October 7, 2022

What’s Inventory Management? Benefits, Types, & Techniques

What’s inventory management?

The way a business orders, stores, uses, and sells its goods is called inventory management. This includes the storage and processing of raw materials, parts, and finished goods, as well as the management of raw materials, parts, and finished goods.

What you should know about inventory management

What a company owns is one of the most valuable things it has.

In industries with a lot of inventory, like retail, manufacturing, food service, and others, a company’s main business is raw materials and finished goods. Not having enough stock when and where it is needed can be very bad.

When you have a lot of stock, there is a chance that some of it will get broken, stolen, or the demand for it will change. Inventory must be insured, and if it doesn’t sell in time, it may have to be sold at a discount or even destroyed.

Inventory management is important for any business, no matter how big or small.

It can be hard to decide when to restock, how much to buy or make, how much to pay, and when and at what price to sell.

Most small businesses use pen and paper to keep track of their stock. Or, use an Excel formula to figure out when to reorder and how much to get.

Larger businesses use software called Enterprise Resource Planning (ERP). The biggest companies use applications called Software as a Service (SaaS).

Different inventory management strategies work best for different types of businesses.

An oil depot can store a lot of oil for a long time, so it can wait until demand goes up before selling it. Even though it is expensive and dangerous to store oil, there is no chance that it will go bad or become useless.

inventory management

When you sell things that go bad quickly or are only popular for a short time, you can’t keep them in stock, and getting the timing or number of orders wrong can be expensive.

Managing the risk of having too much or too little inventory is especially hard for companies with complicated supply chain and manufacturing processes.

Companies have come up with different ways to manage their inventory, such as just-in-time (JIT) and Material Requirements Planning (MRP), to get the right amount of stock.

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What makes inventory management so important?

Inventory management is important for the health of a business because it helps make sure there is never too much or too little stock on hand. This makes it less likely that you’ll run out of stock or keep wrong records.

Benefits of inventory management

Inventory management has two main benefits: it makes sure you can fill incoming or open orders and it helps you make more money.

Inventory management is also:

  • Saves money: When you understand inventory trends, you can see how much and where you have stock. This lets you make better use of the stock you have. It also lets you keep less stock at each location (store, warehouse) because you can pull inventory from anywhere to fill orders. All of this cuts down on inventory costs and the amount of stock that doesn’t sell before it goes out of date.
  • Better cash flow: When you keep track of your inventory well, you spend money on things that sell, so cash is always moving through your business.
  • Give the customer what they want. One way to keep customers coming back is to give them what they want right away.

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Inventory management problems

The biggest problems with inventory management are having too much stock and not being able to sell it, not having enough stock to fill orders, and not knowing what you have and where it is. Some other problems include:

  • Get accurate information about your inventory. If you don’t have accurate information about your inventory, you won’t know when to restock or which items are selling well.
  • Processes that are out of date or that are done with pen and paper can lead to mistakes and slow down operations.
  • Demand Changes: Customers’ tastes and needs are always changing. If your system can’t keep track of trends, you won’t know when and why their tastes change.
  • Putting things in the warehouse: When it’s hard to find the same thing, staff wastes time. Mastering inventory management could help solve this problem.

Inventory management steps

If you make goods to order, inventory management starts when a customer places an order and goes on until the order is shipped.

If not, the process starts when you estimate how much you will need and then make a purchase order for the raw materials or parts you need.

Other parts of the process include figuring out how to store products in warehouses and looking at sales trends.

How inventory management is done

Inventory management is used to find out how many items are in the warehouse and where they are.

With inventory management software, you can track how products move from the supplier to the customer. Inventory management keeps track of how much stock comes in, is picked up, packed, and shipped.

Inventory management process: the 5 main steps

Inventory management is the process of keeping track of and controlling your stock as it moves from your supplier to your warehouse to your customer.

There are five steps that are important:

  • Buying: This can mean buying raw materials to make things or buying things that don’t need to be put together.
  • Production is the process of putting together the parts that make up your finished product. Not every business will make things on its own. Wholesalers, for instance, may skip this step.
  • Keeping stock means storing your raw materials before you make them (if you need to) and your finished goods before you sell them.
  • Sales: Get your products into people’s hands and get paid for it.
  • Businesses need to know how much money they make from each sale and how much they sell.

Methods and conditions for inventory management

Several methods of inventory management use formulas and analysis to plan inventory. All methods try to get closer to the truth. How a business runs depends on what it needs and what it already has.

What inventory management method is best for your business? Here’s a quick rundown:

  • ABC analysis: This method finds out which types of inventory are the most and least popular.
  • Batch Tracking: This method groups items that are the same so that expiration dates can be tracked and broken items can be found.
  • Bulk shipping: This method looks at the goods that aren’t in packages and has the supplier load the goods directly onto the truck or ship. That means you have to buy, store, and ship a lot of things at once.
  • Consignment: If your business uses consignment inventory management, it won’t pay its suppliers for a product until it’s sold. This supplier also has stock until your company sells it.
  • Cross-Docking: This is a way to move goods from the truck of the supplier to the truck that will deliver them without stopping. Almost all of the storage is left out.
  • Demand forecasting is a type of predictive analytics that helps predict what customers will want to buy.
  • Dropshipping: In this method, the supplier sends the goods straight from the warehouse to the customer.
  • Economic Order Quantity (EOQ): This formula tells a company exactly how much stock to order to save money on storage and other costs.
  • “First in, first out” (FIFO) means to move the oldest stock first. Last-in, first-out, or LIFO, means to move the most recent stock first. LIFO is based on the idea that prices are always going up, so the most recently bought items should be sold first because they cost the most.
  • Just-In-Time Inventory (JIT): This is a way for companies to keep as few things in stock as possible until they need to be restocked.
  • Lean Manufacturing: This method focuses on getting rid of waste and other things that don’t add value to the customer in the manufacturing system.
  • Material Requirement Planning (MRP): This system helps manufacturers plan, schedule, and keep track of their stock.
  • Minimum Order Quantity: A company that uses a minimum order quantity will order a certain amount of inventory from the wholesaler with each order to keep costs down.
  • Reorder Point formula: Businesses use this formula to figure out how much stock they should have before they need to reorder, and then they manage their inventory accordingly.
  • Perpetual Inventory Management: This method keeps track of sales and stock use in real time.
  • Safety stock: An inventory management strategy that emphasizes safety stock will make sure that extra stock is always set aside in case the company can’t get more of the item.
  • Six Sigma is a way for a business that is driven by data to get rid of inventory waste.
  • Lean Six Sigma: This method combines lean management and Six Sigma to get rid of waste and make things run more smoothly.

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Keep track of stock

Most companies plan to sell their finished goods quickly, usually within a year, so their inventory is a current asset.

Before inventory can be added to the balance sheet, it has to be counted or measured. Companies usually have complicated inventory management systems that can track stock levels in real time.

inventory management

There are three ways to keep track of inventory: First in, first out (FIFO), Last in, first out (LIFO), or a weighted average. In most cases, an inventory account has four different parts:

  • Raw materials are all the different things that a company buys to use in its production process. Companies have to do a lot of work to turn these raw materials into finished goods that are ready to sell.
  • Raw materials that are being turned into finished goods are called “work in process” or WIP.
  • Finished goods are products that are ready to be sold to customers by the company.
  • Merchandise is a term for finished goods that companies buy from suppliers to sell again in the future.

Inventory management system

Depending on the type of business or product being looked at, a company will use different inventory management methods.

Some of these methods are Just-in-Time Manufacturing (JIT), Material Requirement Planning (MRP), Economic Order Quantity (EOQ), and Days Sales of Inventory (DSI).

  • Just-in-time management (JIT): With this method, companies only keep the stock they need to make and sell products. This saves them a lot of money and cuts down on waste. This method saves money on the costs of storing, insuring, selling, or getting rid of extra inventory. Using JIT inventory management can be risky. If there is a sudden increase in demand, producers might not be able to find enough stock to meet that demand. This can hurt the manufacturer’s reputation in the eyes of the customer and send business to other companies. Even a small delay can cause problems. If the key input doesn’t come “just in time,” it can slow down the system.
  • Material Requirements Planning (MRP) is a way to manage inventory based on sales projections. This means that manufacturers must keep accurate records of their sales so they can plan their inventory needs and let their suppliers know about them on time.
  • Economic Order Quantity (EOQ): This model is used in inventory management to figure out how many units a company should add to its stock with each batch order to lower its total inventory cost while keeping consumer demand constant. In the model, storing and preparing inventory costs money. The EOQ model tries to make sure that each batch of orders has the right amount of stock. This way, the company doesn’t have to place too many orders and doesn’t end up with too much inventory. It is assumed that there is a trade-off between the costs of holding inventory and the costs of managing inventory, and that the total costs of inventory are lowest when both costs are lowest.
  • Days sales of inventory (DSI) is a financial ratio that shows how many days, on average, it takes a company to sell its inventory, including goods that are still being made. The number is the number of days that the company’s current stock will last. This shows how quickly the stock can be sold. In general, a lower DSI is better because it means inventory will sell faster. But the DSI average is different from one industry to the next.

There are different ways to look at an inventory. If a company changes how it tracks its inventory for no good reason, it’s likely that the management is trying to make the business look better than it really is.

When a company writes off a lot of its inventory, it could be because it is having trouble selling finished goods or because its inventory is getting old. This can also make it hard for a business to stay competitive and keep making things that people want in the future.

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Inventory control and inventory management

Inventory control is an important part of inventory management, but the two are not the same thing, even though they sound similar.

What is meant by “inventory control”?

Controlling your inventory is how you keep track of the things you have stored.

This means you need to know everything about your stock, like how many you have, where they are, and what they look like.

It’s also important to keep stock in the right way, keep inventory costs low, and count and manage stock as little as possible.

Inventory management or inventory control goes first?

Inventory management is about more than just control. This includes your supply chain, production, shipping, sales, and reporting.

Almost every business needs to set up an inventory management system before they can worry about control. If you don’t, you won’t be able to keep track of your suppliers, sales, or production.

After that, you can store and sell your products in various ways. It’s up to you whether you want to buy, control, make, or sell.

For example, you might want to make plans for changes based on how the business has worked in the past. You might want to change how stock is counted, for example. Or, you may need to change how things work to account for new or lost customers, changing demand, or changes in product and order profiles.

Conclusion

The way a business stores, uses, and sells its goods is called inventory management.

It can be very bad to not have enough stock when and where it is needed. Inventory needs to be insured, and if it doesn’t sell in time, it may have to be sold at a discount or even destroyed.

Inventory management is important for a business’s health because it helps make sure there is never too much or too little stock on hand.

Mastering inventory management can help solve problems like having too much stock and not being able to sell it, not having enough stock to fill orders, and not knowing where the stock is.

Inventory management is the process of keeping track of and managing your stock as it moves from your supplier to your warehouse to your customer. Businesses need to know how much money they make on each sale and how much they sell.

With inventory management software, you can track how products move from the supplier to the customer.

A system that keeps track of sales and stock use in real time is called “perpetual inventory management.”

Lean Six Sigma is a way to get rid of waste and improve efficiency that combines lean management and Six Sigma.

Material Requirements Planning (MRP) is a system that manages inventory based on estimates of sales.

The Economic Order Quantity (EOQ) model figures out how many units a company should add to its stock with each batch order.

When a company writes off a lot of its inventory, it could be because it is having trouble selling finished goods or because the inventory is getting old.

Days sales of inventory (DSI) is a financial ratio that shows how long, on average, it takes a company to sell its inventory. Inventory control is an important part of inventory management, but it is not the same thing as inventory management.

Hope it useful!

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Dicky Saputra

16+ years of experience in supply chain management. I help companies improve their end to end supply chain performance.

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