In this article we will share 10 key inventory methods you need to apply to your business in 2023. Read on to learn more:
FIFO, or First-In, First-Out, is an inventory management method where the oldest stock is utilized or sold first, ensuring a sequential flow. This approach minimizes the risk of product obsolescence and simplifies cost calculations.
Example: If Company XYZ adopts FIFO and initially purchases 100 smartphones at $500 each and later at $600, the cost recognized for each sale is based on the $500 unit until that specific stock is depleted.
LIFO, or Last-In, First-Out, prioritizes recent inventory for sale, impacting cost calculations and potential tax liability. This method matches the higher costs of recent inventory with revenue, making it particularly advantageous during inflationary periods.
Example: If Company XYZ adopts LIFO for its laptop inventory and purchases 50 laptops at $800 and later at $900, the cost of laptops sold to customers is based on the $900 unit until that specific stock is depleted.
Weighted Average Cost calculates the average cost of all units, providing stability in cost representation. Effective when dealing with homogeneous goods, this method involves straightforward averaging.
Example: Company XYZ, dealing in office supplies, might use Weighted Average Cost and have 200 units with an average cost of $10, determining the cost per unit by averaging the total cost of all office supplies in stock.
Specific Identification is an inventory tracking method where each item is accounted for individually, ensuring precision in costing. This approach is particularly suitable for businesses dealing with unique or high-value items.
Example: Company XYZ, specializing in rare collectibles, can use Specific Identification to assign a unique cost to each item. For instance, a rare painting is priced at $5,000.
Just-In-Time (JIT) minimizes inventory by ordering goods precisely when needed, reducing holding costs and promoting efficiency. This method ensures a lean inventory system and efficient supply chain management.
Example: If Company XYZ implements JIT for its clothing line, it orders materials just in time for production. This may involve ordering 500 meters of fabric when 450 meters are about to be used.
ABC Analysis categorizes inventory based on importance, allowing for efficient resource allocation. This method identifies slow-moving or critical items, enabling businesses to focus efforts and resources where they are most needed.
Example: Company XYZ, selling office supplies, might prioritize efforts based on the ABC categorization of its items. For instance, Category A items, constituting 20% of inventory, might include high-demand products.
EOQ calculates the optimal order quantity to minimize total inventory costs. This method reduces stockouts and overstock situations, providing a systematic approach to ordering.
Example: Company XYZ, using EOQ for raw materials, ensures cost-effective order quantities. For example, the EOQ for a particular raw material might be calculated as 300 units.
The Perpetual Inventory System maintains real-time records, providing immediate updates on inventory levels. This method ensures real-time visibility, reduces stockouts, and facilitates efficient decision-making.
Example - If Company XYZ employs a perpetual system for its electronics inventory, it always has accurate information on stock levels. For instance, if 50 units are sold, the system immediately updates the remaining stock.
Batch Tracking manages inventory in batches, offering enhanced traceability and control. This method is particularly useful for industries requiring quality control over specific batches.
Example: Company XYZ in pharmaceuticals can use Batch Tracking to trace and manage specific batches. For example, a batch of medications can be traced back to its production date, ensuring quality control.
Dropshipping involves selling products without holding them in stock, reducing upfront investment. This method provides flexibility in location and a diverse product range but comes with a dependency on suppliers.
Example: Company XYZ adopting dropshipping for fashion accessories only purchases items from suppliers when customer orders are placed. For instance, if a customer orders 10 handbags, the supplier ships directly to the customer without Company XYZ holding any inventory.
We hope that you will be able to apply our 10 key inventory methods to your business and improve your bottom line!
