Whether you’re new to ecommerce or a long-time warehouse service client, it can be hard to remember everything you need to know about inventory management. So, we’ve put together a glossary of terms used to describe the best ways to maintain your stock at all times if you need an introduction or just a refresher:
ABC priorities classify inventory to organize the distribution of all your products according to their importance to your business. A-class products typically account for 20% of your inventory, but their high demand accounts for 80% of your distributions. B-class products are medium turnover and account for ~30% of your inventory, and C-class products are most numerous but also least requested by customers. By arranging your inventory to favor higher class products, you save pickers and packers enormous effort.
A warehouse audit is a broad term that can apply to many aspects of inventory management including OSHA audits, inventory audits, shipping and logistics audits, accounting audits and more. Each of these must be performed regularly and randomly to gather reliable data, improve warehouse sustainability, reduce costs, and fix or prevent broken equipment.
Contingency planning is a necessary part of your inventory management, as it informs what comes next should obstacles get in the way of everyday protocols. A good contingency plan will address distribution, sourcing, trade compliance, diversification, and redundancies. Right now we are seeing contingency plans in action with shift staggering in the warehouse to keep workers socially distanced while continuing the lines of production.
FIFO v. LIFO
FIFO is first in, first out, and LIFO is last in, first out. Both refer to warehouse operations and accounting principles based upon the order your stock is distributed to customers. FIFO is absolutely necessary for products that expire to maximize its lifetime with the customer before spoiling, but LIFO often makes it easier to access newer inventory when FIFO is less important.
When referenced in inventory management, forecasting typically refers to expected demand for particular products in the near and distant future. 3PLs have the technology to forecast demand based on past trends, historic sales, and potential events, which allows you to limit warehouse costs by keeping a lean inventory.
Just in Time
A practice so nice, we named ourselves after it! Just in Time is an inventory strategy that aligns raw-material orders from suppliers directly with production schedules. By reducing the stock on hand when it isn’t needed, companies decrease waste and inventory costs. But in order to be successful, producers must forecast demand accurately.
Much like how par is the expected number of strokes in golf, par levels are the expected amount of inventory needed based upon projected demand and safety stock needs. Par levels change based on demand seasonality but also factors that could impact delivery times such as holidays, natural disasters, wartime v. peacetime, or even weekends v. weekdays. Many companies are increasing their par levels currently to ensure a strong supply chain in the face of COVID-19.
Reorder points are used to ensure your products are replenished based upon your demand forecast before dipping into your safety stock. The goal of this point, as set for each product individually, is the ensure there is enough inventory on hand so no customers walk away empty handed.
Safety stock, also known as buffer stock, is the extra inventory your business should keep on hand to consistently meet your desired service level. Safety stock ensures a customer doesn’t walk away empty handed when demand is greater than expected or there’s a delay from your supplier. In an age of Amazon delivery services, customers are more likely than ever to make purchases elsewhere, so being prepared is important.