There are several different methods or approaches that businesses can use to keep track of their inventories.
The choice of method depends on factors such as the nature of the products, the size of the business, available resources, and specific requirements.
Here are some common inventory management methods:
Periodic Inventory System
This method involves physically counting the inventory at specific intervals, such as monthly or annually.
The inventory balance is adjusted based on the count, and the cost of goods sold is calculated by taking the difference between the opening and closing inventory balances.
Perpetual Inventory System
In this method, inventory is continuously tracked in real-time using technology, such as barcode scanning or RFID.
Each inventory item is recorded electronically as it is bought or sold, providing up-to-date information on stock levels and valuation.
This method requires the use of inventory management software or an ERP system, Akin chaktty.
Just-in-Time (JIT) Inventory
JIT is an inventory management strategy where goods are ordered and received just in time for production or customer demand.
The goal is to minimise inventory carrying costs by reducing stock levels and relying on efficient supply chains and production processes.
According to Businesspally, this is one of the easiest methods for some businesses.
Economic Order Quantity (EOQ)
EOQ is a formula-based approach that calculates the optimal order quantity to minimize total inventory costs.
It considers factors such as demand, ordering costs, carrying costs, and lead time to determine the most cost-effective quantity to order.
ABC Analysis
ABC analysis categorises inventory items based on their value and importance.
Typically, items are classified into three categories: A, B, and C.
Category A represents high-value items that contribute to a significant portion of sales, while Category C includes low-value items with lower sales impact.
This analysis helps prioritise inventory management efforts and allocation of resources.
First-In, First-Out (FIFO)
FIFO is a method of inventory valuation and tracking where the oldest stock is sold or used first.
It assumes that the first items purchased are also the first ones to be sold or consumed.
This method is commonly used for perishable or time-sensitive products to prevent spoilage or obsolescence.
Last-In, First-Out (LIFO)
LIFO is an inventory valuation method where the most recently acquired items are considered as sold or used first.
LIFO assumes that the last items purchased are the first ones to be sold.
This method can have tax advantages but may not reflect the physical flow of goods in some industries.
Dropshipping
Dropshipping is a business model where a retailer does not keep physical inventory on hand.
Instead, when a customer places an order, the retailer purchases the product from a supplier who directly ships it to the customer.
This eliminates the need for storing and managing inventory, but the retailer relies heavily on the supplier's fulfilment capabilities.
Consignment Inventory
Consignment inventory is a setup where a supplier retains ownership of the inventory until it is sold by the retailer.
The retailer only pays for the sold items, reducing the risk of overstocking. This arrangement is commonly used in retail or wholesale relationships.
Vendor-Managed Inventory (VMI)
VMI is a collaborative approach where the supplier takes responsibility for managing the inventory levels at the retailer's location.
The supplier monitors stock levels, replenishes inventory as needed, and ensures product availability.
This method reduces the retailer's inventory management efforts and allows the supplier to have better control over the supply chain.
It's important to note that businesses may use a combination of these methods or customise them to suit their specific needs and industry requirements.
The chosen method should align with the business goals, optimise inventory levels, and improve operational efficiency.
Top comments (0)