Managing our inventory as a retailer is a humongous task. Inventory management grows more and more complicated with increase in sales volume and diversification of product assortments. In this post, we will discuss the various methods I have come across in retail industry for inventory control.
Types of Inventory Control systems :
- ABC
- Two Bin Method
- Three Bin Method
- Fixed Order Quantity
- Fixed Period Ordering
- Just In Time
- Vendor Managed Inventory
ABC Method :
This is one of the common methods used across retail industry and it is at times coupled with other methods for better control on inventory. This is more of an inventory classification technique where in products are classified based on the sales contribution and importance of the same in their assortment plan.
A- Category products will be the maximum grocers in sales and flagship products with higher margin. Usually top 20% of the products in the assortment contributing to 80% of the total sales are classified under A category where tight control on inventory is required to ensure no loss in sales. 20% of products contributing to 80% of sales is known as 80-20 Rule or Pareto principle
C-Category products are bottom of the line contributing less to sales. These items are marginally important for the business and are kept only for the sole purpose of customer requirement. This will also include Items that are nearing or hit obsolescence and need to discontinued from the product portfolio
B-Category products are important to the retailer but are less important compared to A Category products.
TWO BIN Method :
This is a simple method used usually in warehousing where in an item is stored in two locations or bins in a warehouse and the stock is replenished in the first bin from the second bin once the first bin is consumed completely. The required quantity to be filled in the second bin is placed for ordering.
The availability of stock in each bin is calculated based on reorder lead time to ensure enough stock is made available till the new stock arrives. The below flow diagram will explain the process
THREE BIN Method :
This is a common method followed in manufacturing where Kanban system is used.
It is similar to two bins system with a third bin at the suppliers' location. The supplier will not manufacture spare parts for the manufacturer until the reserve bin is emptied. Three bins each with a Kanban card tracking movement of inventory is available , one at manufacturing/ shop floor, one at the shop/back store, one with the supplier. Once the inventory in manufacturing/shop floor bin/display is consumed/sold, it is replenished with the complete bin from the back store/shop. Later the back store bin is sent to the supplier and replace with a complete bin from the supplier. Then the supplier will manufacture to fill the inventory in the third bin with him. This will act as a complete loop until manufacturing of the product is ceased.
The below flow diagram will explain the above process with respect to a retail scenario
FIXED ORDER QUANTITY :
This method is used to avoid ordering mistakes and ensure regular replenishment of existing products. Only a fixed quantity can be ordered at one time for the item. This type of ordering is usually used in auto replenishment of goods where in auto reordering point is set in system and when the product's inventory level hits the reordering point or minimum stock levels, an order is placed to the maximum stocking capacity of the product. To use this method the retailer should know the minimum and maximum stocking capacity of the product based on space allocated and the sales trend. Below example will explain this scenario :
In the above, the item has maximum stocking capacity of 24 and reorder point is set as 4, so when the inventory has hit 4 units, a purchase order is auto generated for 20 units to full fill the gap.
FIXED PERIOD ORDERING :
In this system there is fixed time interval between every order placed for the item. For example a vendor will visit the store in person and check the inventory of the respective products and resupply the products based on the sales for the time duration. This kind of ordering is done in small format stores like pharmacies and grocery stores
JUST IN TIME :
The objective of JUST IN TIME method is to increase the inventory turnover and at the same time reduce the inventory holding cost. JIT inventory system also exposes the unwanted or the dead inventory held my the retailer/ manufacturer. This method is ideal for manufacturing organisation and it is not used in Retail industry in general. This will also involve usage of Kanban card to track inventory movement.
VENDOR MANAGED INVENTORY :
As the name explains, it involved SKUs managed directly by the supplier. Inventory is replenished based on the sales on regular intervals by the vendor. The retailer provides shop floor space and the vendor is charged a consignment rate on every product sold at the location. The ownership of the items from receiving to sales and inventory loss if any will be with the supplier.
Types of Inventory Control systems :
- ABC
- Two Bin Method
- Three Bin Method
- Fixed Order Quantity
- Fixed Period Ordering
- Just In Time
- Vendor Managed Inventory
ABC Method :
This is one of the common methods used across retail industry and it is at times coupled with other methods for better control on inventory. This is more of an inventory classification technique where in products are classified based on the sales contribution and importance of the same in their assortment plan.
A- Category products will be the maximum grocers in sales and flagship products with higher margin. Usually top 20% of the products in the assortment contributing to 80% of the total sales are classified under A category where tight control on inventory is required to ensure no loss in sales. 20% of products contributing to 80% of sales is known as 80-20 Rule or Pareto principle
C-Category products are bottom of the line contributing less to sales. These items are marginally important for the business and are kept only for the sole purpose of customer requirement. This will also include Items that are nearing or hit obsolescence and need to discontinued from the product portfolio
B-Category products are important to the retailer but are less important compared to A Category products.
TWO BIN Method :
This is a simple method used usually in warehousing where in an item is stored in two locations or bins in a warehouse and the stock is replenished in the first bin from the second bin once the first bin is consumed completely. The required quantity to be filled in the second bin is placed for ordering.
The availability of stock in each bin is calculated based on reorder lead time to ensure enough stock is made available till the new stock arrives. The below flow diagram will explain the process
THREE BIN Method :
This is a common method followed in manufacturing where Kanban system is used.
It is similar to two bins system with a third bin at the suppliers' location. The supplier will not manufacture spare parts for the manufacturer until the reserve bin is emptied. Three bins each with a Kanban card tracking movement of inventory is available , one at manufacturing/ shop floor, one at the shop/back store, one with the supplier. Once the inventory in manufacturing/shop floor bin/display is consumed/sold, it is replenished with the complete bin from the back store/shop. Later the back store bin is sent to the supplier and replace with a complete bin from the supplier. Then the supplier will manufacture to fill the inventory in the third bin with him. This will act as a complete loop until manufacturing of the product is ceased.
The below flow diagram will explain the above process with respect to a retail scenario
FIXED ORDER QUANTITY :
This method is used to avoid ordering mistakes and ensure regular replenishment of existing products. Only a fixed quantity can be ordered at one time for the item. This type of ordering is usually used in auto replenishment of goods where in auto reordering point is set in system and when the product's inventory level hits the reordering point or minimum stock levels, an order is placed to the maximum stocking capacity of the product. To use this method the retailer should know the minimum and maximum stocking capacity of the product based on space allocated and the sales trend. Below example will explain this scenario :
| PRODUCT CODE | PRODUCT | MIN STOCK | MAX STOCK | STOCK ON HAND | RECOMMENDED ORDER QTY |
| 3391891961066 | ICE CUBE TRAY PINK | 4 | 24 | 4 | 20 |
In the above, the item has maximum stocking capacity of 24 and reorder point is set as 4, so when the inventory has hit 4 units, a purchase order is auto generated for 20 units to full fill the gap.
FIXED PERIOD ORDERING :
In this system there is fixed time interval between every order placed for the item. For example a vendor will visit the store in person and check the inventory of the respective products and resupply the products based on the sales for the time duration. This kind of ordering is done in small format stores like pharmacies and grocery stores
JUST IN TIME :
The objective of JUST IN TIME method is to increase the inventory turnover and at the same time reduce the inventory holding cost. JIT inventory system also exposes the unwanted or the dead inventory held my the retailer/ manufacturer. This method is ideal for manufacturing organisation and it is not used in Retail industry in general. This will also involve usage of Kanban card to track inventory movement.
VENDOR MANAGED INVENTORY :
As the name explains, it involved SKUs managed directly by the supplier. Inventory is replenished based on the sales on regular intervals by the vendor. The retailer provides shop floor space and the vendor is charged a consignment rate on every product sold at the location. The ownership of the items from receiving to sales and inventory loss if any will be with the supplier.
