Controlling stock is essential to a business’ success. Overstocking can result in insufficient liquidity whilst understocking can make it impossible to satisfy your customers’ demands.
Stock is how your business makes money and stays afloat, so to ignore keeping it under control can mean serious consequences. In this article we explore some methods designed to provide an efficient system for deciding what, when and how much to order. Then we looked at top tips to help you stay on top of stock levels and avoid over or underspending.
Different methods for stock control management
Here are some of the different methods, both tried and tested and new, around how to best manage your stock levels for the type of business you have.
Your business will take regular stock reviews to establish whether new stock must be ordered. This considers pre-determined figures that help business leaders make the decision to order new stock or hold off. Many businesses operate a minimum stock level – the lowest point stock can go before more is ordered.
This involves ordering new stock either at fixed times, fixed levels or both. For example, a company may have a standing order for 500 units every third Sunday of the month. This type of stock control is particularly useful for companies with fixed contracts and stable demand, with sporadic irregular orders unless they’re placed with a long-term delivery date.
Just in time (JIT)
This stock control system originated in Japan. As the name suggests, stock is ordered as and when it is required to keep costs down and liquidity high. However, the increased cashflow comes at a cost. The company must be exceptionally organised in order to ensure orders are made at the right time, and suppliers must be reliable to fulfil requirements. There is also a risk of running out of stock should a big order be placed.
Economic Order Quantity (EOQ)
EOQ is a complex mathematical formula that aims to keep stock at an optimal level, depending on the type of firm and the industry it operates within. EOQ calculations can be time consuming, so you may find it easier to consult a professional or invest in stock management software which should be able to make out-of-the-box EOQ calculators. EOQ can be combined with other forms of stock management where required.
First in, first out
This system is popular with businesses that work with perishable stock. It aims to ensure that stock does not deteriorate before use. Stock is identified by when it was received and moves onto the next stage of production before stock received at a later date.
Batch control separates stock management and production into batches. This reduces complexity in the production process and helps make sure short-term targets are met. Batch control can also help keep costs down as firms only need the raw materials and components needed to satisfy the demands of an individual batch.
Vendor-managed inventory (VMI)
Vendor-managed inventory (VMI) is a relatively new model of stock management that emphasises shared risk between the buyer and supplier. The buyer provides information to the supplier about their stock requirements; the supplier is then responsible for maintaining a level of stock at a specified location, normally the buyer’s point-of-sale. VMI helps reduce the chance of under-stocking and reduces the time stock spends in the supply chain.
How can my business avoid over or underspending on stock?
Here are some tips around how to effectively manage your inventory for increased profitability as well as how to avoid under or overspending on stock.
1. Define processes and stock types
Carefully defining the processes involved in production, and the types of stock required, are important to ensure your business maintains appropriate levels of stock at the right times. There are four main types of stock:
• Raw materials – components used to create new products
• Unfinished goods – materials that are in the process of being converted to products
• Finished goods – products ready for entry into the market
• Consumables – additional resources used in the production process e.g. fuels and gas canisters
By understanding when and where in the production process the various types of stock are needed, businesses can more easily maintain stock at optimal levels. Here’s an example to show how this works:
• The production process takes two weeks and a new order is due in three weeks
• Check to see whether there are unfinished or finished goods available to fulfil the order.
• If there are, no action on stock is necessary. If there aren’t, check to see whether there are enough consumables and raw materials to fulfil the order through production
• If there are, production can commence. Otherwise raw materials and/or consumables must be ordered
Following this process helps companies ensure they hold the minimum amount of superfluous stock at any one time.
2. Use inventory management software
Inventory management software gives you control over all aspects of stock and supplies, integrating related processes into a centrally accessible software package. As your business functions, the software can advise you of necessary action, such as ordering new products once your stock hits a certain level. This can help you make data-informed decisions to help avoid overstocking.
3. Explore integrated technology
Inventory management software isn't the only technology that can help your business manage stock. Mobile scanners and POS (point of sale) systems can help too. When investing in technology, prioritise systems that work together. A POS system that doesn’t connect well to your inventory management software can cost you both time and money. Transferring the data manually between systems may also result in inaccuracies.
4. Track sales
As well as adding up sales at the end of the day it is beneficial to know what items sold, how many, and update the businesses inventory totals. Then take time to analyse this data and ask some important questions:
• When do certain items sell faster or drop off?
• Is this a seasonal factor?
• Is there a specific day of the week when you sell certain items?
• Do some items almost always sell together?
Understanding your sales totals and the bigger picture of how things look is important for keeping inventory under control.
5. Stock security
Damage and theft can not only affect stock levels but can also impact your bottom line. Stock should be delivered to and kept in a secure area, preferably with CCTV or similar protection. Staff should be trained to follow specific safety procedures in order to protect stock, such as recognising distraction burglaries and escalating issues to senior management should security concerns arise.
Firms may also wish to know what security steps suppliers are taking; a damaged or stolen pallet of stock could mean the difference between fulfilling an order and disappointing a valuable customer.
6. Use effective stock management that suits your business model
There is no ‘one-size-fits-all’ solution for stock management. Numerous methods are commonly used in business depending on the type of company and the industry in which it operates. Find the one that works best for your business.
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