I found an interesting article entitled “Inventory Control Methods,” which talks about the best and worst ways to manage your inventory. The author of that article described four helpful inventory control methods businesses can use.
Here are those methods, along with their pros and cons:
Min-Max System. After a careful examination of your inventory needs, you set two lines – one at the top and one at the bottom of how much of each product you must keep on hand. When you reach the bottom line, you order enough of that product so you won’t go above the top line. As long as you’re somewhere in the middle, you’re okay.
Pros: This method is simple and it makes the task of balancing inventory fairly straightforward.
Cons: Its simplicity could lead to trouble because you might order too many products or run out before they arrive.
Two-Bin System. In this system, you have a main bin and a backup bin of products. You normally use the main bin, but once you run out and need to reorder, you use the backup bin to fill orders until the new products are received.
Pros: You’ve always got spare products for emergencies and sudden rises in demand.
Cons: The products in the backup bin could spoil or become obsolete unless they are cycled into the main bin every now and then. Also, you need to keep an eye on your carrying costs.
ABC Analysis. Separate your products into three groups: A, B and C. Expensive items go into A, less-expensive items go into B, and small parts and other inexpensive items go into C. This way, you can organize your data and know how long it will take to order different parts and products, based on which group they’re in.
Pros: Now this is more like it. This system doesn’t set rigid standards on how many products to keep on hand; it simply tells you how long it will take to order those products. You can do the rest with the help of inventory control software.
Cons: It still requires a lot of work to maintain healthy inventory levels.
Order-Cycling System. Forget constantly checking your inventory. This system lets you do inventory checks at set intervals (e.g. 30 days) and reorder products that are likely to run out by the next check.
Pros: If you’re REALLY good at inventory management, you might be able to pull this off. It certainly doesn’t require as much time as other methods.
Cons: This system is risky and costly! Doing a physical inventory check every 30 days or so will get expensive quickly. And there’s no margin for error on ordering the right amount of products at each check.
There you go! Now you can decide which of these inventory control methods will work best for your organization, depending on your size, products and needs.