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Practical Techniques to Control Warehouse Inventory

Many businesses have plenty of room for improvements, especially in warehousing. Warehousing is the act of storing goods that will be sold or distributed later to customers. Warehouse inventory control refers to various aspects of managing inventories like purchasing, shipping, receiving, tracking, warehousing, and storage, turnover and reordering. It is important to monitor the number of raw materials and finished goods to maintain the right balance of stocks in the warehouse. It can neither be too less or too much as it can affect the overall operation in the warehouse. This article discusses several practical techniques for managing the inventory, and ensure the smooth functioning of the warehouse operations. They include techniques for dropshipping and consignment inventory.

Key performance indicators
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Dropshipping Technique

Dropshipping is an order fulfilment practice in which a retailer accepts customer’s orders and does not keep the stocks physically in the warehouse but ships them directly to the buyer. The dropshipping technique is attractive to smaller businesses and entrepreneurs because it is cost-effective as well as requires relatively little capital investment. In addition, dropshipping eliminates the retailer’s costs for inventory, warehousing and logistics which could in turn, create more profit.

Here is how it works: First, a customer buys an item from the retailer. Next, the retailer liaises and transfers the customer’s order with a third-party partner – a wholesaler, manufacturer, larger retailer, fulfilment house or anyone who agrees to play the role of a drop shipper. Then, the drop shippers must bear all the responsibilities – right from picking, packing, labelling, and shipping the goods to the customers. The retailer’s job of handling only the marketing, sales and customer communication is complete.

Dropshipping Technique
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Consignment Inventory Model

Consignment deal is a legal business partnership in which the consignor – a wholesaler, supplier or manufacturer gives the goods to a consignee – the retailer to sell. To consign means to place goods in the inventory of another party but retaining ownership until the products are sold. The products sold through this consignment model are most likely seasonal, perishable, or previously owned. To begin the partnership, the consignor and consignee should agree at the outset to mutually advantageous measures. For instance, both the consignor and consignee should specify what commission the retailer will charge the supplier and how long the consignee agrees to keep the stocks before returning any leftover stocks. For example, a retailer may seek for a consignment agreement with a fashion designer and have an agreement to sell the designer’s clothes in-store. Then, the retailer will only pay for the goods that are sold, and the unconsumed merchandise will be returned to the designer without worrying about monetary repercussions.

Consignment Inventory Model
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First In, First Out Inventory Strategy

The First in, First out (FIFO) is an asset-management in which goods produced or acquired first are sold, used, or disposed first. In theory, this implies that the oldest inventory gets shipped to customers before newer inventory. This principle is important especially when managing with perishable items. For most retailers, the last thing retailers want is to use the most recent stock to fulfil orders. This leaves older inventory sitting in the warehouse and are more likely to be vulnerable to damage, decay or passing best before dates. Therefore, it is worth making a rule to store new inventory from the rear of shelves and to take from the front – enforcing a FIFO system. However, it is best to discuss this with the accountants as there might be a different inventory valuation method for the end-of-year accounts.

Economic Order Quantity Method

Economic Order Quantity (EOQ) is an important cash flow tool that helps corporation control the most ideal order quantity. This way, it minimises various inventory costs like holding costs, shortage costs, and order costs. The EOQ formula is best applied in situations where companies order the same quantity at each reorder point. The EOQ formula is calculated as the square root of (2 x Annual Demand x Cost per Order) divided by the Annual Holding Cost per unit. The EOQ formula identifies a company’s inventory reorder point. When inventory falls to the EOQ level, the system will automatically signal the companies to order more units. By determining a reorder point, the business avoids running out of inventory and can continue to meet the needs of customer orders. If the corporate runs out of inventory, shortage cost will occur because the corporate has insufficient inventory to fill an order. Shortage in inventory can impact the corporation greatly as corporations might lose the customer, or the client will order lesser in the future. If EOQ can effectively minimise the amount of inventory, the cash savings can be used for some other business purpose or investment.

Just-In-Time Technique

The Just-in-Time (JIT) is a manufacturing system where the materials or products are acquired just before it is put to use. The intention of the “pull” system is to ensure that the sub-assemblies and components used to create finished goods are delivered to the production area on time. These inventories can be ordered a few days earlier depending on the delivery time and date promised by the supplier. JIT is adopted by firms to increase efficiency and decrease waste by not ordering too much inventory and risking dead stocks. This could reduce the unnecessary burden of inventory management. Another important requirement for this technique to be deemed effective is the timely delivery of the orders by the supplier. The main objective is often quality over the lowest price point, so JIT requires long-term contracts with reliable and trustable suppliers. Since the inventory is only ordered when it is needed for shipping or manufacturing, any delay in receiving the items may delay the whole production or the shipping process. Hence, this might be treated as a drawback for this approach. All in all, JIT helps reduce inventory holding costs which in turn, saves storage cost and increases inventory turnover.

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Foo Chuan Yang
Foo Chuan Yang
Foo Chuan Yang has several years of specialised experience in warehousing and logistics, and specifically in the life science sector. He holds the SIPMM Executive Certificate in Supply Chain Management (ECSCM), and he is a member of the Singapore Institute of Purchasing and Materials Management (SIPMM). He completed the Diploma in Logistics and Supply Management (DLSM) in September 2022 at SIPMM Institute.

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