Inventory-Carrying Costs Part 2: Management Techniques
Our previous article defined inventory-carrying costs and the benefits of keeping them at an optimal rate. By keeping your inventory-carrying costs at an acceptable and manageable level, you can maximize your profits and minimize your losses.
Remember that inventory-carrying costs are a part of running a product-based business and cannot be eliminated. The trick is to balance the cost of holding inventory with the cost of not having enough inventory when needed.
In this article, we’ll go over five management techniques that you can use to manage your inventory and keep your business profitable. Remember that none of these techniques will reduce your inventory-carrying costs overnight. They work best when combined with others. Go over each one and decide whether it applies to your specific context.
1. Utilize a Just-In-Time (JIT) Inventory Management
JIT inventory management works by ordering only the amount needed at any given time. This helps eliminate excess inventory and prevents overstocking, which can lead to lost sales and profits. By ordering the exact amount of inventory needed, businesses can reduce inventory-carrying costs and maximize profits.
Additionally, JIT inventory management helps businesses to forecast their inventory needs better. By accurately predicting the inventory needed, businesses can order the right amount in advance, ensuring they always have the right amount when customers place their orders. This helps eliminate stockouts and ensures that customers always get the products they need when needed.
2. Consider Outsourcing
Outsourcing inventory management can help businesses manage inventory-carrying costs by allowing them to focus on core activities while relying on the expertise of a third-party provider to manage their inventory. Outsourcing inventory management can help businesses reduce costs by doing away with the need to hire and train staff to manage inventory.
It can also reduce costs by eliminating the need to invest in costly inventory management software and hardware. Additionally, outsourcing inventory management can help businesses save time by allowing them to focus on more critical tasks, such as marketing and customer service.
3. Create an Inventory Replenishment Plan
An inventory replenishment plan allows you to maintain an optimal level of inventory. This plan should include the types of inventory you need, the quantity, and the ordering frequency.
When determining the types of inventory you need, you should consider the types of products you sell and the customer demand for each. Knowing which items are your best sellers will help determine which items need to be stocked in higher quantities. It would be best to consider any seasonal variations in demand, as this can help you plan for larger orders on certain items during peak periods.
4. Monitor Your Inventory
Monitoring your inventory is essential to ensure you never run out of stock. You should regularly check your inventory levels and compare them to your forecasted demand. This will help you identify any discrepancies and take corrective action.
5. Improve Your Forecasting
Accurate forecasting is essential to inventory management. You should regularly review your demand forecast and adjust the inventory replenishment plan accordingly. This will help you ensure you always have the right amount of inventory.
Forecasting involves using historical data to predict future customer demand. Companies can use various forecasting methods, including trend analysis, seasonal demand patterns, and regression analysis. By understanding the past, businesses can better anticipate future customer demand and adjust their inventory levels accordingly.
Inventory replenishment plans should be regularly reviewed and adjusted based on the demand forecast. This helps businesses ensure they always have the right amount of inventory. Companies should also consider different scenarios, such as increased demand or disruption in supply, and adjust their plans accordingly.
Overall, managing inventory-carrying costs is a critical part of any business. By understanding and utilizing the above mentioned methods, businesses can better manage their inventory and reduce their inventory-carrying costs, ultimately leading to increased profitability. By staying organized and up-to-date on their inventory management strategies, businesses can ensure that their inventory-carrying costs remain low and their profits remain high.
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