Inventory management operations and JIT in the case of Axum Pharmaceutical Organization

Introduction

1. What Is Inventory management?

Inventory management refers to the process of ordering, storing, using, and selling a company's
inventory. This includes the management of raw materials, components, and finished products,
as well as warehousing and processing of such items.

Key concepts about inventory management are given below:-

 It is the entire process of managing inventories from raw materials to finished products.
 It tries to efficiently streamline inventories to avoid both gluts and shortages.
 Inventory management has two major methods for inventory management which are
called just-in-time (JIT) and materials requirement planning (MRP).

Once sold, inventory becomes revenue. Before it sells, inventory (although reported as an asset
on the balance sheet) ties up cash. Therefore, too much stock costs money and reduces cash flow.

One measurement of good inventory management is inventory turnover. An accounting

measurement, inventory turnover reflects how often stock is sold in a period. A business does not
want more stock than sales. Poor inventory turnover can lead to dead stock, or unsold stock.

2. What Is JIT?

JIT is an inventory management method and used as manufacturing model originated in Japan in
the 1960s and 1970s. Toyota Motor company is contributed the most to the development of JIT.
The method allows companies to save significant amounts of money and reduce waste by
keeping only the inventory they need to produce and sell products. This approach reduces
storage and insurance costs, as well as the cost of liquidating or discarding excess inventory.
Inventory is the raw materials, work in process and finished goods a company sells or uses in
production. Accounting considers inventory an asset. Accountants use the information about
stock levels to record the correct valuations on the balance sheet.
2.1. Different Types of Inventory
There are twelve different types of inventory such as: raw materials, work-in-progress (WIP),
finished goods, decoupling inventory, safety stock, packing materials, cycle inventory, service
inventory, transit, theoretical, excess and maintenance, repair and operations (MRO). Some
people do not recognize MRO as a type of inventory.

2.2. Why is the importance of Inventory Management?

Inventory management is vital to a company’s health because it helps make sure there is rarely
too much or too little stock on hand, limiting the risk of stock outs and inaccurate records.

Public companies must track inventory as a requirement for compliance with Securities and
Exchange Commission (SEC) rules and the Sarbanes-Oxley (SOX) Act. Companies must
document their management processes to prove compliance.

3. The Objectives of Inventory Management

One objective of inventory management is to keep enough stock to satisfy customers. Another is
to invest as little as possible in stock while still earning the most profit. The followings are the
objectives of inventory management:

 To ensure continuous supply of materials spares and finished goods so that production should
not suffer at any time and the customer’s demand should also be met.
 To avoid both overstocking and under-stocking of inventory.
 To maintain investment in inventories at the optimum level as required by the operational
and sales activities.
 To keep materials cost under control so that they contribute in reducing cost of production
and overall cost.
 To eliminate duplication in ordering or replenishing stocks. This is possible with the help of
centralizing purchases.
 To minimize losses through deterioration, pilferage, wastages and damages.
  To design proper organization for inventory management. Clear cut accountability should be
fixed at various levels of the organization.
 To ensure perpetual inventory control so that materials shown in stock ledgers should be
actually lying in the stores.
 To ensure right quality goods at reasonable prices. Suitable quality standards will ensure
proper quality stocks. The price analysis, the cost analysis and value analysis will ensure
payment of proper prices.
 To facilitate furnishing of data for short term and long term planning and control of
inventory.
4. Benefits of Inventory Management
The two main benefits of inventory management are that it ensures you’re able to fulfill
incoming or open orders and raises profits. Inventory management also:

 Saves Money:
Understanding stock trends means you see how much of and where you have something in stock
so you’re better able to use the stock you have. This also allows you to keep less stock at each
location (store, warehouse), as you’re able to pull from anywhere to fulfill orders — all of this
decreases costs tied up in inventory and decreases the amount of stock that goes unsold before
it’s obsolete.

 Improves Cash Flow:

With proper inventory management, you spend money on inventory that sells, so cash is always
moving through the business.

 Satisfies Customers:
One element of developing loyal customers is ensuring they receive the items they want without
waiting.

5. Inventory Management Challenges

The primary challenges of inventory management are having too much inventory and not being
able to sell it, not having enough inventory to fulfill orders, and not understanding what items
you have in inventory and where they’re located. Other obstacles include:
6. Inventory Management Process

If you produce on demand, the inventory management process starts when a company receives a
customer order and continues until the order ships. Otherwise, the process begins when you
forecast your demand and then place POs for the required raw materials or components. Other
parts of the process include analyzing sales trends and organizing the storage of products in
warehouses.

7. How Inventory Management Works

The goal of inventory management is to understand stock levels and stock’s location in
warehouses. Inventory management software tracks the flow of products from supplier through
the production process to the customer. In the warehouse, inventory management tracks stock
receipt, picking, packing and shipping.

8. Inventory Management Techniques and Terms

Some inventory management techniques use formulas and analysis to plan stock. Others rely on
procedures. All methods aim to improve accuracy. The techniques a company uses depend on its
needs and stock.

Find out which technique works best for your business by reading the guide to inventory
management techniques. Here’s a summary of them:

8.1. ABC Analysis:

This method works by identifying the most and least popular types of stock.

The majority of the companies today, face the problem of managing their inventory right. After all, it is
difficult to maintain the optimum level of inventory, when you are dealing with a diversity of customer
demands. However, with a good inventory control system, you will be able to manage your stocks
efficiently.
Inventory control assists businesses to maintain ideal stock levels. It tops the priority list of many
industries such as the E-commerce industry, manufacturing, logistics, retail, and other businesses that
deal with inventories. There are various methods of inventory control, and ABC analysis is one such
method.

8.1.1. What is ABC analysis?

ABC analysis also referred to as ABC Classification, is a vital part of Inventory Management. It allows
business owners to distinguish the products in their stock and focus on managing them based on their
worth. The main objective of ABC analysis is to make maximum out of minimum investment without
wasting any resources or inventory.

ABC analysis is an inventory classification strategy that categorizes the stocks into three categories, A,
B, and C, based on their revenue.
Now let us find out what these three categories are.

8.1.2. Categories of ABC Analysis

The ABC analysis considers that all the goods cannot have equal value in the market. They are found in
three different categories:

Segment A: Products included in category A are the most essential goods with the highest value.
Segment A goods consist of approximately 20% of the total products with 80% of revenue generation
for your business.   It is considered as a small category with minimal goods, but maximum revenue.

Segment B: Products included in category B have a slightly higher value than segment B. It
approximately regulates 30% of goods with 15% revenue generation. Not to mention, the goods
included in this category are more in number but less in utility.
Segment C: Products included in category C are more in numbers but least valuable when it comes to
generating revenue. As compared to category A & B, segment C has the maximum share of 50% of the
stock, generating just 5% revenue.

8.1.3. Benefits of ABC analysis

Most of the organizations have a huge amount of stock-keeping units (SKUs), yet they have not been
able to prosper or upscale their business significantly. There are many other challenges in inventory
management that businesses have to handle. Challenges may include lack of information on stocks, a
weak management process, difficulty in managing employees, space, and so on.

ABC analysis is a solution to this problem.  It can assist companies to streamline and optimize their
inventory management. Let’s find out how.

8.2. Economic Order Quantity (EOQ):

This formula shows exactly how much inventory a company should order to reduce holding and
other costs.
8.3. FIFO and LIFO:
First in, first out (FIFO) means you move the oldest stock first. Last in, first out (LIFO) considers
that prices always rise, so the most recently-purchased inventory is the most expensive and thus
sold first.

8.4 . Just-In-Time Inventory (JIT):

Just-in-time (JIT) methodology, in which products arrive as they are ordered by customers and
is based on analyzing customer behavior. This approach involves researching buying patterns,
seasonal demand and location-based factors that present an accurate picture of which goods are
needed at certain times and places. The advantage of JIT is customer demand can be met without
needing to keep large quantities of products on hand and in close to real time. However, the risks
include misreading the market demand or having distribution problems with suppliers, which can
lead to out-of-stock issues.

Companies use this method in an effort to maintain the lowest stock levels possible before a
refill.

Just In Time inventory module was introduced by the Toyota Motoring Company, Japan. This
was fashioned after the supermarket model that originated in the USA. The supermarkets
replenish their stock just as one is removed from the shelves. One of the firms that effectively
use JIT is Wal-Mart. Indeed, though it is certainly not a small business, Wal-Mart probably uses
JIT better than any company on Earth. Wal-Mart’s inventory management is one of the biggest
contributors to the company's success. It's called a "cross-docking system" which means that
supplier’ trucks and Wal-Mart’s trucks meet at the company’s warehouses. 

Managing materials (pharmaceutical products) in that process is an integral part of the business
model for Axum pharmacy settings, especially community and hospital practices. On the other
hand, inventory mismanagement causes unnecessary rise in procurement and carrying costs and
an imbalance in the supply and demand equation. In the case of Axum Pharmaceuticals proper
training of pharmacy students and pharmacists in management skills is an imperative course of
action and get serious attention by the general manager of the organization. Primarily Axum
pharmacy deployed three methods of inventory management to manage inventory: i.e. the visual
method, the periodic method, and the perpetual method.

A. Axum pharmacy applied the visual method to visually compare the stock on hand with a
listing of the amount of products that should be carried. And this method advances the
pharmacy to place a purchasing order when the stock number falls below the desired
listed amount.
B. The periodic method: - as the store manager of the pharmacy explained to us their
pharmacy used periodic inventory management method to count the stock and compare it
with a listing of minimum desired level of the inventory on regular basis at predetermined
periods of time and they count their inventory on quarterly basis. When the quantities fall
below the minimum amount, the products are ordered.
C. The Perpetual inventory management method is the most efficient method to manage
pharmacy inventory used by Axum pharmacy. It involves a computerized system that
monitors the inventory at all times on a continuous systematic basis. In this system, the
inventory on hand is entered into the computer software, and the appropriate amount of
products is automatically reduced from the inventory when a prescription or medication
order is filled.
In general Axum Pharmacy employed a hybrid of methods, e.g. conducting annual
physical count (visual and periodic methods), while maintaining a computerized system
(perpetual method). This strategy enables the pharmacy to compare the quantities of
products in computer with what is actually on shelves.
By virtue of this approach, potential variances owing to fluctuations in supply and
demand will be identified and corrected, and the accuracy of pharmacy’s financial
records will be evaluated and verified. Furthermore, this pharmacy should adhere to the
regulations of their pharmacy boards/associations with regard to inventory management
of specific entities, such as controlled substances, vaccines, and biological products.
However, the computerized system Axum deployed is outdated and not modernized and
sometimes resulted in giving false information about the actual inventory as the daily
sales manager explained.
What Axum pharmacy applies to improve its Inventory Management?
As Inventory is independent pharmacy’s biggest overhead, As Inventory is  the biggest overhead
cost and an unmanaged inventory, it can severely hurt profits and the bottom line. Axum
pharmacy managed the inventory by adopting pharmacy software that can help to improve its
operation as given below:- 
 Know what has on Shelves
The pharmacy owners assumed that they have handled their inventory well, but often find
outdated or slow-moving items buried at the back.  Of course rotating inventory helps, but by
using their pharmacy software and point of sale system to track inventory electronically, it makes
it easier to manage exactly what’s on their shelves.  A quick inventory report from their
pharmacy software or point of sale system is easy and provides additional detailed information.
 Adjusting of their Reorder Points, Manually or Automatically
Using a perpetual inventory helps to save time in Axum independent pharmacy by automatically
adding items to a purchase order when they fall below their minimums, however, these reorder
points need to be reviewed and adjusted from time to time as demand fluctuates either by
customer use or seasonally.  As generic drugs become available, the demand for brand name
medications becomes less and less, making it important to adjust reorder levels on these items in
particular.  Additionally, certain drugs have a higher demand during certain seasons, making it
important to lower reorder levels once that rush has passed.  
 Using special Order for High Priced Drugs
Many independent pharmacies have wholesale contracts that offer same day or next day
deliveries.  High priced medications should never be sitting on your shelf unless you have
multiple patients routinely taking these items.  Instead, coordinate with your patient’s for their
refills.  Through our “ready to refill” queues, reports, and notifications in our pharmacy
management software, you can easily contact your patient prior to them running out of meds. 
Give yourself enough time to order the item when it’s due instead of stocking it and sitting on
tens of thousands of dollars of unnecessary inventory. 

 Stock Big Sellers??? Sells… and Fast Movers ( wording is not clear)
It’s important in both your pharmacy department and frontend to stock “hot ticket” items. 
Patients and customers can’t purchase what you don’t have, so making sure to stock popular
drugs and OTC items will keep your customers coming back. 
 Products Should Never Expire on Shelves
By maintaining certain “days’ supply” of inventory the pharmacy is minimize the risk of items
expiring on the shelves.   Ideally??? only stocking about a weeks’ worth items will make sure
that nothing sits stale and goes out of date.  The pharmacy using point of sale to generate
inventory reports like usage reports, and current quantities on hand will make it easy to see
which items should be returned and also which items need to have their perpetual inventory
quantities adjusted. 

JIT {Just in Time} Model at Axum pharmacy

As with other business outfits Pharmacy has to deal with resources and to determine the best way
to deploy them. Pharmacist, unlike other business operators, has a lot of overheads that are of
course time critical in nature. As pharmacy operation become very savvy business concern,
operators are urged to “Go Lean or Go Home” Gone are those days where inventory is allowed
to sit and gather dust on the shelves before they are picked up by the beneficiaries. Gracefully
moving from PUSH philosophy to PULL methodology. More or less, Axum pharmacy is applied
the following JIT concepts as given next:-

 As it is known, Just in Time (JIT) Pharmacy is the way forwarding inventory. It envisions

a pharmacy that runs like a supermarket or fast food restaurant. The fast food restaurants
have the buns, patties and the other condiments ready BUT don’t “deploy” until an order
comes in except of course during the rush periods where historic data justifies preparing
in advance. The pharmacy is applied the thing in it service providing process.

 Axum as a retail Pharmacy has two major assets at its disposal which are known as, the
Pharmacists, Pharmacy Technicians and other support staffs. And the second element is
inventory. Un qualified business operators believes in reducing of manpower will lead to
improved money management and increased customer satisfaction. This is NOT exactly
true in retail pharmacy. The inventory remains the most expensive asset the pharmacy
carries and one that will keep you BIC {Best in Class} and when not properly managed
 quickly becomes a liability. Hence, Axum pharmacy have to deploy improved inventory
management system to survive in the sector. This smart system will enable the pharmacy
to perform efficiently, gracefully with minimal negative impact on customer satisfaction
secondary to out of stock positions.

However, the system must also address the issue of inventory on hand vis-à-vis filled but
not sold inventory. Contrary to conventional believe, there is a cost associated with
carrying inventory because they have a finite shelf life. As such, the pharmacy be able to
ensure inventory on hand mirrors anticipated demand. Time is ripe to have a better
inventory system without incurring additional financial liability than necessary.

Benefits or advantages of JIT in Pharmacy service

I. The business will enjoy a streamlined inventory position that accurately mirrors
anticipated demand

II. This type of inventory management system will reduce the disappointment of not
getting the medication on hand when needed

III. This system allows pharmacists and staff to better understand the “power” of their
inventory and know it directly correlates to customer satisfaction, or lack thereof.

IV. This system allows you to have an expanded view of what your inventory level is
at any point in time which reduces the risk of pilferage or shrink

V. It helps the pharmacy to reduce waste and be more efficient with allocating staff
& assets

VI. Requires & represents smaller financial investment

VII. This allows your pharmacy to deal with new generics when they hit the market as
patient’s transition from brand to generic. You don’t get lumbered with
unnecessary inventory to send back for credit.

VIII. JIT helps better management of expiration dates and improves the chances of
getting top reimbursements when returned to the suppliers.
 Note:-JIT in pharmaceutical service has its own disadvantages such like, Supply shortage
and Inability to respond to seasonal demands of medicines. However its advantages are
much more useful than it draw backs.

Conclusions
Inventory Management is the core of pharmaceutical supply management. Inadequate controls of
inventories can result in both under and overstocking of items. An effective inventory
management system plays an important role in reducing the associated costs across different
stages of the supply chain system which include selection, quantification, procurement, storage,
distribution and use. Effective pharmaceutical items management has a great impact on the
efficiency and effectiveness of the service delivery.
However the awareness, knowledge, practice and implementation of inventory control
techniques were exist on a much lower scale in the facilities. Our investigation shows that overall
inventory management practice at Axum pharmacy is not satisfactory and effective.
Finally, from this study it can be concluded that inventory management practices were poor.
Most of the time Axum do not use scientific method that can be used in controlling inventory
and those for quantifying needed pharmaceutical products at the market. For example during
covid-19 incidence the timely supply of max and other related protective inventories were poor
as the manager explained. On the other hand sufficient storage area to store all the needed
products, lack of technology in inventory control and lack of proper training of inventory
management and supply chain is the main challenge that Axum faced overtime. In general, over
stock of medicine which can lead to expiration and spoilage of medicine and out of stock of
medicine which might have leads to interruption of quality health care delivery and affect overall
profitability is a result of poor inventory control as a consequence.

Recommendations
From both financial and operational perspectives, efficient inventory management plays a great
role in pharmacy practice. Given the great deal of resources invested in inventory management,
Axum pharmacy should periodically calculate the ITOR to evaluate how well a pharmacy is
managing its inventory. Information technology makes methods of inventory management and
methods of evaluating inventory management more efficient, more precise, and more accurate.
Thus, relevant software should be employed in pharmacies and pharmacists should be trained
on utilizing such systems for managing inventory.
Pharmacists cannot take the impacts of inventory mismanagement lightly. Improper
management of pharmacy inventory has deleterious impacts on patient safety. Pharmacists
should consider details pertaining to pharmacy inventory management when assessing a
potential medication error or other drug therapy problems (e.g. patient needs a medication but
not receives it due to product unavailability; and loss of efficacy due to incorrect storage
conditions).
Finally, the following recommendations were suggested by the group to help improve
pharmaceutical inventory management practice at Axum pharmacy.
1. The study recommends that applying the scientific inventory management concepts along with
the practices such as having essential medicine list, use of established formula to determine
facility resupply need, established optimized stock level ( i.e. maximum, minimum, safety stock
and reorder level) and use of inventory management techniques such as ABC analysis, VEN
analysis and Economic order quantity in order to classify items and ensure their availability
ensures inventory control efficiency and effectiveness in best service delivery.

2. The study recommends that all pharmaceutical stores should adopt good storage practices and
use of expiry tracking chart to prevent wastage of medication due to expiration. The study further
recommends that Axum must use the first- expiry, first out (FEFO) method in the storage and
issuance of pharmaceutical products. The FEFO method is considered the best because, a
medicine can be received which may have the expiry date nearer than that same type of medicine
that is already stocked.

3. The study recommends that all facilities to computerize all inventory management system to
provide information regarding each stock movement and for better controlling inventory and
quantification of drugs instead of manual methods.

4. The study also recommends that top management or stake holders should provide support for
personnel that directly related to stock and inventory management practice by providing proper
training of inventory management and proper storage facilities.

5. Finally, the study recommends that facilities should be effective and efficient in practicing and
keeping records to improve pharmaceutical inventory management practice. Using stock cards
and updating bin cards should be regularly used for all products to track the level of stock and
prevent stock outs of essential medicines, overstocking and expiration of medicine.

Note: most parts of the paper is good, but there are repetitions and broad part in it. Hence, I am
trying to exclude and edit irrelevant parts of the paper and correcting wordings of some parts
also. So u can correct as it is, if u have convinced by the correction given.

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Dwivedil, S., Arun K, and Preeti K. 2012. Inventory management: A tool of identifying items
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Inventory management operations and JIT in the case of Axum Pharmaceutical Organization

Introduction

9. What Is Inventory management?

Inventory management refers to the process of ordering, storing, using, and selling a company's
inventory. This includes the management of raw materials, components, and finished products,
as well as warehousing and processing of such items.

Key concepts about inventory management are given below:-

 It is the entire process of managing inventories from raw materials to finished products.
 It tries to efficiently streamline inventories to avoid both gluts and shortages.
 Inventory management has two major methods for inventory management which are
called just-in-time (JIT) and materials requirement planning (MRP).

Once sold, inventory becomes revenue. Before it sells, inventory (although reported as an asset
on the balance sheet) ties up cash. Therefore, too much stock costs money and reduces cash flow.

One measurement of good inventory management is inventory turnover. An accounting

measurement, inventory turnover reflects how often stock is sold in a period. A business does not
want more stock than sales. Poor inventory turnover can lead to dead stock, or unsold stock.

10. What Is JIT?

JIT is an inventory management method and used as manufacturing model originated in Japan in
the 1960s and 1970s. Toyota Motor company is contributed the most to the development of JIT.
The method allows companies to save significant amounts of money and reduce waste by
keeping only the inventory they need to produce and sell products. This approach reduces
storage and insurance costs, as well as the cost of liquidating or discarding excess inventory.
Inventory is the raw materials, work in process and finished goods a company sells or uses in
production. Accounting considers inventory an asset. Accountants use the information about
stock levels to record the correct valuations on the balance sheet.
10.1. Different Types of Inventory
There are twelve different types of inventory such as: raw materials, work-in-progress (WIP),
finished goods, decoupling inventory, safety stock, packing materials, cycle inventory, service
inventory, transit, theoretical, excess and maintenance, repair and operations (MRO). Some
people do not recognize MRO as a type of inventory.

10.2. Why is the importance of Inventory Management?

Inventory management is vital to a company’s health because it helps make sure there is rarely
too much or too little stock on hand, limiting the risk of stock outs and inaccurate records.

Public companies must track inventory as a requirement for compliance with Securities and
Exchange Commission (SEC) rules and the Sarbanes-Oxley (SOX) Act. Companies must
document their management processes to prove compliance.

11. The Objectives of Inventory Management

One objective of inventory management is to keep enough stock to satisfy customers. Another is
to invest as little as possible in stock while still earning the most profit. The followings are the
objectives of inventory management:

 To ensure continuous supply of materials spares and finished goods so that production should
not suffer at any time and the customer’s demand should also be met.
 To avoid both overstocking and under-stocking of inventory.
 To maintain investment in inventories at the optimum level as required by the operational
and sales activities.
 To keep materials cost under control so that they contribute in reducing cost of production
and overall cost.
 To eliminate duplication in ordering or replenishing stocks. This is possible with the help of
centralizing purchases.
 To minimize losses through deterioration, pilferage, wastages and damages.
  To design proper organization for inventory management. Clear cut accountability should be
fixed at various levels of the organization.
 To ensure perpetual inventory control so that materials shown in stock ledgers should be
actually lying in the stores.
 To ensure right quality goods at reasonable prices. Suitable quality standards will ensure
proper quality stocks. The price analysis, the cost analysis and value analysis will ensure
payment of proper prices.
 To facilitate furnishing of data for short term and long term planning and control of
inventory.
12. Benefits of Inventory Management
The two main benefits of inventory management are that it ensures you’re able to fulfill
incoming or open orders and raises profits. Inventory management also:

 Saves Money:
Understanding stock trends means you see how much of and where you have something in stock
so you’re better able to use the stock you have. This also allows you to keep less stock at each
location (store, warehouse), as you’re able to pull from anywhere to fulfill orders — all of this
decreases costs tied up in inventory and decreases the amount of stock that goes unsold before
it’s obsolete.

 Improves Cash Flow:

With proper inventory management, you spend money on inventory that sells, so cash is always
moving through the business.

 Satisfies Customers:
One element of developing loyal customers is ensuring they receive the items they want without
waiting.

13. Inventory Management Challenges

The primary challenges of inventory management are having too much inventory and not being
able to sell it, not having enough inventory to fulfill orders, and not understanding what items
you have in inventory and where they’re located. Other obstacles include:
14. Inventory Management Process

If you produce on demand, the inventory management process starts when a company receives a
customer order and continues until the order ships. Otherwise, the process begins when you
forecast your demand and then place POs for the required raw materials or components. Other
parts of the process include analyzing sales trends and organizing the storage of products in
warehouses.

15. How Inventory Management Works

The goal of inventory management is to understand stock levels and stock’s location in
warehouses. Inventory management software tracks the flow of products from supplier through
the production process to the customer. In the warehouse, inventory management tracks stock
receipt, picking, packing and shipping.

16. Inventory Management Techniques and Terms

Some inventory management techniques use formulas and analysis to plan stock. Others rely on
procedures. All methods aim to improve accuracy. The techniques a company uses depend on its
needs and stock.

Find out which technique works best for your business by reading the guide to inventory
management techniques. Here’s a summary of them:

16.1. ABC Analysis:

This method works by identifying the most and least popular types of stock.

The majority of the companies today, face the problem of managing their inventory right. After all, it is
difficult to maintain the optimum level of inventory, when you are dealing with a diversity of customer
demands. However, with a good inventory control system, you will be able to manage your stocks
efficiently.
Inventory control assists businesses to maintain ideal stock levels. It tops the priority list of many
industries such as the E-commerce industry, manufacturing, logistics, retail, and other businesses that
deal with inventories. There are various methods of inventory control, and ABC analysis is one such
method.

16.1.1. What is ABC analysis?

ABC analysis also referred to as ABC Classification, is a vital part of Inventory Management. It allows
business owners to distinguish the products in their stock and focus on managing them based on their
worth. The main objective of ABC analysis is to make maximum out of minimum investment without
wasting any resources or inventory.

ABC analysis is an inventory classification strategy that categorizes the stocks into three categories, A,
B, and C, based on their revenue.
Now let us find out what these three categories are.

8.1.2. Categories of ABC Analysis

The ABC analysis considers that all the goods cannot have equal value in the market. They are found in
three different categories:

Segment A: Products included in category A are the most essential goods with the highest value.
Segment A goods consist of approximately 20% of the total products with 80% of revenue generation
for your business.   It is considered as a small category with minimal goods, but maximum revenue.

Segment B: Products included in category B have a slightly higher value than segment B. It
approximately regulates 30% of goods with 15% revenue generation. Not to mention, the goods
included in this category are more in number but less in utility.
Segment C: Products included in category C are more in numbers but least valuable when it comes to
generating revenue. As compared to category A & B, segment C has the maximum share of 50% of the
stock, generating just 5% revenue.

8.1.3. Benefits of ABC analysis

Most of the organizations have a huge amount of stock-keeping units (SKUs), yet they have not been
able to prosper or upscale their business significantly. There are many other challenges in inventory
management that businesses have to handle. Challenges may include lack of information on stocks, a
weak management process, difficulty in managing employees, space, and so on.

ABC analysis is a solution to this problem.  It can assist companies to streamline and optimize their
inventory management. Let’s find out how.

8.2. Economic Order Quantity (EOQ):

This formula shows exactly how much inventory a company should order to reduce holding and
other costs.
8.3. FIFO and LIFO:
First in, first out (FIFO) means you move the oldest stock first. Last in, first out (LIFO) considers
that prices always rise, so the most recently-purchased inventory is the most expensive and thus
sold first.

8.4 . Just-In-Time Inventory (JIT):

Just-in-time (JIT) methodology, in which products arrive as they are ordered by customers and
is based on analyzing customer behavior. This approach involves researching buying patterns,
seasonal demand and location-based factors that present an accurate picture of which goods are
needed at certain times and places. The advantage of JIT is customer demand can be met without
needing to keep large quantities of products on hand and in close to real time. However, the risks
include misreading the market demand or having distribution problems with suppliers, which can
lead to out-of-stock issues.

Companies use this method in an effort to maintain the lowest stock levels possible before a
refill.

Just In Time inventory module was introduced by the Toyota Motoring Company, Japan. This
was fashioned after the supermarket model that originated in the USA. The supermarkets
replenish their stock just as one is removed from the shelves. One of the firms that effectively
use JIT is Wal-Mart. Indeed, though it is certainly not a small business, Wal-Mart probably uses
JIT better than any company on Earth. Wal-Mart’s inventory management is one of the biggest
contributors to the company's success. It's called a "cross-docking system" which means that
supplier’ trucks and Wal-Mart’s trucks meet at the company’s warehouses.