Top 5 Inventory Methods & the Importance of Inventory Control

Inventory Methods September 19, 2022

Jin Hyun

Writer

Inventory management is the process of acquiring, storing, and selling inventory in a systematic way. This applies to both finished products, as well as raw material, and can involve everything from managing purchases from customers and suppliers to controlling the amount of stock businesses are carrying at a given time.

Essentially, it's about having a balanced approach to handling the right amount of inventory at the right time and place, at a minimal cost.

Choosing the most efficient Inventory method for the business' needs is the key to increasing profits by optimizing sales and costs. By carrying only what they need, businesses can limit wasted inventory as well as excessive spending.

5 Common Inventory Methods

There are many different types of inventory methods depending on the industry and scale of the business as well as its specific goals. Below are 6 of the main techniques that can help to reduce waste and drive profit.

1. Manual counting
Suited to small or new businesses with limited staff and inventory, this method involves manually checking the expiry dates on products, identifying and taking away broken goods, and assessing if theft or misplacing of items have occurred.
All information should be logged in to spreadsheets to track when certain perishable goods will go bad and how much profit has been lost due to damage or theft.

2. The periodic method
This is another method suited to the needs of small businesses. The periodic method calculates how stock volumes have changed over a certain fiscal period by simply comparing the inventory at the beginning of the period with the fiscal-end inventory figures.

3. Weighted average cost (WAC)
This refers to the cost of all goods purchased during a certain period. Suitable for year-round businesses that don't experience much change in their inventory levels, this method rolls the cost of new inventory into existing inventory costs to create a weighted average. The amount is adjusted continuously as new stock is purchased.

4. LIFO
Last-in-first-out (LIFO) is one of the active inventory methods that is used most often by companies that sell goods on demand, rather than products with expiration dates.
It is based on the assumption that the goods the company acquired most recently are the ones that will sell first. LIFO is also used by businesses to incur smaller tax costs as it reports results in smaller profit margins.

5. FIFO
Opposite to the method above is first-in-first-out, which is also the method used by many online eCommerce companies. The FIFO method assumes that the oldest goods in a company's inventory are the ones that are sold first.
Oftentimes, this leads to the balance sheet cost of inventory matching the marketplace value of the goods. As businesses don't need to manipulate numbers to calculate this inventory cost method, it remains precise yet simple. FIFO is also one of the most widely used inventory methods for international companies.

Benefits of Efficient Inventory Control

Inventory control is essential for businesses to be clear about their flow of capital and balance of supply and demand without overspending on unnecessary stock or losing revenue due to missed opportunities.

When companies have an efficient inventory system, this allows them to accurately fulfill orders in a timely manner. Benefits include-

Order fulfillment accuracy
If the inventory is not managed properly, there can be errors or delays in fulfilling orders due to stock-outs or mistakes, leading to returns, refunds, and loss of customer rapport.
If companies are failing to meet the demands of customers by not matching the inventory to the requested output of goods, they will inevitably see a decline in business. If consumers can't get what they want, it's likely they will turn to a competitor who can meet their needs.

Increased customer trust
Customers waiting for orders are placing their trust in the business for accurate deliveries. If the goods are damaged, late, not-as-described, or completely wrong, buyers will not purchase from the same company again.

Great inventory methods lead to customers feeling satisfied with the service by receiving what they want, when they expect it, which anchors the business as a trusted brand. Leaving customers satisfied is much more than just about gaining positive reviews, it's about building a relationship with consumers to ensure they keep coming back.

Enhanced ordering & scheduling
If a business isn't clear about the inventory that's stocked, how could they gauge the right amount to order? Overstocking is a very common experience for businesses, especially with items that don't sell, which can stay in storage for longer periods of time, leading to an increase in wastage.

Having the appropriate inventory methods in place will quell this issue by knowing what to refresh and when. After all, having excess waste is not only bad for the environment but also for profits as the money spent on purchasing this stock would have also been wasted.

Reduction in overall costs
With fewer resources and time spent over confusing inventory processes, this streamlines workflow and saves money on staffing, ordering, re-shipping, and more. The bottom line is, efficient inventory management reduces overall costs.