Scribd
Upload
15 views

Inventory Control Techniques

The document discusses 14 inventory control techniques that businesses can use to control stock levels and maximize profits, including demand forecasting, ABC analysis, and economic order quantity. Demand forecasting uses historical sales data to predict future demand and set reorder points. ABC analysis categorizes inventory into A, B, and C categories based on importance and revenue. Economic order quantity determines the optimal order amount to minimize costs based on factors like purchase costs and demand.

Uploaded by

parikshithreddy555
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
15 views

Inventory Control Techniques

The document discusses 14 inventory control techniques that businesses can use to control stock levels and maximize profits, including demand forecasting, ABC analysis, and economic order quantity. Demand forecasting uses historical sales data to predict future demand and set reorder points. ABC analysis categorizes inventory into A, B, and C categories based on importance and revenue. Economic order quantity determines the optimal order amount to minimize costs based on factors like purchase costs and demand.

Uploaded by

parikshithreddy555
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

Inventory Control Techniques:

In this article, we’ll look at 14 inventory control techniques that will show
you how to control your inventory (stock) levels, help you optimize stock,
and maximize profits.

Different types of inventory control techniques are applied by business


leaders based on business type, size, location, and demands.

Here are 14 effective inventory control techniques that you can


apply, either individually or in combination, based on the demands of your
business:

1. Demand Forecasting.
Demand forecasting has become a familiar inventory control technique for
retailers and manufacturers. Demand forecasting estimates future demand
based on historical sales data where the company expects customers will
purchase according to estimate.

Remember, no predictions will be 100% perfect. But good predictions


maximize potentials with minimal abilities.

The key to controlling your stock levels is predictive analytics from


historical data. It’s critical to select and implement advanced inventory
forecasting models that produce accurate demand forecasts. For small and
medium-sized retailers and manufacturers, most of the time, there is no
need to consider complex demand forecasting issues. It’s enough to follow
historical sales patterns with some other factors like seasonality and trends.

Seasonality: Season is an essential factor in which demands may vary


from season to season. It’s best practice to forecast the market based on
previous seasons, as this makes the data more accurate for forecasting
going forward.

Trends: Product demand is influenced by occasions, festivals, shifts in


societal attitudes or values, technology, social, economic, and legal factors.
Follow up on the trends and upcoming possibilities and adjust your
forecasts accordingly.

Simple Implementation: For a defined period, analyze historical data


and calculate safety stock and reorder point. Safety stock is the minimum
stock quantity needed to avoid stock-outs based on demand. Reorder point is
calculated from safety stock and lead time to ensure that the minimum
stock quantity (safety stock) is maintained at any given moment. Reorder
point is reached when a product’s stock quantity touches the reorder point,
signaling the need to order more to ensure safety stock at all times.

Two Key Points of Demand Forecasting When Used as an


Inventory Control Technique:

1. Demand-driven replenishment (DDR) uses demand data to determine the


right amount of inventory to order. This data can be collected from a variety of
sources, such as sales data, customer surveys, and market research. DDR can
help businesses to avoid overstocking and understocking, and it can also help
them to improve their inventory accuracy.
2. Continuous replenishment (CR) orders inventory on a continuous basis,
rather than in batches. This can help businesses to reduce their inventory costs
by avoiding the need to store large amounts of inventory. CR can also help
businesses to improve their inventory accuracy by ensuring that they always
have the right amount of inventory on hand.

2. ABC Analysis.
ABC analysis is an inventory control technique that categorizes inventory
items based on their importance and profits. ABC inventory
categorization follows the 80-20 rule where 80% (almost) of revenues come
from 20% (almost) of items. This 20% of items are categorized as ‘A’
category. The next 30% of items are classified as ‘B’. And the bottom 50% of
items are classified as ‘C’. This categorization helps business leaders
understand which products or items are most important to the financial
success of their business.

This ABC categorization technique splits items into three


categories and controls inventories based on their importance:

1. Category A is the most valuable product contributing to overall revenues.


2. Category B is the products between the most and least valuable items.
3. Category C is the least valuable item, vital for general business but doesn’t
matter much individually.

3. Economic order quantity.


Economic order quantity (EOQ) is a formula for ordering an ideal quantity
based on factors such as purchase costs, carrying cost, holding cost,
production cost, demands, and other variables.
The primary objective of EOQ is to minimize related costs. The formula
determines the optimized number of product quantities to minimize
the cost of goods sold (COGS). This helps free up tied cash in inventory for
most businesses.

This formula is effective when businesses benefit from rates for bulk
purchases, carrying and holding costs are significant factors, and costs
decrease dramatically for large-scale production.

EOQ = square root of: [2(demand)(order cost)] / holding costs.

Annual demand:
Ordering cost per order:
Yearly holding cost per unit:

You might also like