This question has many answers and really depends on the type of business you are running. If you are dealing in perishable goods, such as food or medication, you will want to employ the FIFO method for your inventory. If you are in the manufacturing business you will want to use JIT method. There is also EOQ, if you are into forecasting. If your inventory moves in waves or surges of demand, such as during seasonal times, you may use Safety Stock.
Help for Managing Inventory
The Types of Inventory ManagementLets take a look at the possible methods for managing inventory.
- First In, First Out (FIFO) - This method is used when you need to sell all of an item before it expires or goes out of demand. A good example of this might be a gallon of Milk. You buy a shipment of Milk, and stock your shelves. When the next shipment arrives you will stock it behind the current inventory, to make sure that the first shipment sells before the last.
- Just In Time (JIT) - This method is used mostly when manufacturing, and is meant to provide the inventory only when it is going to be used. This is a very difficult balance to acquire since there needs to be very tightly managed processes. If you are unable to meet the deadline for providing the material, you lose money employing machinery and workers who aren't producing. On the other hand the material arrives too early and the company risks paying fees on the excess inventory.
- Economic Order Quantity (EOQ) - This is very similar to the JIT method of handling inventory. You are looking for the right balance of inventory levels. Not too much, and not too little. This method deals in forecasting your supply and demand. When are customers expecting the item to be available, and when are they not interested. Knowing, and tracking these types of data will assist in this method.
- Safety Stock - This method ensures that when you have a spike in demand for the inventory, you will have enough to meet it. This method also ensures that when you are dealing with inventory that has a long lead time, you won't run out while you wait. For a good example of Safety stock, look at Walmart, Home Depot, Lowes and any other large retailer. During seasonal times you will see large amounts of specific items on overstock.
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