For product-based businesses, managing inventory levels is crucial to making your business run smoothly and keeping customers happy. Here are six inventory management terms that you’ll want to familiarize yourself with.
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Stocktake
Stocktaking is when you manually verify the quantity of inventory your business has on hand. You identify all the merchandise, count it and record totals per item. You may also need to verify your results versus what your inventory management system says.
It’s an essential part of inventory management because it affects your ordering decisions, which is why it’s required as an annual company audit. How this process is conducted will vary significantly from business to business.
Another form of stocktaking is cycle counting, which occurs more frequently. Instead of conducting one big annual count, you break this down into several smaller sessions. Yearly stocktaking can be very disruptive to your business, so cycle counting can make this process more manageable.
SKU
A SKU, or stock keeping unit, is a way to catalog and reference products in your inventory. Before you can track your inventory, you must correctly set up SKUs for each of your products.
SKUs are usually broken down by category and the characteristics of the product. For instance, if you go to Target, the store is broken down into several different sections, like groceries, household items, clothing and toys. If you decide to visit the toys section, each item has a SKU for its specific category. The SKU may contain letters or numbers that specify it belongs in the toys section.
ABC analysis
If you manage inventory with hundreds of SKUs, then ABC analysis can make this process easier. Also referred to as ABC classification, this tool helps you identify and prioritize your inventory's most essential products.
Category A refers to your most valuable products that contribute the most to the profitability of your business. Category C is for small transactions that are less important to the company, and Category B products fall somewhere in the middle.
You get to decide what criteria determine which products are the most valuable. For instance, you can calculate the value based on revenue or profitability.
Before you can track your inventory, you must correctly set up SKUs for each of your products.
Batch tracking
Batch tracking is a quality control system that businesses use to group similar sets of stock. For instance, inventory batches are often items that came in on the same day.
Doing this makes it easier to track the expiration dates and identify defective items. Here are three common batch tracking strategies:
- FIFO: This term stands for “first in, first out,” and states that the oldest inventory is sold first. This is a great way to make sure your merchandise is up-to-date.
- LIFO: LIFO means “last in, first out,” and states that the newest inventory is sold first. This strategy is vital for companies that want to ensure inventory doesn’t go bad.
- FEFO: “First expired, first out” is used on products with expiration dates. It ensures that the products that will expire the soonest are sold first.
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Landed cost
Landed cost refers to the total cost your business incurred to get new products into inventory. This term is typically used for internationally shipped items.
These costs include things like:
- Shipping.
- Manufacturing fees.
- Taxes.
- Insurance.
- Handling fees.
- Currency conversion.
Landed costs can either be calculated per item or per batch. Some of these fees may change over time, so it’s normal for your landed costs to fluctuate slightly.
Since all of these fees will factor into your final profit, businesses must know the landed cost. Tracking your landed cost ensures that your business remains profitable.
Demand forecasting
Demand forecasting is the process of estimating future customer demand by looking at your historical sales data. Accurate demand forecasting makes planning and ordering inventory a much easier process.
This process uses either qualitative or quantitative inventory forecasting. With quantitative forecasting, you’ll look at data like financial reports, previous sales and website data. Qualitative forecasting involves looking at market trends, emerging technologies, product life cycles and more. All of this information can help predict future customer demand.
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