Any business that deals in the supply of goods will have to have some form of stock management, and they’ll know that it’s not an easy job. There are seasonal fluctuations, adverse economic conditions, space restraints, delivery timelines and customer demands to take into account.
What is the importance of managing stock levels?
Maintaining your stock levels well helps keep your business flowing orders out to your customers smoothly and on time.
Poor inventory management can cause a raft of problems including not having sufficient stock to meet demand, having too much stock for the space available, goods deteriorating while in storage, increased holding costs and missed sales.
These problems can have detrimental effects on your customers, and consequently upon your reputation and ultimately your sales, so it’s in your interest to optimise your stock levels.
Common Ways of Managing Stock Levels
There are a number of techniques you can use in managing stock levels methods at your warehouse, we’ve listed some of these below:
First In First Out (FIFO)
The FIFO approach means stock that is the first to arrive at your warehouse is the first to leave it; it’s particularly applicable to perishable goods and it minimises the deterioration of stock quality. Stock is tracked with a timestamp and is moved along the distribution process before stock with a later timestamp.
Stock reviews are common in most businesses and help to keep track of stock volumes, the rate at which certain goods are depleted, and identify any product losses (either through theft or damage). Depending on the nature and amount of your goods, stock reviews can be time-consuming exercises.
You can use stock reviews to identify how quickly a product sells and use that to forecast how much to order to cover a certain period.
Just in Time (JIT)
The JIT method involves receiving inventory from suppliers only when they are required. The benefits of this method are that it uses minimal storage space and therefore means warehouse costs are greatly reduced; on the other hand, it does require agile planning and can be subject to delays, either if the supplier has low stock volumes or there are disruptions in the distribution channels.
Just in Case (JIC)
The JIC method takes the direct opposite approach to the JIT method and involves keeping a certain level of stock available at all times, just in case. This approach means you can respond to customer demands more easily and with minimal risk, however, it does require you to have ample storage space.
Fixed-Time or Fixed-Level Reordering
Agreeing on a fixed point for reordering, whether that is a regular time interval or a minimum quantity, is a useful method when you have a consistent flow of products, perhaps for your main sellers. A stationery company, for example, knows that its customers will order a set number of boxes of printer paper every month, and so has a recurring order with its suppliers to provide those on a monthly basis.
Economic Order Quantity (EOQ)
EOQ is a mathematical formula that calculates the optimum level of stock for meeting demand while minimising costs. It’s best applied to products that have a consistent level of supply and demand, and consistent purchase and holding costs.
Invented in 1913 and developed over time, the current EOQ formula is below, where Q = EOQ units, D = demand in units (annually), S = order cost (per order) and H = holding costs (per unit, per year).
Two-bin or Three-bin System
The two-bin system is, quite simply, a system that uses two bins. The stock in the first bin is used to fulfil orders and, when the first bin is empty, a replacement order is placed with the supplier. The contents of the second bin are calculated to cover the orders that are received during the lead time of receiving the new goods from the supplier.
If, for example, a company sells 100 water bottles a week and their supplier has a 2-week lead time, the second bin will have 200 bottles to cover outgoing orders. The first bin may, for example, accommodate 1,000 bottles and, each time the first bin is emptied, the company orders 1,200 bottles.
This approach is typically used for low-value items that can be bought in bulk and stored for long periods.
A three-bin system uses an additional bin for the running stock – i.e. it has two first bins and one second bin. This allows for fewer orders which can reduce costs associated with delivery and order management.
Vendor-Managed Inventory (VMI)
VMI puts the onus of stock management on the supplier rather than the customer. The warehouse will tell the supplier about their stock requirements including average weekly or monthly orders as well as any seasonal fluctuations, and the supplier will plan their deliveries accordingly. Of course, if there is an unexpected surge of orders, the warehouse can communicate this to their supplier and replenish their stock.
This approach is a fairly new model and reflects more of a partnership approach than a traditional buyer/seller business relationship.
Contingency planning doesn’t just refer to not having enough of a certain product in stock to meet demand, it covers all aspects of inventory levels, such as:
- A surge in sales and not enough stock to meet demand
- Late delivery of stock
- Running out of storage space
- Stock unavailable from your usual suppliers
These stock problems are not simple to predict and can cause big issues for you and your customers, so having contingency plans ready to go can help reduce the bumps in the road. These may include having backup suppliers or a flexible secondary storage location.
Warehouse Management System (WMS)
A WMS is a tool that automates the control of stock in your warehouse and produces accurate stock reports and forecasts.
A tool like Optimiser WMS improves your warehouse operations in terms of both efficiency and accuracy and can be configured to suit your particular requirements.
For more information about how Optimiser WMS can help in managing stock levels and ensure your warehouse overcomes shipping issues, please get in touch with Optima Warehouse Solutions today.