The management and replenishment of stock has a direct impact on your company’s cash flow, and also on it’s ability to adapt to demand. Poor management can result in all kinds of problems. That’s why it’s important to manage your stock properly and know which method to use.
In this article we’ll give you some valuable tips on managing your stock, and we’ll examine three tried and test stock management methods.
The importance of good stock management
Stock management plays a vital role in your supply chain. But what exactly does stock management involve, in a warehouse? And what are the risks when this activity is neglected or mismanaged? That's what we’ll examine in this section.
Stock management: a definition
A company’s stock may consist of various products:
- Products or goods you have acquired and intend to sell;
- All raw materials used to manufacture goods;
- Pre-manufactured or partly-manufactured products;
- Defective products: these are products that have been returned by customers, or arrived in the warehouse already damaged, or whose manufacture/assembly does not comply with the quality criteria. They are placed in storage pending their repair, destruction or recycling.
Stock management designates the close supervision of goods flows. Properly conducted, stock management ensures you have enough products in times of high demand, but not too many when demand is low.
Good stock management ensures the immediate availability of the products requested, regardless of the context (high or low demand). Its optimization is therefore crucial for the health and growth of your company.
Risks of poor stock management
Stock management is not just a detail. Poor management causes several major problems:
- Stockout of high-demand goods;
- Need for emergency restocking, sometimes at additional cost;
- The supply chain is blocked because there are no goods to process;
- Excessive quantities of goods in stock: these goods do not move, take up unnecessary space, and may become obsolete.
These problems in turn spread to other parts of the supply chain. The company’s survival is directly threatened as a result.
If you don’t have enough stock, for example, you can’t satisfy demand. So you lose sales, which means you may have to interrupt production, which means you may have to lay off your workers for a spell.
You have to extend your delivery times, find quick fixes to emergency situations (at additional cost), and re-think the whole organization of your supply chain. These problems can also cause you to lose customers or gain a bad reputation. It’s here that we see how a simple lack of optimization in stock management impacts the entire supply chain.
But shortage of stock is not the only risk. It’s a mistake to assume that holding goods in large enough quantities is an easy way to get round this risk. Too much stock can create numerous problems too.
If you hold more stock than you need, products are being stored unnecessarily and taking up space that could have been better allocated to other goods that are more in demand. It also entails unnecessary storage costs.
If your products are perishable or obsolete, you may have to destroy them, which goes down as a net loss with a direct impact on your sales.
In every instance, poor stock management has a direct impact on your ROI. Too much stock or too little stock - the consequences can be disastrous in both cases.
The objective, therefore, is to have the right quantity of goods available at time T; but you also need to optimize stock turnover so that each element of your supply chain is working all the time. This is exactly what good stock management can achieve for you.
The 3 most effective stock management methods
As we’ve seen, poor stock management has disastrous consequences. So we need the right stock management solution. There are various stock management methods.
The ones we examine here are the three most widely-followed methods: WAUC, FIFO, and the LIFO inventory valuation method.
1. The WAUC method: Weighted Average Unit Cost
WAUC is a method for determining the value of the company’s stock. It works by calculating a weighted average cost. To do so, we divide the total purchase costs by total quantities purchased.
This calculation may be performed:
- On each addition to stock: here, we add the previous WAUC value to the purchase cost of the new stock entry. The result is then divided by the total quantities in stock.
- Periodically: the first step is to determine the duration of the stock turnover cycle: i.e. how long it takes for product to be shifted. Then we divide this figure by the average stock. (Average stock is calculated from the continuous inventory, or else by averaging initial stock and final stock.) Now we know how long it takes to move the stock, we add up all purchase costs over the same period and divide the result by the total quantities entering stock in the period.
2. The FIFO method
FIFO stands for “first in first out”. As the name suggests, the first products to enter stock are the first to be picked.
Products entering stock at a later date will remain in stock for some time longer. In this method, stock is valued at the latest purchase cost.
This method is particularly useful for managing products that can not remain in stock for long periods (due to the risk of expiry or obsolescence).
3. The LIFO inventory valuation method
LIFO stands for “last in first out”. This is the opposite of the FIFO method, for with LIFO the last product to enter stock is the first to be released. There are several advantages with this method. With LIFO:
- The work of operators is easier;
- We can positively assess the life cycle of products that are present in stock and expected to increase in value over time.
This method only applies to non-perishable products.
Seven tips to improve your warehouse logistics processes
Follow the seven tips below to make your warehouse logistics run even more smoothly.
1. Define a stock management strategy
Your stock management strategy must take into account your actual needs. It depends on the number of deliveries you process each day, quantities of items stored, and the space they occupy.
2. Optimize the working environment in your warehouse
Making improvements to your employees’ working environment makes their work easier.
Your goal should be to reduce the need for employee legwork and the distance covered each time.
For example, you can make improvements to how stock is stored and the to the tools available to employees, or even automate storage zones to speed up or optimize certain tasks.
3. Optimize storage space, expand racking, store products according to their category
Your storage space should be organized as well as possible and kept in order at all times. You will gain productivity if stocks are easily accessible, especially products in high demand and therefore subject to high turnover. Remember also to separate products according to their category (spare parts, fresh produce etc.).
4. Make your teams more professional: create work zones and designate responsible persons
If your warehouse is large, you have every interest in organizing it by zones (reception, delivery, picking, etc.). Each zone should be perfectly organized to avoid unnecessary movement and errors. Also, consider appointing managers in charge of the different work zones. This enables better organization of work and more professional employees.
5. Practise cross-docking
This is the method to use if you need to move stock quickly: orders marked as pending are shipped without even entering the storage racks.
6. Encourage picking of similar orders
The orders placed by customers are often similar. Organize your warehouse so that these orders are prepared at the same time - that way you save time and gain in productivity.
7. Create management procedures to deal with unexpected stockouts
With good stock management, you can minimize the risk of unexpected stockouts. However, external circumstances do sometimes impinge and shortages can occur even in an optimized stock management system.
To avoid this, plan ahead: decide on the procedures to follow when the situation arises, so you’ll be ready and able to react faster and more effectively.
Stock management plays a crucial role in every supply chain. You have to do everything you can to keep your stock at an optimal level.
This means you have to clearly define your needs and the challenges you face, and then adopt a strategy that’s consistent with this orientation. Order picking automation is another solution for maximizing productivity.
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