Inventory management is the process of keeping track of all the goods that a company has in stock. And the benefits of good small business inventory management extend beyond what meets the eye. Having too much stock not only weighs you down monetarily but also takes up stock room space. However, understocking can mean delayed deliveries and unhappy customers. Inventory is integral to every business dealing and therefore, inventory management has a large role in your company’s success. For modern manufacturers, it is important to have systems which can make their life easier even as they focus on the growth of their business. Here is the ultimate lowdown on all that you need to know about inventory management.
What is Inventory Management
Before we go into the details, let us have a basic understanding of what is inventory, etc. There are several definitions of inventory but in simple terms, it is the sum of all items used in a business including anything related to business operations. Some examples include safety or office equipment, etc. The items of an inventory can be broken down as follows.
Raw materials– Components which can be used to create products;
Work-in-progress– Items in the process of becoming finished products; and
Finished goods– Products that are completed and ready to be sold.
One of the main issues that makers often face is that of having to deal with the constantly moving pieces of raw materials and the finished products. It is therefore important to understand that inventory is dynamic and the first step to attaining fluidity is through management. This makes it easier for the company to look for the right tools to keep track of their stock. An inventory management software can help in keeping the inventory information up to date and free of human errors. It can also help in taking care of small business needs including sales and accounting.
The Difference Between Inventory and Stock
Often, business owners, retailers, and manufacturing experts use the above two terms interchangeably. However, it is really a matter of personal choice. It is good to be specific about how to distinguish between the types of inventory that a business deals with. To remove any uncertainty, it is better to mention the type of inventory that a company is referring to. The main forms of inventory include raw material, work-in-progress, finished goods, MRO (Maintenance, Repair, Overhaul); and assembly items.
Inventory Management vs Inventory Control
Again, these are two terms that are used interchangeably. Inventory control is one aspect of the broader discipline of inventory management. Inventory control is about understanding where the inventory is and ensuring it reaches the right place for efficient and timely manufacture of finished goods. Inventory management includes aspects like cost of purchasing raw materials, carrying costs of inventory, and inventory processing overheads. It is about how inventory fits into your overall business plan and success metrics and ensuring that production is efficient enough to be profitable. A good manufacturing inventory management helps in saving time, money and resources thereby ensuring complete peace of mind. The end goal is positive customer experience and overall customer satisfaction.
Popular techniques used in inventory management
There are different types of inventory-management and control techniques that you choose to utilize.
Economic order quantity
Also referred to as EOQ, this is a formula for the ideal order quantity that a company needs to purchase for its inventory. The set of variables include total costs of production, demand rate, and other factors. The overall goal of this technique is to minimize related costs and the formula helps in identifying the greatest number of product units needed to minimize buying. The formula also considers the number of units in the delivery of and storing of inventory unit costs thereby helping free up tied cash in inventory in the process.
Minimum order quantity
This is the smallest amount of set stock that a supplier is willing to sell. The supplier will not sell if the retailer is unable to purchase the MOQ of a product. For example, the inventory items that cost more in terms of production have a smaller MOQ when compared to cheaper items that are easier to make.
This technique splits subjects into three categories. It helps identify items with a heavy impact on the overall inventory cost. Category A has the most valuable products which contribute to overall profit. Category B is products which are somewhere between the most and least valuable. Category C is small transactions that are crucial for overall profit but do not matter individually.
Just-in-time inventory management
This technique is about arranging raw material orders from suppliers in direct connection with production schedules and helps reduce inventory costs. This makes sure that the inventory comes in on a need basis and that there is no risk of dead stock or ordering too much. Dead stock refers to inventory that was never sold before being removed from the sale status.
Safety stock inventory
This is the inventory which is ordered over and above the expected demand and prevents stockouts caused due to incorrect forecasting or unforeseen changes in customer demand.
FIFO and LIFO
Both these methods help in determining the cost of inventory. FIFO refers to First in, First out, assuming that the older inventory gets sold first. It helps in keeping the inventory fresh. LIFO refers to Last-in, First-out, assuming that the newer inventory is sold first; this helps the inventory from going bad.
Reorder point formula
This inventory management technique is based on the own purchase and sales cycles of a business – which further varies on a per-product basis. A reorder point is usually higher than a safety stock number to factor in lead time.
This is the quality control inventory management technique in which it is possible for users to group and monitor a set of stock with similar traits. It helps in tracking the expiry of inventory or trace defective items to their original batch.
This is where a consigner (vendor or wholesaler) agrees to give their goods to a consignee by paying upfront for the inventory. The consigner continues to own the goods and the payment is done by the consignee only when the goods sell.
Perpetual inventory management
This simply refers to counting inventory when it arrives and is the most basic inventory management technique. It can either be recorded with pen and paper or through a spreadsheet.
In this technique, the store does not keep the products that it sells in stock. During the sale, they purchase the item from a third party and then have it delivered to the customer.
This technique can be applied to any business practice and the goal is to improve efficiency. The technique eliminates waste and non-value-adding activities from daily business.
This brand of teaching helps companies with tools to improve the performance of their business by increasing profits and decrease the growth of excess inventory.
Lean Six Sigma
This enhances the tools of Six Sigma and focuses more on increasing word standardization and the flow of business.
This technique is based on historical sales data. It helps in formulating an estimate of the expected forecast of customer demand.
In this technique, an incoming truck unloads materials directly into outbound trucks to create a JIT shipping process. There is little or no storage in between deliveries.
This is a cost-effective technique. It helps in palletizing inventory to ship more at once.
Benefits of inventory management
Every successful e-commerce and online retail brand has an effective inventory management system in place. It is possible to achieve several of the benefits of inventory management with a strategic plan in place. This further optimizes the process of overseeing and managing inventory, including real-time data of inventory conditions and levels. Some benefits of inventory management include the following.
Accurate Order Fulfillment
Imagine a scenario in which the customer has placed an order with an e-commerce brand but the item is out of stock in the warehouse!. Even worse, the brand ships the wrong item to the customer. We have heard several such instances. To avoid inaccurate fulfilment of orders, high return volumes and loss of customer base, every business must take out the time to develop a more robust plan.
Better Inventory Planning and Ordering
It can become difficult to understand what products are needed if the company doesn’t know what is stocked. When online retailers do not manage their inventory properly, there is a high likelihood of overstocked items, some of which may not even be strong sellers. Inventory management avoids such issues and allows warehouse managers to refresh inventory only when needed – as a result, becoming both space and cost-effective.
Increased Consumer Satisfaction
Customers who shop online await their orders and nothing can be worse than them not receiving the order on time or as expected. Buyers would be less likely to purchase from a brand where such issues arise. With good inventory management, orders are fulfilled quickly and satisfactorily. This level of user experience and satisfaction ensures that the brand builds a strong portfolio and will keep customers coming back for more.
Better accuracy in inventory orders
Some of the critical requirements of good inventory management include accuracy of product orders, status, and tracking. A fulfillment partner who’s effective will have tools like real-time software and systems. This will further ensure that no product is left untracked throughout the fulfillment process.
A good inventory management strategy also means a fulfillment centre that is more organized. This leads to more efficient fulfillment plans now and forever along with other benefits such as cost-savings and improved product fulfillment.
Increased efficiency and productivity
When a company has a proper inventory management, there are less resources and time invested in managing inventory. It can also be allocated to other areas. Such warehouses make use of technology to hasten the tracking and fulfillment operations, ensuring that inventory records are accurate.
Savings in time and money
With improved ordering accuracy, efficiency, and product flow, overall, a good inventory management leads to savings in time and money.
When the inventory management process is effective, it protects from incorrect or damaged goods being shipped to customers. This further enhances customer experience and removes issues such as refunds. The business will also have repeat buyers.
Why is Inventory management software important?
As we saw above, having an inventory management system in place is extremely important for business growth, success, and revenue generation. This is because inventory can become a big expense for businesses. Inventory management can have a positive impact on all business aspects including customer services. Nowadays, many organizations have started making use of what is called an inventory management software to monitor the required products according to customer’s demand. An inventory management software also allows the accounts and management departments of an organization to function smoothly and effectively. Some other reasons why inventory management software is important are as follows.
Inventory Order Management
With inventory management software, businesses can track and order products that are needed as per the client’s demand. The software helps in tracking the availability of products in stock in real time and helps in the generation of order for good sale items. The company will thus be able to identify the items that sell the most and restock them accordingly. An inventory management software will help in maintaining a record and lead to better customer satisfaction.
A business owner is always concerned about having the most selling products in place always. This is where an inventory comes in as one of the major ways to generate revenue and profit for the business. With an inventory management software in place, the business owner would be able to have a real-time update on the products in stock and get first-hand info. Apart from this, the software will also update on other aspects including revenue and profit.
With inventory management software, a business owner would be able to greatly maximize profits. This is because the software makes it easier to manage the arrival, purchase and selling of stock. For business owners who order large quantities of stock, there will be a lot of time needed by the employees for organizing stock and maintaining the record. When a certain stock is not available, it can put extra pressure on the customer services department. With inventory management software, all these processes become easier and it also helps with better management of records.
When the inventory stock is well managed, it is easier for a business to handle the product cost. A business that uses inventory management software can also find the best market deals. These further help in driving towards the purchase of items at a lower price. For a business that purchases a high volume of products, products at a lower price would accrue benefits in the form of increased selling. This is because inventory management software allows for tracking the cost of products from purchase details and prepares a comprehensive report in just a few clicks.
An inventory management software also helps in tracking the inventory turnover. It allows business owners to acknowledge their selling products and order quantity and in turn, they would be able to keep the selective stock which sells more. All this will further translate to a boost in revenue.
Perhaps the most amazing aspect of an inventory management software is that it helps work out a deep analysis of trends which can then be reviewed by the management. It makes it possible to see which are the most selling products and the vendors with the most demand from customers. They also display seasonal products that are in most demand during specific times. Apart from sharing business insights and product details, the most impressive aspect of an inventory management software is perhaps the capability of keeping the shelves open. With an effective inventory management software, it will also be possible to sort out products and create space for upcoming trending stock.
An inventory management software thus helps in not only running a business but also streamline its operations in a way more efficient and cost-effective manner. An inventory management software also ensures that the products in stock are of the topmost quality. Every business needs certain metrics including excellent customer service – this is perhaps the most important. By implementing the right software, it is possible to enhance customer services and it will also be an important link between the manufacturer, distributor and the retailer.