Inventory management is one of the most important aspects of any business, especially small businesses. Inventory can be a major financial drain on a business if not managed properly, and it can also lead to lost sales and decreased profits.
There are a number of inventory management techniques that small businesses can use to help them stay organized and manage their inventory more effectively. One of the most important things to do is to develop a system for tracking inventory levels and ordering new stock as needed. This can be done with a simple spreadsheet or other software programs like MRP software or by using pen and paper to track stock levels manually.
Another important aspect of inventory management is maintaining good records. This includes recording how much stock you have on hand, what you paid for it, and when it was purchased. This information can help you keep track of your inventory levels and make sure you’re not running out of stock, as well as help you plan future orders.
Another important consideration for small businesses is deciding what to do with excess inventory. If you have products that are sitting on the shelf and not selling, you may be able to sell them at a discount or return them to the supplier. Alternatively, you could donate them to charity or recycle them.
Inventory management can be a tricky business, but small businesses can stay organized and manage their inventory more effectively by using the right techniques. They can ensure that their products are always in and avoid any unnecessary financial losses.
1) Separate raw material storage area
This will help you preserve raw materials for further use. Inventory for raw materials should be measured regularly to know the amount available to use at any given time. This will prevent raw materials spoilage, loss, or damage by fire, water, insect attack, and unauthorized access.
2) Assign priority numbers
Inventory control starts with giving priority numbers to inventory items based on your business needs (like urgent orders). Inventory control is also used in determining/managing production processes like quality checklists. Inventory record sheets must reflect current inventory statuses like the location of items, quantities, and remaining shelf life. Compute costs regularly so you can determine the cost-effectiveness of producing inventory over orders from suppliers.
3) Stock rotation
When supplies are running low, produce more using inventory that was stocked first than stocks stored later. This is to ensure that the oldest stock is used first before the newer ones. This practice is also known as First In, First Out (FIFO).
4) Inventory accuracy
Inventory accuracy is important to have effective inventory management and control. Inaccurate records can result in purchasing or producing more than what is needed. Inventory accuracy is to have a correct count of the physically on-hand items. This can be done through cycle counting, which is counting all items in the inventory at least once every period.
5) Inventory valuation
Inventory valuation assists in knowing when to order more products, helps you avoid stock-outs, and sharpens your competitive edge by having accurate costing information. You should always have a valuation book so you can record inventory daily. There are different Inventory methods for valuing inventory.
6) Inventory classification
Inventory Classifications consists of raw materials, work in progress, and finished goods Inventory. Valuation is done using the cost method that assigns costs for one or more classifications to Inventory items in the same classification. The cost method uses the cost of purchased parts or components from suppliers, then adds direct labor and overhead costs associated with processing inventory items into finished goods. Any additional costs incurred in bringing inventories to their present location and condition must also be recorded in inventory records.
7) Order cycle
For effective Inventory management, order points should be set up depending on how fast items purchased by your business sell out, probably because demand exceeds supply. You will need to know the lead time (the time it takes from order placed to receipt of inventory) and delivery time (the time it takes for the supplier to deliver products after an order is placed) to place your orders accordingly.
8) Inventory tracking
Inventory tracking is essential in knowing the movement of Inventory items, whether it’s being sold, transferred, or scrapped. This will help you keep track of where your inventory is and how much is available.
9) Supplier management
Keep track of supplier performance by evaluating on-time deliveries, quality, and prices. Have a system in place that will allow you to notify suppliers of any changes in demand promptly.
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10) Inventory budgeting
Having an Inventory budget will help you forecast Inventory needs, set Inventory purchase limits, and determine inventory carrying costs.
Inventory management is not a one-time event. Rather it’s an ongoing process that should be reviewed and improved regularly. Periodic reviews will help you keep track of your Inventory status and make the necessary changes to ensure an effective Inventory management system.