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Understanding different types of inventory stockpiles better can lead to supply chain improvement opportunities.
Maintaining stock of goods is a cost for the company, while at the same time, this stock is required to create “value”.
Stocks and the flow of goods are two highly interdependent variables. Hence, proper inventory management results in higher quality operating processes, resulting in a reduction in waste in resources and capacity. Improving and balancing these factors can contribute to increasing the productivity of a warehouse.
It is hence important to understand the different types of stock classification methods in warehouses.
Inventory can be classified in many different ways. Let’s look at 3 examples.
3 ways warehouse inventory can be classified
Functional stock categorization
This is is a type of classification that segregates products based on the type of strategic bucket they fall into.
These sub-categorization includes:
- Safety stocks. They are used in extraordinary circumstances. For example, this could be utilized when a spike in orders occurs or in case of a delay in delivery by suppliers. A company must protect itself from possible uncertainties and ensure the uninterrupted conduct of operations and this kind of stock provides that protection. It is important to keep track of the expiry dates of stocks allocated as safety stocks. Otherwise, these stocks become unusable while taking up precious warehouse space.
- Immediate alert buffer stocks. These are the stocks that are used near the reorder point, which is an indicator that warns us that the time has come to issue a supply order. As soon as you reach a certain level of stock, you should replenish or restock items. These stocks serve (together with the security stock) to avoid the risk of a stock-out failure.
- Seasonal stocks. They are the stocks that accumulate in periods of low demand and are consumed when demand increases.
- Restricted, inactive, blocked stocks. This category includes products that are obsolete or that are in the terminal stage of their life cycle. These are goods that can no longer be sold or integrated into customer orders. Sometimes they are simply kept in the warehouse because nobody knows what to do with them, a very wasteful situation!
- Speculative stocks. These stocks are created to take advantage of a particular market scenario. If, for example, the company envisages an increase in the purchase price of a certain product in the short term, it can store it to speculate on the price later.
- Cycle stocks. These are the stocks that the company accumulates beyond its needs in the short term to benefit from a quantity discount.
Not all these classifications will apply to all business models and industries. For example, some businesses may operate on a pure “built to order model” hence will not need to maintain any speculative stocks.
Life cycle stock categorization
This method of classification deals with the shelf life of a product.
- Stocks of perishable products: This refers to products that deteriorate over time or have a certain life cycle.
- Stocks of non-perishable products: These products are not affected by the time factor, so they can be stored for long periods.
- Stocks expiring. These products will no longer be able to be sold once the expiration date indicated on the package has been exceeded.
It is important to keep in mind that customers would also expect stocks to have a minimum amount of balance shelf life upon receipt and the expiry date on the box is not necessarily the effective expiry date to monitor.
Stock levels (operational classification)
In this type of classification, the stock is classified according to the type of operational organization and the daily needs of the company.
Optimal level. This refers to the perfect balance according to the company’s objectives. This is the type of stock management that makes it possible to reduce costs, optimize profitability and respond appropriately when demand variances occur.
- Total stocks: All products available in the warehouse.
- Net stocks: All unallocated inventory in the warehouse.
- On-hand stocks: This stock is the sum of net stock and products sent by your suppliers, but not yet received.
- Minimum stocks: The lowest limit amount of product to keep in stock to avoid putting production or distribution processes at risk.
- Maximum stocks: The upper limit quantity of materials to be kept in stock beyond which both operating costs and disposal times would increase considerably.
The productivity of any warehouse depends on proper inventory management. Operators should always have a complete view of what is lying stationary on the shelving by carrying out continuous sanitary checks that affect all products. Knowing the types of inventory, dividing them by function, expiration date, or operating mode, will help you to bring further efficiency to the plant and the organization of the goods.
These are the most common types of inventory, however, you can also further classify stocks in other ways such as based on economic value (ABC analysis).
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