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Importance of Inventory Management: Challenges and Benefits

If you’re in business, then you know the importance of inventory management. It’s a key part of keeping your operation running smoothly and efficiently. But what is it exactly?

Tracking your inventory from the point of purchasing to selling it to a customer is crucial to the success of your business. The process involves identifying and responding to trends and ensuring there is always sufficient inventory to meet customer demand.

Before it sells, inventory ties up cash. But once sold, inventory becomes revenue. Too much inventory ties up cash, so it is important to keep a good balance of products.

Importance of Inventory Management

We cannot understate the importance of inventory management. It helps businesses keep track of their inventory, know when they need to reorder and avoid stockouts.

Good inventory management can also help businesses save money by reducing the cost of inventory, and improving inventory turnover.

What is Inventory Management?

Inventory management is the process of tracking inventory levels, orders, and sales. It helps businesses know how much stock to order when to order it, and how to keep track of it from purchase to sale.

Inventory management is the proactive identification of stock needs based on customer trends. This ensures that there is always enough inventory on hand to fulfill customer orders and avoid any potential shortages.

Inventory management is the practice of tracking and managing a company’s physical assets. One of the measurements for this is “inventory turnover rate,” which refers to how many times the inventory of goods is sold in a period.

A business needs to sell its goods quickly, or it risks having too much stock it cannot sell. This is known as ‘deadstock’.

Inventory management is important for public companies to comply with Securities and Exchange Commission (SEC) rules and the Sarbanes-Oxley (SOX) Act. Companies must document their management processes to prove compliance.

Benefits of Inventory Management

There are two main benefits to using an inventory management system. The first is that it ensures that you can fulfill your orders. The second is that it helps you raise profit.

Saves Money: Knowing what you have in inventory helps you use what you have on hand and understand when you’ll need to order more. Being able to fulfill orders from any store or distribution center, rather than having all of your items at one central location, allows you to keep a smaller amount of each thing in stock. This saves you money, as you’re not wasting money on things you don’t need, and it also means you don’t end up selling things that have become obsolete.

Better Cash Flow: Proper management of your inventory means you only buy products that you know will sell, so money is always moving in the business.

Customer Satisfaction: One way to develop customer loyalty is by making sure they get what they want when they want it.

Challenges of Inventory Management

Inventory management is tricky because having too much stock and being unable to sell it is a big problem, but so is not having enough of it.

Identifying Accurate Stock Details: Without correct and up-to-date inventory data, you can’t know when to restock your shelves or which products move best.

Outdated Processes: Outdated or manual tasks can slow you down and increase your error rate.

Changing Customer Demand: Your customers’ preferences and needs are constantly changing. If your inventory system isn’t tracking these trends, how will you ever know when they have changed and why?

Inefficient Warehousing: Employees waste time if products are hard to find. Inventory management is key to solving this problem.

Inventory vs Stock

Inventory and stock are often used interchangeably in retail businesses. Managers will frequently refer to “stock on hand” when referring to products like apparel and housewares. However, inventory is a broader term that can also refer to stored sales goods, raw materials, and parts used in production.

Although there is a distinction between the terms inventory and stock are frequently used synonymously.

What Are the Different Types of Inventory?

There are 12 different types of inventory:

  • 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)

Inventory Management Process

For companies that provide on-demand services, inventory management starts when an order is placed and is completed when the product has been shipped.

In other cases, inventory management begins when you forecast your demand and place POs for the required raw materials or components.

Other tasks involve analyzing sales trends and organizing products stored in the warehouse.

How Inventory Management Works

The purpose of inventory control is to monitor and track the number of products you have in stock, and where they are located. It ensures you have enough product to meet customer demand, and that you don’t overstock and waste money.

In the warehouse, inventory management keeps track of when goods arrive, are picked, packed, and shipped.

Inventory Management Techniques and Terms

Some inventory control methods involve formulas and data analysis to forecast demand. Other approaches depend on established routines.

All these methods aim to improve accuracy. These techniques depend on your needs and your available inventory.

ABC Analysis: This technique identifies the most and the least profitable stocks.

Batch Tracking: This method groups similar products together to identify which ones have expired and which ones are defective.

Bulk Shipment: This involves purchasing, stocking, and transporting large amounts of materials at once.

Consignment: When using a consignment management system, you don’t pay your suppliers until a product has been sold. That also means that the supplier still owns the products until they’re sold to customers.

Cross-Docking: This method eliminates warehousing, as the goods are directly transferred from a supplier’s truck to the delivery truck.

Demand Forecasting: Predictive analytics can help forecast consumer demand.

Dropshipping: In the dropshipping model, the supplier will ship products directly to the customer from its warehouse.

Economic Order Quantity (EOQ): This formula shows you how much stock you should keep on hand to reduce holding costs.

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 newest inventory is moved first.

Just-In-Time Inventory (JIT): Some companies use this tactic to keep inventory low before refilling.

Lean Manufacturing: This approach removes any process or item that does not add value to the customer from the production chain.

Materials Requirements Planning (MRP): This system handles planning, scheduling, and inventory control for manufacturing.

Minimum Order Quantity: A business that buys in small quantities will purchase only the minimum quantities of goods from suppliers in each transaction to keep costs down.

Reorder Point Formula: This inventory management technique is used by businesses to figure out the minimum level of product they need to have in stock, then order it.

Perpetual Inventory Management: This technique entails recording stock sales and usage in real-time.

Safety Stock: An inventory system that focuses on having excess items on hand will help ensure there’s enough supply to cover any unexpected shortages.

Six Sigma: This is a method that removes wasteful practices from a business’ inventory management.

Lean Six Sigma: Lean management combined with Six Sigma principles is an effective way of removing wasteful activities from your business.

Why is Inventory Management Important?

As consumers form increasingly high expectations and demands of their retail experiences, products are being bought, returned, and shipped through every channel — in-store, through a website, and through a mobile app, both from stores as well as from a warehouse.

Omni-channel shopping efforts can complicate inventory tracking, as products may be moved to multiple locations during their selling lifecycle. This is due to haphazard returns, canceled orders, and shipping charges that can be brought on by new shopping technology. Accurate management of this inventory is critical to creating a positive customer experience.

Inventory management is critical to the success of any business that sells physical products. Inaccurate inventory tracking can lead to lost sales, frustrated customers, and inefficiencies in the supply chain. Newer technology can help to improve accuracy and create a positive customer experience.

An inventory management system can help provide a clearer view of all stocks, helping businesses better manage things such as their allocation of goods, their handling of overstock, and other processes that deal with their inventories.

Here, we will show you a few reasons why you should update your inventory management system.

Inventory vs. Cycle Counting

Inventory is the process of counting all stock once a year, while cycle counting is the practice of counting a selected set of stock more often.

Cycle counting is an important way to check that the amount of inventory in your inventory management system is accurate. By regularly counting selected items, you can ensure that your records are up-to-date and accurate.

A best practice for cycle counting is to count specific SKUs regularly and integrate them into the daily tasks of warehouse staff. 

Some companies may count certain products more frequently than others, such as counting the top moving products or high-value goods.

Demand Planning and Inventory Management

The demand planning process is where you determine how much of each product you will sell, and when.

After demand has been determined, inventory management can begin to track the flow of goods from the supplier through production and ultimately to customer orders. This process ensures that customers receive the products they need on time.

Inventory Management Formulas

As inventory management is a critical part of any business, it is important to understand the various formulas used to calculate stock levels. By understanding these formulas, businesses can optimize their inventory and avoid costly mistakes.

Inventory Management KPIs

Inventory management is an important aspect of supply chain management. There are numerous KPIs used to measure the success of inventory managers.

Inventory management KPIs are important calculations that provide insight into your business processes. By understanding which KPIs are most relevant to your business, you can improve your inventory management and make more informed decisions about your stock.

How Is Inventory Management Different From Other Processes?

People often mistake inventory control for similar processes. However, it’s simply the process of tracking all goods within an organization.

Supply chain management includes tracking the flow of goods from suppliers to customers. Warehouse management is a part of inventory control and focuses on stocks in a specific location.

Inventory Management vs Inventory Control

Part of the process of managing stock is controlling it. This entails moving goods around a warehouse.

Inventory Management vs Inventory Optimization

Inventory optimization is key to reducing costs and maximizing efficiency. By utilizing inventory in the most efficient way possible, businesses can minimize spending on stock and storage. This allows businesses to hold less inventory overall, saving both money and space.

Inventory Management vs Order Management

Inventory management is responsible for ordering and tracking stock as it arrives at the warehouse. Order management is the process of receiving and tracking customer orders. Software often combines both tasks.

Many software options combine both functions.

Inventory management is a key element of order management. By allocating inventory to specific orders as they come in and then changing the status in the inventory record, you can effectively put the items “on hold” for that order. This ensures that the right products are available when you need them and helps to avoid multiple shipments for a single order.

Integrating your order management and inventory management systems can cut down on the number of shipping errors, as your inventory software can suggest which warehouse should fulfill an order, based on the item availability at all locations.

Supply Chain Management vs Inventory Management

Supply chain management is the process of managing the supply chain of a business. This involves tracking inventory, ordering, and trends.

Inventory management is a critical part of supply chain management, as it helps to ensure that goods flow smoothly through the warehouse and are available when needed. By tracking inventory levels and trends, businesses can avoid stock-outs and disruptions to their operations.

The supply chain is responsible for ensuring that the right inventory is in the right place at the right time to meet customer demand. Inventory management is a critical part of supply chain management, and it includes activities such as forecasting, stock planning, order management, and warehouse management.

Warehouse Management vs Inventory Management

Inventory management and warehousing are two different processes. While inventory is the stock a company has on hand, a warehouse is a physical place where that company stores that product.

Stock and inventory are managed for many companies by inventory management.

The key to streamlining your warehouse operations and ensuring maximum efficiency is a well-organized facility. By assigning each product a specific location in the warehouse, you can prevent staff from wasting time moving around unnecessarily. This also allows you to make better use of labor resources.

However, these processes can only be effective if they are based on accurate inventory records.

Inventory Management vs Logistics

Logistics is the practice of organizing and controlling the transportation and storage of goods. This includes the management of inventory levels and stock location. Inventory management is a critical part of logistics, as it ensures that goods are available when needed and that stock levels are maintained.

The relationship between inventory and supply chain management is intertwined.

Without good inventory and logistical management, warehouses and operations can’t function.

Inventory Management vs ERP

An enterprise resource planning (ERP) system is software that handles business processes such as accounting, purchasing, compliance, and supply chain management.

Inventory management is an important aspect of modern ERP software, as it allows you to see your inventory in real-time, as well as track it as it’s being shipped.

Additionally, an ERP system can help optimize inventory management processes to ensure that they are as efficient as possible.

How to Choose an Inventory Management System?

Identifying the features of your inventory management software is the first step toward choosing one. Do you require the ability to track the movement of goods within your warehouses, or do you need to plan and forecast your inventories?

Conclusion

Tracking your stocks from the point of purchase to delivery is crucial to the success of your business, hence the importance of inventory management. The process involves identifying and responding to trends and ensuring there is always sufficient inventory to meet customer demand. Bring the benefits of inventory management to your business and keep your operation running smoothly and efficiently.