also mean deadstock – they occupy precious space in your warehouse but not turning in any sales or has depreciated in value. You may have to dispose of these non-moving items and must no longer replenish it to save on the storage costs in the long run.