Inventory management is the set of measures used by a company to find out what order amount and when with a view to achieving a balance between low storage cost and high capacity to respond to customers.
The challenges of inventory management
A company must do everything to prevent its inventory from draining it, hence the importance of choosing the right approach. So how can you improve your inventory management? Before talking about the different options available to the manager, it is essential to make a little reminder of the challenges of stock management: indeed, two companies will not necessarily have identical problems. Therefore will not implement the same methods of inventory management.
Avoid overstocking
The first notable consequence of this state is an increase in costs (fixed and variable). It is known that too much dormant income is harmful to the financial health of the company. We can already note the costs of building or renting additional storage space, for example. Then, the quantity of personnel required is also increased (workers, security, etc.). The cost of insurance will also be increased. If your business is within the world of construction or building, do you have enough circulator pumps or enough Pavement Marking Tape? The second repercussion of too high a stock is the increase in working capital. This translates into an increased need for financing and more limited financial leeway.
Too much inventory can also force the company to sell its surplus at a discount or even at a loss to avoid accumulating the storage costs we saw above. If this is sometimes the only solution, it is not a good practice. The company will achieve less margin or even no margin on its sales. This can damage the planned development but also negatively impact cash management.
Finally, a company with too much stock is exposed to an additional risk of obsolescence (depending on the goods stored). Think about a store selling perishable food. If their stock of seasonal fruits is too high, each day that goes without being sold will gradually decrease their durability. In the worst case, the fruit will eventually rot and the company will have no choice but to throw it away. It is even worse than selling at a loss since in this case the company does not make any income.
The Calendar replenishment
This method of inventory management is rather rigid since the company that uses it will order fixed quantities of goods on a fixed date. Usually, it is set up as part of a contract that the buying company signs with its supplier. It provides for the precise delivery days for the months of the year to come. This method is suitable for businesses that are already well established. And for goods that are sold, processed, or consumed at regular intervals. For products with a more “random” flow frequency, this method is not recommended. It is one of the easiest methods of inventory management to use: it does not require a lot of time investment to operate and has relatively low administrative costs.