Inventory management is the process of overseeing and controlling the inventory levels of a business. It involves the planning, procurement, storage, and tracking of inventory to ensure the business has the right stock. Effective inventory management is critical for businesses of all sizes, as it can impact their cash flow, customer satisfaction, and profitability.
Inventory management techniques and methods involve various activities, including forecasting demand, determining optimal stock levels, managing inventory turnover, and implementing processes for stock replenishment. The goal is to ensure that the business consistently has enough inventory to meet customer demand but not so much that it ties up valuable resources or creates waste.
Effective inventory management can significantly impact a business's bottom line. If a business overstocks inventory, it ties up valuable capital and warehouse space, leading to higher carrying costs and potentially lowering profits. Conversely, understocking can result in stockouts, missed sales opportunities, and unhappy customers.
The evolving inventory management techniques
Modern inventory management techniques often involve software and automation tools to streamline processes and provide real-time inventory tracking. These tools can help businesses to reduce the likelihood of stockouts, optimize their order management processes, and improve their inventory turnover ratios.
Knowing the introduction to inventory management is an essential part of any business's operations. It can help to minimize waste, reduce costs, and improve customer satisfaction, all of which can contribute to the long-term success and profitability of the business.
An Overview of the Process of Inventory Management
The inventory management process involves a series of activities that enable businesses to keep track of their inventory levels and ensure that they have the right amount of stock on hand to meet customer demand. Here is an overview of the typical inventory management process:
Forecasting demand: The first step in inventory management is estimating future product demand. This is done by analyzing historical sales data, market trends, and other relevant factors.
Determining optimal stock levels: Businesses can determine the appropriate amount of inventory to keep in stock based on the demand forecast. This involves setting minimum and maximum stock levels, re-order points, and safety stock levels.
Procurement: Once optimal stock levels have been determined, businesses must procure the necessary inventory. This involves selecting suppliers, negotiating prices, and placing orders.
Receiving and storage: When inventory arrives, it must be received, inspected, and stored in the appropriate location. This can involve using inventory tracking software to assign unique codes or labels to each item.
Tracking inventory levels: Businesses must continuously monitor their inventory levels to ensure they remain within the optimal range. This can involve using inventory tracking software or physical counts of stock on hand.
Order fulfillment: When customer orders are received, businesses must check their inventory levels to determine whether they have enough stock to fulfill the order. If not, they must order more inventory or backorder the item.
Stock replenishment: When inventory levels fall below the minimum stock level, businesses must re-order stock from their suppliers. This can involve using automated re-order systems or manual ordering processes.
Inventory Management vs. Other Process
We all know that inventory management is critical. But let’s understand how inventory management stacks up against other processes.
Inventory Management vs. Inventory Control
The whole inventory management process includes inventory control. The movement of goods inside the warehouse is controlled by inventory control.
Inventory Management vs. Inventory Optimization
Utilizing inventory as efficiently as possible helps reduce the amount of money spent on stock and keeping such products.
Using any available inventory to satisfy client orders across all locations and sales channels is another way to optimize inventory. By doing this, you can store less inventory overall.
Inventory Management vs. Order Management
Inventory management is in charge of placing orders and monitoring inventory once it enters the warehouse. Receiving and monitoring client orders is the process of managing orders. Software frequently combines the two jobs.
Order management depends heavily on inventory management. For example, inventory can be allotted to individual orders as they are received, and then the inventory record's status can be altered to "hold" the inventory for that order. Additionally, when the inventory system and order management system are connected, the inventory system can suggest which location should fulfill the order depending on where all the products are available, eliminating the need for numerous shipments for a single transaction.
Inventory Management vs. Supply Chain Management
The process of controlling the movement of goods into and through a firm and supplier relationships outside of that organization is known as supply chain management. Inventory management can concentrate on trends and orders for the firm or a division of the organization.
A supply chain's smooth operation depends on effective inventory management. Inventory control keeps track of the movement of items into, through, and out of the warehouse. Demand forecasting, sourcing, production, quality assurance, delivery, warehousing, and customer support are all parts of the supply chain and require insight into the inventory.
Inventory Management vs. Warehouse Management
Inventory management is enhanced by warehouse management. Stock at a warehouse is organized by warehouse management. Many warehouses or a whole business might have its supply and trends managed through inventory management.
The secret to optimizing your warehouse operations is a facility that has been carefully planned and impeccably arranged. Each product has a designated location in the warehouse, which minimizes wasteful staff movement and increases labor productivity. However, the quality of these operations depends on the inventory data that power them.
Inventory Management vs. Logistics
Controlling warehouse operations and systems for replenishment and delivery is known as logistics. Stock levels are kept constant, and stock locations are managed.
For businesses to control their logistics, inventory management is essential. It is interdependent between inventory management and logistics. Inventory management is required for logistics to operate. Effective logistics systems enhance operational and warehousing activity.
Inventory Management vs. Enterprise Resource Management
Software called an enterprise resource planning (ERP) system controls commercial processes, including accounting, purchasing, compliance, and supply chain management. In contrast, as an element of a current ERP system, inventory management offers visibility into stock levels, goods on the way, and current inventory status, making it instantly visible throughout the business.
Planning a company's replenishment orders correctly is aided by inventory management. ERP systems provide businesses with precise inventory data so they can use it to create an inventory management strategy. In addition, ERP systems optimize the data for effective inventory management.
Effective Inventory Management Techniques
It is always a great idea to know about inventory management techniques to be updated with the industry trends and stay effective in the process.
Economic Order Quantity
Economic order quantity (EOQ) is a formula that determines how much inventory a business should buy based on several parameters, including total production costs, demand growth, and more. The formula determines the most units to reduce purchasing, holding, and other expenditures.
Just-in-Inventory Management
By using the just-in-time (JIT) inventory management strategy, businesses can avoid dead stock by ordering what they need (inventory that was never sold or used by customers before being removed from sale status).
FIFO & LIFO
There are two ways to calculate the cost of goods: LIFO and FIFO. First-in, first-out, sometimes known as FIFO, is the theory that older stock is sold first to maintain its current.
To stop the stock from spoiling, LIFO, or last-in, first-out, posits that the most recent inventory is usually sold first.
Minimum Order Quantity
The least amount of inventory that a retail company will buy to keep costs down is known as the minimum order quantity (MOQ). However, keep in mind that compared to cheaper products that are simpler and more affordable to create, inventory items with higher production costs often have a smaller MOQ.
Safety Stock Inventory
Additional inventory is ordered and kept away to ensure the business has enough replenishment. This lessens the likelihood of stock-outs, frequently brought on by bad forecasts or unanticipated changes in client demand.
ABC Analysis
This method divides products into three groups to pinpoint those significantly influencing the cost of inventory.
Your most valued items and the ones that add the most to overall earnings are under Category A.
The items in Category B are in the middle of the value spectrum.
Small transactions essential to overall profit but have little bearing on them individually fall under Category C.
Re-order Point Formula
The re-order point formula determines the bare minimum of stock a company should have before placing another order. A re-order point is often more significant than a safety stock number to account for lead time.
Consignment Inventory
You're correct if you're picturing your nearby consignment shop. Consignment inventory is when a vendor/wholesaler agrees to deliver their goods to a consignee (i.e. a retailer) without the consignee making an upfront payment for the inventory. Instead, the consignor still owns the products while supplying the inventory. The consignee only agrees to pay for them when they are sold.
Batch Tracking
To manage inventory expiry or track down defective products, users can utilize the quality control approach of batch tracking, which groups and keeps track of comparable commodities.
Perpetual Inventory Management
When you count your inventory as soon as it arrives, the technical is called perpetual inventory management. This is done to provide real-time data. The simplest inventory management system can be manually entered on paper using a pen or in an Excel spreadsheet. Using portable devices capable of scanning RFID tags and product barcodes, you can also utilize an inventory system that has the power of automating inventory balances once stock is moved, sold, used, or trashed.
Consignment Inventory
You're correct if you're picturing your neighborhood consignment shop. Consignment inventory is when a vendor or wholesaler agrees to deliver their goods to a consignee (retailer) without the consignee making an upfront payment for the inventory. Instead, the products are still owned by the consignor supplying the inventory, and the consignee only pays for them when they are sold.
Dropshipping
Dropshipping is a kind of order fulfillment that involves the provider sending the customer's order straight from the source. For example, rather than selecting the item from their stock when a business makes a sale, they buy it from a third party and send it to the customer.
Demand Forecasting
To predict client demand, demand forecasting is based on previous sales data. Essentially, it's a projection of the products and services a business anticipates its clients will buy.
Lean Manufacturing
A comprehensive collection of management techniques known as lean manufacturing can be used in any industry. It aims to increase efficiency by doing away with waste and other unnecessary tasks from day-to-day operations.
Six Sigma
The Six Sigma methodology equips businesses with the tools to raise performance (earnings) and reduce excess inventory.
Lean Six Sigma
Lean Six Sigma improves Six Sigma's tools but emphasizes improving word consistency and business flow.
Bulk Shipment
Palletizing merchandise to send more at once is an economical shipping strategy known as bulk shipments. Check out case studies pages from various companies to find success stories from B2C and B2B retailers to see efficient inventory management.
Summing it Up
Inventory management techniques are crucial for businesses to optimize their inventory levels, reduce costs, and increase efficiency. Several techniques are available, including just-in-time (JIT) inventory, economic order quantity (EOQ), and ABC analysis.
Choosing the right inventory management technique depends on various factors, such as product type, demand, and supply chain structure. By implementing effective inventory control techniques, businesses can achieve better control over their inventory and improve their overall performance.
FAQs
1. What are the 4 types of inventory?
The 4 types of inventory are:
Raw materials inventory: Raw materials are the essential components that are used in the production of goods.
Work-in-progress inventory: This type refers to goods being produced but not yet completed.
Finished goods inventory: Finished goods are products that have completed the manufacturing process and are ready for sale to customers.
Maintenance, repair, and operating (MRO) inventory: MRO inventory includes supplies and materials used for the maintenance, repair, and operation of equipment, facilities, and buildings.
2. What is MRO inventory?
Palletizing merchandise to send more at once is an economical shipping strategy known as bulk shipments. You can find success stories from B2C and B2B retailers and learn about some instances of efficient inventory management.
3. What is OEM vs MRO?
OEM inventory refers to parts and components that the original equipment manufacturer uses to produce goods and supplies. These parts are designed to meet the exact specifications of the equipment and are often used by manufacturers to build products that meet specific quality standards and performance requirements.
On the other hand, MRO inventory includes supplies and materials used to maintain, repair, and operate equipment, facilities, and buildings. These items are necessary to keep a business running but are not directly used in producing goods or services.
4. What is MRO and MRP?
MRO stands for Maintenance, Repair, and Operating supplies, which are necessary to keep a business running but are not directly used in producing goods or services. MRO inventory is essential for the maintenance and upkeep of equipment, facilities, and buildings and for the smooth functioning of administrative and support functions.
MRP, on the other hand, stands for Material Requirements Planning. It is a system that helps manufacturers manage their inventory levels by generating a detailed production schedule based on the materials and components required to meet production goals.