Business

5 Inventory control techniques for stock optimisation

Inventory management is a methodology that aids companies monitor their stock and inventory stages. Companies can use many techniques to optimize their inventory and maximise profits. 

The five inventory control techniques that are most commonly used by businesses are:

  1. First In, First Out (FIFO)
  2. Average Cost Method
  3. Last In, First Out (LIFO)
  4. EOQ (Economic Order Quantity)
  5. JIT (Just in Time) 
  • First In, First Out (FIFO)

The First In, First Out (FIFO) inventory control technique is based on the principle that the first items to be stocked in inventory are also the first items to be sold. This technique is often used in businesses where inventory has a short shelf life or where products go out of fashion quickly.

Advantages of using the FIFO technique include:

– Reduced inventory costs as older items are sold before they reach their expiration date

– Increased sales as newer items are more likely to be in demand

– Simplicity of implementation

Disadvantages of using the FIFO technique include:

– Out-of-date products may be sold to customers if they are not managed properly

– Perishable products may go to waste if they are not sold in time

  1. Average Cost Method

Under this method, the average cost of all units purchased is calculated and used as the standard cost for valuing inventory. This technique best suits businesses that buy large quantities of inventory at a time and want to smooth out price fluctuations.

Also, there is- 

  • The Weighted Average Cost Method

This method is similar to the average cost method, but it considers that businesses usually purchase different quantities of inventory at other times. Under this technique, the weighted average cost of all units purchased is used as the standard cost for valuing inventory

  • Last In, First Out (LIFO)
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LIFO is one of several inventory control techniques used to manage stock levels and optimize inventory turnover. In the LIFO system, goods that are received last are also the first to be sold or used. This technique is often used in businesses where products have a short shelf life or are subject to rapid changes in fashion or technology.

LIFO can benefit businesses as it minimizes the risk of stock obsolescence and allows firms to take advantage of price increases on raw materials or finished goods. However, LIFO can also lead to higher inventory costs and may not be suitable for all businesses.

If you are considering using LIFO for your business, you must speak to a qualified accountant or inventory management specialist to ensure it is the right fit.

  • Disadvantages of using the LIFO Technique

-LIFO can lead to higher inventory costs as businesses must keep more stock to ensure they can meet customer demand.

– This technique can also result in lower levels of customer service as businesses may not be able to fulfil orders for products sold out.

-In addition, LIFO can create accounting complexities and may not be suitable for businesses that operate in multiple jurisdictions.

  • Economic Order Quantity (EOQ)

The Economic Order Quantity i.e. model is one of the most crucial inventory control techniques. The EOQ model is based on the premise that there is a trade-off between the cost of ordering and holding inventory. The prime goal of the EOQ model is to track the order quantity which reduces the total cost of inventory.

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There are several advantages to using the EOQ model:

  1. It is relatively simple to calculate.
  2. It considers both the ordering and holding costs of inventory.
  3. The EOQ model can be used to compare different inventory control policies.

There are some drawbacks to deploying the EOQ model. First, it assumes that demand for the product is constant. But, this might have some exceptions. Second, it believes that the inventory holding cost is regular. This may not be the case if the inventory is perishable or if there are storage costs associated with the inventory.

  • JIT (Just in Time) System 

Another common inventory control technique is the just-in-time (JIT) system. The JIT system is based on the premise that inventory should be ordered and received only as needed. The main aim of the JIT system is to reduce the inventory amount to be paid. 

Below are some advantages to using the JIT system:

  1. Minimizes the inventory amount so a company to stay
  2. Enhanced usage of resources since inventory is unoccupied 
  3. For better-improved quality, deploy the JIT system since this helps reduce the probability of problematic things that are sent to the users. 

Below are also some drawbacks/ disadvantages of the JIT system:

  1. Need a deep connection betwixt customers and suppliers
  2. Tough for operations if they cannot be properly managed.
  3. Might not be apt for all products.

The inventory control technique that is best for a particular company depends on the products it sells, the nature of its business, and its specific needs. There exists no such approach to inventory management. Each company must carefully consider its options and select the best inventory control technique suited to its particular situation.

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Just in Time (JIT) inventory control is a system where inventory is delivered or produced only as needed and not before. The goal of JIT is to reduce waste as well as enhance transformation by lowering the amount of inventory on hand. JIT can be used in manufacturing and other areas, such as marketing and customer service.

JIT inventory control has several benefits, including reducing the amount of space needed to store inventory, reducing inventory cost, and increasing inventory level accuracy. JIT can also enhance customer support by lowering lead times and making sure that products are available whenever required. 

One potential downside of JIT is that it can lead to stockouts if inventory is not managed carefully. JIT also requires close coordination between suppliers and customers to maintain inventory levels.

Despite the potential challenges, JIT inventory control can be a powerful tool for optimizing stock levels and reducing waste. When implemented correctly, JIT can help businesses improve their bottom line.

Conclusion 

There are a variety of inventory control techniques that can be used to optimize stock levels and reduce waste. These control techniques include just-in-time (JIT) inventory control, ABC analysis, and Economic Order Quantity (EOQ).

Each inventory control technique has advantages and disadvantages, so selecting the proper method for your business is essential. So, get the best inventory control techniques for stock optimization per the requirements.

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