Construction Inventory 101 – Common Terms You Need To Know

Top 3 Inventory Management Mistakes

When your inventory is organized correctly, you can expect the rest of the supply-chain management to fall into place. However, without it, you risk your company to a litany of mistakes like out of stocks, mis-shipments, mis-picks, overstock, and so on. Proper inventory management is critical and can be considered a baseline a project could have and key to solving this problem.

• Mis-picks are brought about by disorganized shelf labels. Incorrect paper pick lists, or just a messy warehouse in general. 
• Mis-shipments, on the other hand, results from mis-picks at the start of the inventory process and can also result from the lack of quality control and quality assurance procedures.
• Out of stocks and overstocks happens when a company incorporates manual methods to place orders without keeping an updated quantity or a full grasp of the state of their supply inventory. This is a lousy predictor for inventory forecasting and concludes in too little or too much stock. The latter means a delay in the construction activities, while the former means money down the drain.

All of these inventory mistakes will cost you valuable resources in construction– time and money– and costs you wasted labor that will be spent in correcting the errors in the future. When you fail to implement inventory management tools, the risk of human mistakes increases by the minute. Additionally, your customer service reviews and loyalty take a negative turn as well.

16 Common Terms Construction Inventory You Need To Know

That being said, it is established that inventory management tools are only as powerful as the way you use them.

It is sure worth the time and money to implement an inventory management software set up by the same construction professionals who also use it on the job site. One of the front runners in the construction industry, Pro Crew Schedule, where we just launched the inventory management feature in our project management software.

To properly familiarize yourself and your team in terms of organizing your inventory management procedures, here are standard inventory-control techniques you can utilize in your own company.

1. Economic order quantity

Economic order quantity (EOQ) is a formula for the ideal quantity of order a company needs to purchase for its inventory with a fixed set of variables like demand rate, total production costs, and other factors.

The primary goal of EOQ is to minimize the related costs a construction company typically incurs. The formula is used to identify the maximum number of product units to minimize buying frequency. Additionally, the formula also takes several units in the delivery and storing of inventory unit costs. This can help free up the budget in inventory for most construction companies.

2. Minimum order quantity

The minimum order quantity (MOQ) is the smallest amount of set stock a supplier is willing to sell on the market for the supplier side. If your company’s procurement team cannot reach the MOQ of a specific material, the supplier won’t sell it to you.

For example, inventory materials that cost more to produce usually have smaller MOQ as opposed to cheaper materials that are easier and more cost-effective to produce.

3. ABC Analysis

This popular categorization technique split subjects into three categories to identify items that significantly impact the overall inventory cost.

• Category A: this serves as your most valuable product that can contribute the most to your overall profit.
• Category B: refers to the products that fall somewhere between the most valuable to the least important.
• Category C: indicates the small transactions vital for the overall profits but don’t weigh much individually in your company altogether.

4. Just-in-time inventory management

JIT inventory management is a method that arranges and organizes raw materials orders from suppliers in direct connection to the supplier’s production schedules.

JIT is an excellent way to reduce inventory costs. Construction companies receive inventory on an “as-needed” basis rather than ordering too much and risking dead stock of materials. Deadstock refers to the inventory that was never sold or used by the customers before being removed from the sale status.

5. Safety risk inventory

Safety risk inventory (or SSI) management refers to the extra inventory being ordered in addition to the expected demand. This technique is frequently implemented to prevent stockouts typically brought by unforeseen customer demand changes or incorrect forecasting.

6. FIFO and LIFO

First-In-First-Out (FIFO) and Last-In-First-Out (LIFO) are methods used to determine inventory’s overall cost. FIFO assumes that the old inventory is sold first, which aims to keep the inventory safe.

On the other hand, LIFO assumes that the newer items in the inventory are typically sold first. Moreover, it helps prevent inventory from going bad or deteriorated.

7. Reorder point formula

This inventory management technique is based on a company’s sales and purchase cycles that vary on a per-product basis. A reorder point formula is usually higher than a safety number on stock to factor in lead time in the production.

8. Batch tracking

Batch tracking is one of the most conventionally used quality control inventory management methods wherein companies can group, arrange, and monitor a set of stocks with similar traits or functions. This technique helps track the expiration of inventory or easily trace the defective items back to their original batches.

9. Perpetual inventory management

The most common inventory management trick in the book, perpetual inventory management, is simply counting the items as soon as they arrive. Being the most basic technique, it can be recorded manually using pen and paper or a spreadsheet.