There five key principles of inventory management:
- demand forecasting,
- warehouse flow,
- inventory turns/stock rotation,
- cycle counting and
- process auditing.
Focusing on these five fundamentals can yield significant bottom-line savings.
1.Demand Forecasting
Depending on the industry, inventory ranks in the top five businesscosts. Accurate demand forecasting has the highest potential savings forany of the principles of inventory management. Both over supply andunder supply of inventory can have critical business costs. Whether itis end-item stocking or raw component sourcing, the more accurate theforecast can be.
Establishing appropriate max-min management at the unique inventoryline level, based on lead times and safety stock level help ensure thatyou have what you needs when you need it. This also avoids costlyoverstocks. Idle inventory increases incremental costs due to handlingand lost storage space for fast-movers.
2.Warehouse Flow
The old concept of warehouses being dirty and unorganized is outdated and costly. Lean manufacturing concepts, including 5S have found aplace in warehousing. Sorting, setting order, systemic cleaning,standardizing, and sustaining the discipline ensure that no dollars arelost to poor processes.
The principles of inventory management are not any different fromother industrial processes. Disorganization costs money. Each process,from housekeeping to inventory transactions needs a formal, standardizedprocess to ensure consistently outstanding results.
3.Inventory Turns/Stock Rotation
In certain industries, such as pharmaceuticals, foodstuffs and evenin chemical warehousing, managing inventory down to lot numbers can becritical to minimizing business costs. Inventory turns is one of the keymetrics used in evaluating how effective your execution is of theprinciples of inventory management.
Defining the success level for stock rotation is critical to analyzing your demand forecasting and warehouse flow.
4.Cycle Counting
One of the key methods of maintaining accurate inventory is cyclecounting. This helps measures the success of your existing processes andmaintain accountability of potential error sources. There are financialimplications to cycle counting. Some industries require periodic 100%counts. These are done through perpetual inventory count maintenance orthough full-building counts.
5.Process Auditing
Proactive error source identification starts with process audits. Oneof the cornerstone principles of inventory management is to audit earlyand often. Process audits should occur at each transactional step, fromreceiving to shipping and all inventory transactions in between.
By careful attention to each of these critical core principles, your business can increase efficiency and reduce costs.
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