Every business has its inventory challenges in finding the perfect balance of stock, but construction can be uniquely demanding. Inventory management issues usually show up when it’s too late and can impact the bottom line and customer satisfaction. It could be a project coming to a grinding halt because you’re out of the right steel beam. Or wasteful spending on a fresh supply of PVC pipes when you’re unaware of the hundreds in stock.
The key to better construction inventory tracking is to have a toolbox of valuable techniques that bring control and efficiency to the process. This article will address different inventory methods and provide an overview of how to implement them. The advantages are compelling and can be adopted for different types of construction company business models and unique factors driving your business.
1. Just-in-time (JIT) inventory
The JIT method, also known as Lean Manufacturing, is centered around the idea of minimizing inventory amount at all times, which eliminates unnecessary stock costs. This means that you order supplies for the current job coming up—no more, no less.
JIT offers benefits such as lower inventory holding (or carrying) costs, better cash flow, and better overall efficiency.
To use the JIT method of inventory tracking, a company should follow these general guidelines:
- Assess demand and supply needs accurately
- Work with suppliers, vendors, and partners to negotiate reliable turn times
- Ensure that your current inventory management processes are optimized
- Continuously monitor the inventory process performance to make iterative improvements
2. ABC analysis
ABC analysis is a common inventory tracking technique that focuses on which inventory parts should be prioritized based on their importance. The ABC, as indicated in the name, divides your business’s inventory into three categories: A (highest priority), B (next highest), and C (lowest).
The advantages are that you can deeply understand your most and least revenue-generating products, prioritize high-demand stock when needed for customers, better allocate resources, and lower storage costs.
ABC analysis at a high level involves:
- Gathering relevant records.
- Reviewing sales/demand records
- Running the ABC calculation through stock categorization
- Creating your standard operating procedure based on ABC priority—and continuing to refine the process
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3. Demand forecasting
The demand forecasting technique analyzes prior sales data to predict future demand for a certain product or service. Similarly, to JIT and ABC analysis, the key element is to meet the needs of customers without overstocking. Across industries, it is a popular method for inventory tracking, and in construction, it can be extremely helpful to balance projects and job site allocation.
The advantages of demand forecasting include a more accurate budget, an improved production schedule, a better pricing strategy for higher-demand goods, and improved customer satisfaction. But also know that demand forecasting doesn’t always yield the same results, so construction companies should also rely on several forecasting methods to increase confidence in their calculation.
The three main calculation methods are:
- Active demand forecasting: Geared for fast-growing businesses, it includes in product development and other internal factors, as well as macro influences like the economy and competitors
- Passive demand forecasting: This method relies on past historical sales and consumption data, expecting it will be identical. For that reason, it’s best suited for well-established service providers.
- Short-term demand forecasting: The focus here is on a tiny time period, like a holiday. It’s used to help plan for promotions, seasonal shifts, and other short intervals of activity. It’s best for businesses with peak demand days.
There are additional demand forecasting techniques that can also be used instead of, or in combination, depending on your construction business model.
4. Economic Order Quantity
The Economic Order Quantity (EOQ) technique for inventory tracking relies on knowing exactly how much product a company should order to meet customer demand while minimizing holding and ordering costs. The goal is the right balance of inventory—not over allocating budget in inventory assets while meeting the demands of your customers. This model works best for businesses with consistent demand.
The benefits of using EOQ are that you optimize your inventory costs to meet the current needs. It also frees up the budget for revenue-generating opportunities, and results in better on-time availability for customers.
5. Automated replenishment
The automated stock replenishment technique relies on software data analysis of inventory levels, lead times, and sales history to optimal reorder levels to purchase from suppliers.
Major benefits include comprehensive, real-time, accurate inventory tracking, less labor cost, and a strong safeguard against stockouts.
In simple terms, automated replenishment uses inventory management software to predetermine reorder thresholds, place orders, and receive stock. There are various methods to determine automated replenishment, such as minimum/maximum replenishment, forecast-based replenishment, and JIT replenishment.
6. Perpetual inventory
Perpetual inventory is a computerized, real-time inventory tracking method to track and record items as they are added or removed from the inventory, which keeps track of all costs of products purchased and sold automatically. The biggest difference from the other inventory tracking methods is it doesn’t require physical inventory.
Advantages of perpetual inventory include continuous and accurate updates of stock levels, having to run fewer inventory counts (and with less manual labor), decreased stock-outs, and easier planning for future demand.
There are a variety of perpetual inventory calculation methods that can be used, depending on the type of construction business model you have. They include EOQ, The Cost of Goods Sold (COGS), FIFO (first-in, first-out), LIFO (last in-first out), and the Weighted Average Cost (WAC).
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The importance of inventory management
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