What Are Types Of Inventory Methods In Business?

Inventory management is an essential aspect of running a successful business. It involves keeping track of the goods and materials that are coming in and going out, as well as ensuring that the right amount of stock is available at all times. There are several different inventory methods used by businesses to manage their inventory effectively, each with its own benefits and drawbacks. In this blog post, we will explore the four main types of inventory methods used by businesses today: perpetual Inventory system, Physical Count System, First In First Out (FIFO) method and Last In First Out (LIFO) method. So whether you’re a procurement expert or just starting your business journey, read on to find out which type of inventory management system may work best for your company!

The Four Types of Inventory

Managing inventory is a crucial part of running any business. There are several types of inventory management systems that businesses use to keep track of their stock. The four most common types are perpetual, physical count, first in first out (FIFO), and last in first out (LIFO).

The perpetual inventory system involves tracking the movement of goods on an ongoing basis using software such as barcodes or RFID tags. This method allows for accurate and up-to-date information about stock levels and makes it easier to identify when more items need to be ordered.

The physical count system involves manually counting all inventory at regular intervals. While this method can be time-consuming, it ensures that there are no discrepancies between recorded levels and actual stock on hand.

The FIFO method assumes that the oldest items in inventory will be sold or used before newer ones. This approach prevents older items from becoming obsolete or expired while still ensuring that fresh stock is available.

LIFO assumes that the newest items added to inventory will be sold or used first. This method may result in lower taxes but can lead to older items being left unsold for extended periods.

Each type of inventory management has its own benefits and drawbacks depending on your specific business needs. It’s essential to consider which option works best for you!

The Perpetual Inventory System

The perpetual inventory system is a method of keeping track of inventory levels in real-time. This means that every time an item is sold or received, the record is immediately updated electronically. As a result, businesses using this system always have up-to-date information on their stock levels.

One advantage of the perpetual inventory system is that it helps to minimize errors and inaccuracies in inventory records. With real-time tracking, there’s less chance of items being overlooked or miscounted during physical counts.

Another benefit of this system is that it allows for better forecasting and planning. By having accurate knowledge about current stock levels, businesses can make more informed decisions about what products to order and when to restock.

However, setting up a perpetual inventory system can be costly since it requires investing in specialized software and equipment. Additionally, training employees on how to use the new system effectively may take some time.

While the perpetual inventory system may not be suitable for every business due to its costs and complexity, it offers significant advantages for those looking to improve their procurement processes.

The Physical Count System

The Physical Count System is an inventory method where businesses manually count their entire stock on hand at a specific point in time. Unlike the Perpetual Inventory System, which relies on computer software to keep track of inventory levels, the Physical Count System involves physically counting each item and recording its quantity.

This method is often used by small businesses or those just starting out because it doesn’t require expensive technology or sophisticated record-keeping systems. However, it can be time-consuming and labor-intensive since employees have to stop daily operations to conduct the counts.

One disadvantage of this system is that discrepancies between physical counts and recorded amounts could occur due to human error or theft. It’s essential for companies using this method to perform regular audits and reconcile any differences found during the count process.

Despite its drawbacks, the Physical Count System remains a useful tool in tracking inventory levels accurately. Companies should consider implementing other methods like First-In-First-Out (FIFO) or Last-In-First-Out (LIFO) with this system if they want more accurate records of their stock requirements over longer periods.

The First In, First Out (FIFO) Method

The First In, First Out (FIFO) method is a popular inventory management technique used by businesses. This method assumes that the first items to be received are also the first ones to be sold or used.

The FIFO method works well for perishable goods such as food and beverages and helps ensure that older products are sold before newer ones. It can also help prevent waste and spoilage of unsold products.

With this method, businesses must keep track of their inventory levels regularly and record the date each item was received. When an order comes in or when it’s time to restock shelves, managers will look at the oldest available stock first.

By using FIFO, businesses can manage their inventory more effectively while reducing waste and increasing sales revenue. However, this approach may not work for all types of products or industries where other methods may be more applicable.

The FIFO method offers many benefits for procurement teams looking to streamline their operations by ensuring they’re always selling their oldest stock first.

The Last In, First Out (LIFO) Method

The Last In, First Out (LIFO) method is another inventory management technique that businesses can use. This approach operates based on the assumption that the last goods to be purchased are also the first ones sold.

In other words, when a business sells its products, it assumes that it sells its most recently acquired items before selling any of its previously acquired ones. The LIFO method is commonly used in industries where product costs rise over time.

Using this strategy means that a company’s cost of goods sold will reflect current market prices rather than outdated price levels from previous periods.

However, there are some drawbacks to using the LIFO method as well. For example, if prices consistently increase over time and a company continues to use LIFO accounting for an extended period of time, their financial statements may not accurately represent their profitability or true value.

While the LIFO method can have benefits in certain situations and industries, companies need to carefully consider whether it aligns with their long-term goals and objectives.

Conclusion

Inventory management is a crucial part of any business operation. Proper inventory methods can help streamline processes and improve the bottom line. The four types of inventory methods discussed in this article – perpetual inventory system, physical count system, FIFO method, and LIFO method – offer different advantages based on the unique needs of a business.

It’s essential to choose an appropriate procurement strategy that suits your company’s goals while keeping in mind factors such as product demand, sales cycles and shelf life. By implementing effective procurement strategies with accurate inventory management systems like these mentioned above will ensure that businesses can operate efficiently and stay competitive in their respective markets.