Inventory management is a critical aspect of running a successful business, especially for Small and Medium-sized Enterprises (SMEs). Learning how to improve inventory management can significantly impact an SME’s growth, profitability, and customer satisfaction.
Read on to explore various inventory management strategies that can help SMEs thrive and expand their operations, plus how and when outsourcing warehousing and storage can be a valuable asset.
Inventory Management Strategies
ABC Category Inventory Analysis
ABC analysis categorises inventory items based on their importance and value.
The ABC classification method seeks to categorise the inventory within a warehouse into three distinct groups, namely A, B, and C. This categorisation is based on the chosen criteria, allowing for the allocation of additional resources and attention to the most crucial references for the company.
For an SMEs, products can be classified into three categories:
Category A
Category A items are high-value and high-priority items that require more resources. They only make up around 20% of inventory but represent most of the usual movement in a warehouse, with higher rotation, and also account for around 80% of a company’s revenue.
Being the priority references category, the company must allocate more resources to it, to carry out, periodically and frequently, more exhaustive and complex stock controls.
Category B
Category B items are moderate to low value items that need regular management. In the ABC classification, category B product references hold moderate importance and turnover for a company, typically constituting around 30% of total warehouse products and contributing over 20% of the company’s revenue.
Serving as an intermediary between categories A and C, these references should undergo periodic assessment for potential reclassification to A or C.
Stock control for category B products requires periodic review, though less frequent than for category A items, which demand most of the warehouse’s attention. Category B products are typically stored in accessible, albeit not always directly reachable, areas within the warehouse, following the prioritisation of A category products.
Category C
Finally, category C items are low-value items with lower priority, they are the most numerous but generate minimal revenue for the company. They often constitute over 50% of product references but contribute less than 5% of the total revenue.
Given their low demand, these references have minimal warehouse rotation, requiring minimal resource allocation. Inventory control can be infrequent, employing basic methods to prevent obsolescence or expiry issues. These items are typically stored in less accessible warehouse areas, distant from the dispatch zone.
It’s essential to assess category C references to determine if dedicating resources to their storage and stock is cost-effective, as the costs may outweigh the profits derived from their sales.
Should ABC Category Inventory Analysis Be Outsourced?
Outsourcing warehousing can help SMEs focus more on their A and B items, ensuring that high-value stock is managed efficiently, there is also the option that an outsourced provider can manage the category A and higher value items.
Outsourcing the management of Category A items to a 3PL provider ensures that SMEs benefit from the provider’s expertise and resources to efficiently handle high priority items. By doing so, SMEs can optimise their inventory while minimising the risk of overstocking or stockouts for these crucial items.
Collaborating with a 3PL provider for the management of Category B references ensures that they receive the necessary attention without overwhelming SMEs’ internal resources. The provider’s experience in managing items of moderate importance can enhance the efficiency of inventory control, resulting in cost savings for SMEs.
By outsourcing the management of Category C items to a 3PL provider, SMEs can ensure that these references are handled cost-effectively in less accessible warehouse areas. This approach allows for the regular assessment of whether dedicating resources to their storage and stock remains worthwhile, considering the potential cost-effectiveness of these low-value items.
Just in Time (JIT) Inventory Management
What is Just in Time Inventory Management?
The Just-in-Time (JIT) was originally developed for the manufacturing industry, focusing on streamlining operations by synchronising raw material orders with production schedules.
It can easily be adapted for a number of other industries, including retail and ecommerce – simply put, rather than holding large amounts of inventory, businesses can maintain smaller quantities and restock as needed. This approach helps reduce storage costs and minimises the risk of obsolete stock.
One crucial aspect for JIT is establishing strong supplier relationships. Timely and reliable deliveries are paramount, as JIT relies on receiving goods precisely when they are needed. SMEs should work closely with suppliers who can accommodate this demand-driven approach, ensuring that products are available for shipping as orders are received.
Harnessing historical sales data and market trends for demand forecasting is another key element to predict which products are likely to sell and when. This helps in making informed decisions about inventory levels and restocking schedules, minimising the chances of running out of stock or carrying excessive inventory.
Should Just in Time (JIT) Inventory Management be Outsourced?
Using 3PL, warehouse or storage provider which is strategically located, enables quick and cost-effective fulfilment and delivery. By reducing lead times, they align with JIT principles, ensuring that products reach customers promptly after orders are placed.
Technology plays a significant role in e-commerce JIT. Inventory management software, real-time order tracking, and automated order processing streamline operations and help businesses respond quickly to changes in demand. This is also an argument for outsourcing to 3PL companies, which have the time and capital to invest into ever changing technologies.
It’s also important to acknowledge that JIT involves certain risks, such as supply chain disruptions. Therefore, SMEs should have contingency plans in place, or partner with a logistics company who have the capabilities to address unforeseen issues, ensuring that they can still meet customer demands even in challenging circumstances.
Economic Order Quantity (EOQ) Model
Calculating the EOQ helps SMEs strike a balance between carrying too much or too little inventory. Outsourcing warehouse and storage can provide SMEs with flexibility, allowing them to adjust order quantities based on real-time demand and inventory levels.
Economic Order Quantity (EOQ) is a vital concept for small and medium-sized enterprises (SMEs) that determine the optimal order size for materials and products. It involves weighing the costs of holding and selling goods against annual demand, resulting in the ideal order quantity and order frequency. This figure is essential for SMEs seeking to minimise expenses while meeting demand and reducing overall inventory costs.
How to Calculate EOQ Formula
The EOQ formula is expressed as EOQ = √(2DK/H), where:
– D represents the annual demand for a particular product.
– K denotes the order cost per purchase order.
– H stands for the annual holding cost per unit.
Suppose an SME, such as an e-commerce store, sells 1,000 t-shirts annually. With an order cost of £1.50 per purchase order and an annual holding cost of £3 per unit, the EOQ calculation would be as follows:
EOQ = √(2 x 1,000 x £1.50 / £3) = 31.6
Rounding up, the ideal order size for this SME to minimise costs while meeting customer demand is 32 t-shirts. Assuming a constant demand throughout the year, the SME would need to place approximately 31 orders annually to meet its demand of selling 1,000 t-shirts.
EOQ is a crucial tool in the inventory management toolkit, enabling SMEs to strike the right balance between stocking enough products to meet demand and keeping costs low. It ensures businesses do not face running our of stock during periods of high demand or overstocking during low-demand phases, thus optimising storage costs and order fulfilment. However, SMEs must also consider the limitations of EOQ, including its assumption of constant demand and the need for accurate data input.
Outsourcing The Economic Order Quantity (EOQ) Model
Outsourcing the management of Economic Order Quantity (EOQ) to a logistics provider can be a practical solution for small and medium-sized enterprises (SMEs. To achieve this, SMEs should establish a robust data-sharing and collaborative relationship with their logistics provider. By sharing historical sales data, demand patterns, and other relevant information, SMEs enable the provider to accurately calculate EOQ and align their services with specific needs. The choice of an advanced inventory management software is crucial. SMEs should opt for a 3PL provider that offers such software and configure it to their unique requirements based on EOQ calculations. This software not only calculates EOQ but also offers real-time tracking and reporting, allowing for dynamic adjustments as demand patterns evolve.
A flexible supply chain management approach is a hallmark of effective EOQ outsourcing. The 3PL provider should be able to adapt to fluctuations in demand, adjusting orders based on seasonality, market trends, and shifting business circumstances. Regular review and adjustment of EOQ calculations in collaboration with the logistics provider are essential, ensuring that EOQ remains optimised as demand patterns evolve.
Monitoring and reporting capabilities should be robust, allowing SMEs to identify anomalies and opportunities for improvement in real-time. Effective communication between the SME and the 3PL provider is vital to refine the EOQ management process continually.
Lastly, risk management is critical. Both the SME and the logistics provider should collaborate to develop strategies for mitigating potential supply chain disruptions, such as supplier issues or transportation delays.
How to Improve Inventory Management For Your Business.
SMEs must carefully consider the methods they employ to optimise their operations. The choice of an inventory management system can significantly impact a company’s ability to meet customer demand, minimise costs, and ultimately drive growth.
It’s crucial for SMEs to choose a system that not only aligns with their unique needs but also complements their resources, especially when it comes to storage, training, and workforce capabilities.
Outsourcing to a 3PL provider can be an incredibly beneficial move for SMEs. The ABC analysis method, categorising inventory into A, B, and C items, demands varying levels of attention and resources. Outsourcing the management of these categories to a 3PL allows SMEs to focus on their core competencies while benefiting from the provider’s expertise and resources to handle high-value, high-priority items. It also ensures that moderate-value items receive the necessary attention without overburdening the internal resources, leading to cost savings. Finally, it allows for the cost-effective management of low-value items in less accessible warehouse areas, with the option to reassess their cost-effectiveness periodically.
Partnering with a strategically located 3PL provider for a Just-in-Time (JIT) approach can also greatly enhance inventory management for SMEs, allowing for quick and cost-effective fulfilment and delivery, aligning well with JIT principles. The provider’s investment in technology and expertise in managing inventory can also be a valuable asset. Finally, SMEs can benefit from the flexibility and scalability provided by a 3PL, ensuring they can adapt to changing demand patterns and respond to unforeseen challenges effectively.
Outsourcing EOQ management to a logistics provider can offer flexibility and adaptability. By establishing strong data-sharing and collaborative relationships, SMEs can ensure that EOQ calculations remain accurate and that orders are dynamically adjusted to meet evolving demand patterns. The logistics provider’s advanced inventory management software can play a pivotal role in this process, offering real-time tracking, reporting, and dynamic adjustments.
In conclusion, SMEs should take a deliberate approach when choosing their inventory management strategies and carefully consider whether outsourcing to a 3PL, warehousing and storage provider aligns with their storage, training, and resource capabilities. Such partnerships can enhance efficiency, reduce costs, and provide the necessary flexibility to accommodate changing market dynamics, ultimately contributing to SME growth and success in a competitive business landscape.
