Inventory Management Techniques and Their Importance

An inventory is a warehouse or storage location where a business maintains stocks of its products so that it can ensure swift delivery of those products on the order. With the ever increasing demand in products, more and more management practices have evolved to ease the process of product procurement by the customer. Highly efficient delivery systems and supply chains are developed to ensure efficient delivery of the products to their consumers. In the current scenario when customer satisfaction and service have become a prime reason for a business to stand apart from its competition, the need for effective inventory management is largely seen more as a necessity than a mere trend. Project management is a field of management that deals with the effective management of various types of projects.

To understand the various inventory management techniques it is crucial to know why it is important.

• First, a mismanaged inventory can lead to an unnecessary increase in the working capital. The excess funds could have been fruitfully directed to fuel the company’s growth initiatives or research and development efforts.

• Second, effective inventory management would lead to low storage costs, which will in turn lead to an increase in the company’s profits. Storage space is expensive; if you are able to manage your inventory well and able to reduce the amount of goods that you need to store, then you will require less space, which will in turn lead to low warehouse rental costs.

• Third, it can help you satisfy your customers by providing them with the products they need in the swiftest manner. Poor inventory management leads to lower availability of goods and higher delivery time. Hence, if you want to gain those service satisfaction stars, you need to manage your inventory well.

• Fourth, goods stored in inventory over a long period may spoil. This leads to unnecessary overheads in operating a business. Hence, proper inventory management can help you reduce those costs greatly.

• Fifth, if you have inventories scattered in various locations, you need a proper system to manage those inventories on the basis of demand and supply. Inventory management techniques can help you go a long way in managing multiple inventories.

Various businesses have employed the basic inventory management techniques or inventory control methods to keep their inventory costs in check. Inventory management has become an intrinsic part of supply chain management. There are various methods that an organization may use to manage its inventory:

Just in Time (JIT)

As the name suggests, the JIT inventory management technique says that the item will be ordered only if it is needed for shipping or manufacturing. The item may be ordered a few days back depending on the delivery time promised by the supplier. A mandatory requirement of this approach is the proper identification of each item before the manufacturer or reseller requires it. Since, there can be many goods required by supplier or manufacturer at any time, each and every future requirement should be properly identified and timely ordered.

Another crucial requirement for this technique is the timely delivery of the order by the supplier. Since the item is ordered just before it is needed, any delay in the arrival of the item may delay the whole production process; this may be treated as a drawback in the approach. The JIT inventory management technique helps reduce the size of the inventory and leads to low storage costs. Although, early identification and order of all items required in the future should always be there to make this approach effective. Early identification of risks is also a prime concern in managing a business properly.

There are several components to JIT that deserve mention in the text:

• Production in Small Lots: The philosophy encourages production in smaller lots rather than bulk production. Bulk production takes much time, whereas smaller lots need less storage space and less manufacturing time than large lots.

• Short Business Setup Time: If a business agrees to produce in small lots, it will require less time for setup. Since, the production is less, little inventory space is needed which leads to lower costs.

• High Quality in Delivery: Since, the goods are produced in smaller lots and as-and-when they are needed. Businesses can ensure high quality standards by inspecting each and every one of their products. Quality control is very difficult in case of bulk productions, which may make it very difficult to inspect each and every product after arrival in the warehouse or manufacturing. That is why JIT inventory management systems are very efficient in maintaining high quality standards in their inventory.

• Excellent Preventative Maintenance: JIT approach makes it possible for the application of an excellent preventative maintenance strategy. Since, business downtimes can lead to irreparable losses, JIT is essential to maintain a good inventory management system.

• Commitment of Supplier on Timely Delivery: Since JIT is highly dependent on the close cooperation and close coordination between suppliers and the procurers, each and every supplier should be committed to making deliveries on time. Since untimely delivery of orders can lead to delayed production or low customer satisfaction, a level of commitment is necessary for the suppliers to make timely deliveries.

• Employees with a Flexible Attitude: The employees of the business should be able to respond proactively to the changing business scenarios. Flexible attitude of employees is essential to make the JIT approach beneficial for business.

Accurate Response

The inventory management approach of accurate response is an excellent mechanism that helps businesses manages their inventory, which may get overloaded due to improper forecasts. Businesses greatly manage their inventory on the basis of future demand predictions. It has become increasingly important for these forecasts to be accurate for a business to keep itself alive in the cut-throat competition. Since more and more companies have come up with sophisticated inventory management systems that give accurate forecasts on product demands, the need for accurate response is highly needed.

Bad forecasts lead to businesses storing huge amount of inventory due to expected future demands. This leads to many storage costs and bad management of inventory. With the accurate response inventory management practice, one can reduce the unpredictability in the markets by making more accurate predictions. The underlying principle in making an accurate response strategy is identifying the products for which demand can be forecast. Then the product whose demand can’t be predicted is kept away from the predictable products.

The accurate response method helps businesses better manage and predict their inventory. First, all the items that were not available and lead to a drop of sales are incorporated in the total costs so that these products are available for maintaining customers. Second, products are classified as predictable and unpredictable so that proper inventory stock can be maintained for the predictable products. The various benefits of the accurate response inventory management techniques are:

• Delivery Success: By maintaining an inventory of the predictable products, businesses can ensure successful delivery of products that would otherwise have resulted in a loss of sales. An inventory of predictable products can be maintained for the future to ensure swift delivery and unpredictable products can be kept on a deliver-on-order basis. This helps in reducing inventory storage, delivering products proactively, and reducing costs.

• Lower Costs: Inaccurate forecasts can lead to an increase in the price of goods stored because retailers, wholesalers and distributors incorporate the overheads incurred due to storage of these products into product costs. Accurate response can prevent this and help the sellers lower the cost of such products and gain a competitive advantage.


The method involves a seller making a dropshipping contract with another company. The best part of the technique is that there is no need to bear the cost of inventory; the seller can directly transfer the order to a dropshipping company, which will then take the responsibility of delivering the item to the customer. The seller receives a certain percentage of the sales that he can make. The downside to this method is that the seller does not have any control over the shipping of the item and cannot cross check the quality of the shipment.

Procuring Bulk Shipments

This is an age-old method of managing inventories; the method relies on the principle that if you purchase goods in bulk, you are able to procure them in much lower costs. The method can only be employed if a business is sure that he will be able to sell that product. If a product is in high demand then you should consider using this inventory management technique which is sure to save you much money.

Apart from these practices there are many techniques that will help you manage your inventory. As businesses are becoming more competitive, more and more inventory management practices have come into the light. However, there are a certain pointers that should always be kept in mind if you really want to successfully manage your inventory:

• Do not maintain too much inventory in your warehouse. If a certain quantity of product is needed after a year, do not go forth and unnecessarily bear its storage costs for one whole year. Make use of the different accurate forecasting methods to help you efficiently procure the goods in a timely manner before demand escalates.

• Make sure that you track your inventory items properly. Using bar codes and inventory tracking software you need to make sure that there are no counting errors that were incurred while accessing an inventory. Inaccurate tracking can lead to a false promise to customers, who will give you a difficult time if you are not able to fulfill your promise of delivering the order on time.

• Order products on the basis of priorities. The products that are in most demand should be ordered first and so forth. If you keep on randomly storing products in your inventory, then you will unnecessarily incur huge storage costs.

• You should always use proper inventory management software to manage your inventory. Even if you own a small business, you will need to have the proper software with data backup modules to help you manage inventory efficiently.

• You should always have a backup plan in case of system failures. Also, you should backup your inventory data into remote systems so that there is no accidental loss of inventory data. A good backup plan can go a long way in making your inventory management more efficient process.

In a nutshell, inventory management will lead to low storage costs, ample usage of funds and timely delivery to customers. The various approaches to inventory management may depend on the requirements of the business.

INO Bulk Warehouse Management Solution is designed by CEL Consulting to truly deliver on these very important issues by ensuring that every event is captured whilst significantly optimizing the efficiency of the warehouse. INO is suitable for a wide range of commodities including grains, oilseeds, dairy, live stock, feed ingredients, biofuels, raw material, fertilizers... INO Bulk Warehouse Management offers companies a competitive advantage when dealing with today’s volatile markets. Significant gains in operational efficiency are always achieved once INO Bulk Warehouse Management Solution. An operational cost reduction of up to 35% can be expected.

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