Top 5 Principles of Inventory Management

There five key principles of inventory management:

  1. demand forecasting,
  2. warehouse flow,
  3. inventory turns/stock rotation,
  4. cycle counting and
  5. 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 business costs. Accurate demand forecasting has the highest potential savings for any of the principles of inventory management. Both over supply and under supply of inventory can have critical business costs. Whether it is end-item stocking or raw component sourcing, the more accurate the forecast can be.

Establishing appropriate max-min management at the unique inventory line level, based on lead times and safety stock level help ensure that you have what you needs when you need it. This also avoids costly overstocks. Idle inventory increases incremental costs due to handling and lost storage space for fast-movers.

2. Warehouse Flow

The old concept of warehouses being dirty and unorganized is out dated and costly. Lean manufacturing concepts, including 5S have found a place in warehousing. Sorting, setting order, systemic cleaning, standardizing, and sustaining the discipline ensure that no dollars are lost to poor processes.

The principles of inventory management are not any different from other industrial processes. Disorganization costs money. Each process, from housekeeping to inventory transactions needs a formal, standardized process to ensure consistently outstanding results.

3. Inventory Turns/Stock Rotation

In certain industries, such as pharmaceuticals, foodstuffs and even in chemical warehousing, managing inventory down to lot numbers can be critical to minimizing business costs. Inventory turns is one of the key metrics used in evaluating how effective your execution is of the principles 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 cycle counting. This helps measures the success of your existing processes and maintain accountability of potential error sources. There are financial implications to cycle counting. Some industries require periodic 100% counts. These are done through perpetual inventory count maintenance or though full-building counts.

5. Process Auditing

Proactive error source identification starts with process audits. One of the cornerstone principles of inventory management is to audit early and often. Process audits should occur at each transactional step, from receiving 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.


Return from Principles of Inventory Management to What Is Inventory Management

Return from Principles of Inventory Management to Purchasing Procurement Center Homepage