Inventory management: 4 methods to implement it
Inventory management allows a balanced stock of all the necessary material. Discover how to perform it and what benefits it entails
The management and maintenance phase of an asset is a common topic, along with the various types of maintenance and the facility management software useful to optimize this phase. But have we ever wondered how important material availability management is at this stage? What are the benefits of performing it it correctly?
This article will cover the importance of inventory management, the main methods to achieve it and the benefits it entails for the entire Operation and Maintenance phase.
What is inventory management?
Inventory management is the process related to the flow of goods, be they finished or semi-finished products, auxiliary goods, etc., which a company has in stock and makes use of.
The goal of inventory management is to have a balanced stock of the products needed, staying in line with the budget . If the objective is achieved, the company will find the spare equipment of a broken piece in stock. So, there will be no need to rush to buy it at the price imposed by the market in that specific moment. It goes without saying that inventory management must also take into account the following two aspects:
- the frequency with which goods are needed, so as to have them available at the right time by avoiding overstocks of unused material;
- the variation of market trends, avoiding to buy material in a period of increase in price and stocking up when the price remains low compared to standards.
The goal is to minimize costs by helping businesses to know when to buy more goods based on normal usage rates.
What are the 4 main methods of inventory management?
To efficiently and functionally manage inventory there are 4 applicable methods; the choice between these four approaches will depend on the type of company, the size of the warehouse and the budget available.
Let’s look in more detail at the 4 main methods for inventory management:
- Just in Time Management (JIT): this model originated in Japan between 1960 and 1970 and allows companies to reduce expenses and waste while maintaining only the products they strictly need. This approach reduces the costs of storing, clearing and disposing of overstocks. It has a certain level of risk related to the fact that if demand increases unexpectedly, the supplier may not be able to meet the order to restock;
- Materials Requirement Planning (MRP): this inventory management method requires careful planning of future production and/or work and careful planning of the materials necessary to complete the planned work. An inaccurate sales-forecast or a bad inventory management may translate into the company’s inability to complete the projects withing expected time and budget;
- Economic Order Quantity (EOQ): this model tries to calculate the number of units that a company should add to its inventory in order to reduce total costs while assuming a constant consumer demand. The purpose is to prevent a company from making orders too frequently with the risk of an excess of inventory sitting on hand.
- Days Sales of Inventory (DSI): this method considers the average time in days that take a company to use its inventory. Based on this calculation, orders of the various goods are therefore made.
How to improve inventory management?
Incorrect inventory management for a company can be a serious problem, causing a lack or overabundance of goods. In both cases, the main consequence will be an economic loss for the company.
Let’s see, then, how to optimize inventory management in a few simple steps:
- prioritize inventory: in order to plan orders efficiently, sorting inventory goods as per priority may be very useful. Priority is based on the importance the goods have for the specific company. It will consequently influence the frequency with which it will be necessary to make a new order;
- create a database with the most important information: for each good, it can be useful to collect a history of the main information (identification code, manufacturer, country of origin, price). Once processed, this information can return useful inputs to place orders in those periods when the market price drops;
- regularly check the inventory: it is essential to check the goods in stock and verify that they actually correspond to what is recorded in the system with a certain frequency (weekly, monthly, semi-annual, annual);
- analyze the relationship with suppliers: it may happen that the source of inventory-related problems does not lie in our inefficient management but a mistake by suppliers who delay deliveries or do not always have the requested quantity of goods available. In these cases, if problems persist, it could be useful to find a solution with the supplier or opt for a change of the supplier;
- put together a protocol to be followed by all employees: working in a coherent and aligned way is essential in every sector and at every stage of the life cycle of an asset and it is also essential in inventory management. So, all employees should know and follow a single way to manage orders, deliveries and stocks;
- keep track of how often the goods leave the warehouse: this step is essential and consists of taking note of when and in what quantity each good leaves the warehouse. This data will help to understand how long it takes to run out of stock and therefore how often it is useful to schedule orders;
- use the right tools for inventory management: it is clear that such work is not sustainable without the help of technology and the right software. Investing in facility management software is therefore an unmissable step on which the success of inventory and asset management depends.
What are the benefits of proper inventory management?
The fact that managing inventory efficiently and effectively is beneficial for the company is certainly true, but let’s see in detail what benefits are obtained from proper inventory management:
- economic savings: we have seen how managing goods in stock, orders and supplies efficiently, serves to avoid running out of material and therefore having to place orders urgently and at the same time to avoid accumulations of material. Avoiding these two scensarios translates into economic savings for the company;
- better cash flow: one of the advantages of efficient inventory management is to improve cash flow. This is because you invest in what is really needed that is used in a short term period. In this way, there are no long periods in which the investment made does not correspond to the economic return;
- customer satisfaction: having the material available when necessary helps to respect the project workflow and therefore to finish within the set times without disappointing the client.
Once again, facility management offers us new challenges to face in a professional and efficient way. If you don’t want to find yourself unprepared and have full control of every aspect of the O&M phase of an asset, I recommend you try facility management software that will allow you to improve the productivity of maintenance processes and save time and costs.