Nowadays, most people love to run a business and hate to work under some unknown people as an employee. Running an own business is easy with various advanced techniques and concepts, but managing them successfully to earn a profit is little. One of the major tasks is Inventory management.
As the inventories of the business are the assets of the business. Improper inventory management may bring loss to the companies in various ways. If you don’t want to waste your money, learn the lists and importance of inventory models through this post.
List and importance of inventory models
1. ECQ- Economic Order Quantity
The first and foremost model in Inventory management is Economic Order Quantity (EOQ). The EOQ tells you how many inventory units you should order to save money based on your company’s holding costs, ordering costs, and rate of demand.
Formula to figure out your EOQ – Divide the square root of (2SD) by the production cost. S is your setup cost (order), and D denotes your demand rate (units).
However, the EOQ makes significant assumptions that may not apply to every company. It is presumptuous that your demand rate, ordering costs, and inventory unit price are constant. So consider the nature of your business and use this model if necessary.
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2. Inventory production Quantity
The next important inventory model is Inventory production quantity or Economic production quantity. This inventory production quantity is an addition to the EOQ model.
It is using to reduce your business’s holding and setup costs by telling you the number of products you have to order in a single batch.
Rather than delivering one full product, it guesses that every order is delivere to your supplier in parts to your business.
Formula to figure out Inventory production quantity– Divide the square root of (2SD) by the production cost (1-x). S is your setup cost (order), and D denotes your demand rate (units).
This model is important for your business if the demand for your products is constantly more than periods and if your business is an automotive company that needs inventory in parts from suppliers.
3. ABC analysis
Many business people use the Instore stock management app to manage inventory in their business effectively. Focusing on inventory management will help save your money more, and the next inventory model is ABC analysis it helps to sort out your stock based on level of importance.
When you are clear with the importance of specific inventory, you will focus your attention on it. You will use the 80/20 or Pareto principle in this model to categorize your inventory into groups A, B or C. This model will used in other inventory management strategies to attain a more effective result.
- First Category A provides your most important products that contribute the most to overall profit.
- Second Category B contains products that come in the middle of both the most and least valuable.
- Third Category C contains the small transactions essential for overall profit but doesn’t matter much independently to the company in total.
Bottom line:
Analyze your business and use the right model for effective results. Different inventory models will use in different companies, and the nature of the business decides its usage. Thus, the details pointed out above are the list and importance of Inventory models.
