Do you know which businesses are destined to reach great heights? The one using inventory management effectively.
Inventory constantly moves, shifts, and demands your attention, so you are in hot waters when it is not managed smoothly. For a small retail business, it is easy to manage and categorize inventory but what if that small business reaches a peak selling point, stockouts can become an alarming problem, right? Therefore, efficiently managing inventory is the heart of the business operations. But sadly, not every business relies on modern-day inventory management systems, which can save them time and money.
In this blog, we will explore inventory management in depth, its importance, benefits, and best methods.
What is inventory management?
Inventory management is a primary part of the supply chain to ensure all materials are available when required. You can organize, store, utilize, track, and monitor all supplies from the manufacturer to the point of sale.
With inventory management, inventory visibility is clear – you know when to order, how much to order, and what to stock. Businesses need an accurate inventory view to ensure order fulfillment, reduce shipping time, and minimize stockouts or overstocking.
Inventory management is a primary part of working capital management as well. A substantial investment is needed for larger inventories, therefore, an efficient inventory management strategy helps businesses avoid needless investments and make sure capital is sufficiently used.
Importance of inventory management
Inventory management reflects a business’s operational health as it helps ensure that inventory levels are maintained. In different industries like retail or food services, a lack of inventory can become a serious liability.
Small and large businesses need to have a proper inventory management system to track their supplies and keep a check on their costs as well. Any sudden change in demand can otherwise affect the customer’s experience and the product quality. So, businesses following a customer-centric approach are more careful about overstocks or shortages, which can become a challenging process.
Remember, inventory is typically a current asset of the company that they sell to earn more profit and generate a steady revenue stream. Measuring and tracking the assets regularly will keep the operations streamlined. That’s where tracking inventory control KPIs comes in. Markets are more competitive, and inventory KPIs like accuracy or turnover, measure the effectiveness of your business. Proper inventory management helps improve these KPIs, and achieve your business’s desired goal.
Types of inventory
The following table explains some types of inventory that require rigorous management:
| Inventory types | Description |
| Raw materials | Semi-finished/raw products shipped to be assembled. The inventory management system tracks the time of dispatch from the supplier. |
| In progress | Products made from raw materials that are in the process of being assembled. There can be several active projects in this stage. |
| Repair | Under maintenance, or refurbished goods that are handled in-house or with the help of a third party. |
| Finished goods | Goods that are ready to be shipped and are in the final form. |
| MRO goods | These are maintenance, repair, and operating supplies (MRO). They are part of the production process. |
| Packaging materials | Materials used to pack finished goods. These fall under three categories: primary packaging (boxes or bags), secondary (boxes, bags, or other material), and miscellaneous packaging (bubble wrap, pallets, etc.). |
| Safety stock | The amount of extra goods kept as a safety buffer to avoid stockouts or backorders. These are regularly monitored and tracked. |
| Decoupled inventory | These are the parts, supplies, and finished products waiting to be used by the next machine (not every machine works at a similar pace, and can produce more or less number of finished goods). |
Methods of inventory management
There are several ways businesses can conduct efficient inventory management. These methods help businesses stay on top of their everyday operations while reducing inefficiencies. Some methods include:
1. Inventory tracking
This includes tracking inventory regularly using scanning systems and barcode technology. With modern tracking systems, users can ensure they are always aware of their inventory movements.
2. Stock level monitoring
Businesses monitor inventory levels regularly or conduct inventory audits to ensure the inventory management system counts match the physical counts. Reorder points can be established so businesses never run out of stock.
3. Regular inspections
Conducting periodic checks is important to empower businesses to maintain the quality of their inventory. Inspections allow businesses to maintain the right inventory and ensure they do not incur additional costs due to excessive inventory holding.
4. In-depth reports
Assessing inventory data regularly involves generating everyday reports that can be forwarded to the operations and warehouse teams to evaluate inventory. These reports include detailed information, such as stock levels, purchase orders, and stock reorder levels.
5. Multi-location support
Inventory management is optimized when businesses can work collaboratively with various team members to ensure that they are all on the same page regarding inventory updates. Team members based in remote locations can access inventory data, and perform actions according to customer needs.
3 common types of inventory management systems
Inventory management systems help businesses track inventory items being moved across locations. While there are several kinds of inventory management systems, the three major types are:
1. Periodic inventory system
It is an inventory evaluation technique that involves physically counting inventory items at specific intervals. Initial records of the inventory are kept along with any purchases made throughout the year and a physical count is maintained at the end of the year to calculate on-hand inventory.
2. Manual inventory system
It is rather an obsolete technique that requires physical counting of inventory and manual record keeping. Paper-based records are maintained and updated with time as needed.
3. Perpetual inventory system
In this method, the inventory count is updated automatically and continuously as an item is added or removed from the repository. For example, an inventory item can be scanned and sent to another location and the system will update its number.
Benefits of managing inventory with an inventory management system
Adopting an inventory management system, such as inventory management software to achieve accuracy in business operations is a trending global practice.Â
Reportedly, the global market for inventory management software is expected to reach USD 2.56 billion by 2029 from USD 1.52 billion in 2023 – a CAGR of 6.62%. As business processes become more complex, the need for real-time inventory tracking is now more than ever.
Inventory management systems help expedite the inventory management process by enabling inventory labeling, automating inventory tracking, and updating inventory counts. Inventory management, if done correctly, yields long–term returns.
Let’s delve deeper into understanding the benefits of using an inventory management system and the ways to conduct seamless inventory tracking:
1. Improve inventory utilization
Inventory management can help businesses fully utilize the available inventory. For businesses that do not sell goods, full inventory utilization supports uninterrupted operations. It helps such businesses make the best use of the available resources and allocate them to different processes as per business needs.
An inventory management system enables businesses to record all inventory items in a central asset repository. This repository includes details, such as inventory name, quantity, purchase date, and custodian, so the user can access this information when checking out an inventory item. The availability status of the inventory is accordingly updated.
Using such a system allows users to save the time needed to look for inventory – enhancing productivity. By having a holistic view of the available inventory, users can generate insights about usage patterns, and frequency of demand, and deal with stockouts quickly (if they occur).
For example, a healthcare facility needs to make sure that they have the right number of gloves, surgical masks, and medicines available for emergency operations. An inventory management system would give the staff operational control over the available inventory and see if enough is available.
2. Maintain adequate inventory levels
Having the right inventory level – not too much and not too little – is the key to striking a balance between meeting customer demand and having cash flow problems. This means a business never has to say no to its customers due to understocking, and doesn’t incur exceptionally high costs by overstocking.
Without the right inventory count, businesses suffer from lower profits due to the cash stuck in inventory and the additional costs of managing the inventory in the warehouse. For instance, 43% of small businesses do not track inventory at all or use manual methods – leading to lost capital and high costs.
An inventory management system allows users to use the inventory details to set minimum and maximum thresholds. So, if the inventory goes below the set threshold, the system will alert the user through a notification highlighting the need for restocking. Likewise, it will prevent users from adding inventory items to the system beyond the threshold. This way, users can keep the inventory in check and minimize costs associated with low or excessive inventory.
3. Leverage an efficient purchase order process
A purchase order process is a structured way for businesses to order goods and services from manufacturers or vendors. Making this process smooth allows businesses to establish a clear chain of communication and develop financial control over their purchases.
Using an inventory management system enables users to automate the process of purchasing by allowing users to not only create purchase orders but also track them with a unique identifier. This way, they can incorporate all the relevant details into the purchase order to ensure the right inventory items with their exact count are delivered.
Since purchase order processing requires approval from authorized personnel, the system prevents others from making purchases – adding a layer of security. The approval process ensures that the order is legitimate and required by the business.
Automation through a dedicated system simplifies these processes. The users can quickly retrieve, update, and cross-match inventory data to pinpoint any discrepancies.
Operations managers can also create asset inventory reports to account for the number of inventory items procured along with their costs. This level of data consolidation helps them respond to customer demand and organize their internal operations.
4. Ensure regulatory compliance
Having complete control over inventory is one of the best ways for businesses to ensure that they are staying compliant with industry standards. Businesses must establish a safe work environment by meeting the safety and quality standards. Following these industry best practices makes businesses audit-ready.
Modern inventory management solutions come equipped with the ability to ensure that businesses are staying compliant when it comes to handling inventory. Department managers can conduct audits from time to time to ensure that the inventory is safe to use. This can include conducting physical checks, scanning inventory barcodes for data retrieval, and flagging unusable inventory items, such as rusty nuts and bolts.
The staff handling inventory can see if inventory is available in reality as highlighted in the system and if it is in the hands of the right personnel. The discrepancies can be highlighted immediately.
Let’s say, if a construction business has extra cranes in inventory, the on-site manager can assess their condition and send them for service right from the system. Likewise, the manager can track the entire lifecycle of the cranes and see if they are in usable condition.
This information helps inventory managers make data-driven decisions to improve the performance of the inventory and keep business activities running smoothly.
Process of inventory management
It is important to understand the inventory management process to minimize errors. The steps involved in the process are the fundamentals of inventory management as they help direct workflows toward higher warehouse efficiency.
Here is how the inventory management process works:
1. Arrival of products at warehouse
In the first stage, raw materials and subcomponents are delivered to the warehouse. This step is crucial to initiate tracking and to maintain the production schedules meeting your customer’s demands. An inventory management system allows you to easily log the incoming shipments. You can scan the barcodes and streamline the check-in process.
2. Checking and storage
Once the product has arrived at the warehouse, the second step is to verify the quantity, and quality of the product. You can follow up with a customizable checklist before the inspection takes place to take care of any discrepancies. After inspection, the item is stored at the assigned location to facilitate quick retrieval. This practice helps reduce the risk of errors.
3. Updating inventory levels
Inventory is counted once stored at the warehouse. Using an inventory management system, you can update the inventory levels by automating the process to ensure inventory information is up-to-date. You can easily track the available inventory, place new orders, and allocate the items wisely.
4. Order placement
You need to understand the reorder points to maintain an optimal stock level. The automated order placement enables you to set reorder alerts to notify, streamline the orders, and timely restock the inventory levels.
5. Order confirmation
Using an inventory management tool you can track the placed order and their real-time status. In case of any delays or issues, you are notified via alerts.
14 Common inventory management techniques
Some of the common techniques used for inventory management are:
1. ABC analysis
ABC analysis is an inventory management technique that helps decide the value of an inventory item based on its importance to the business. This helps managers determine which inventory item is the most important to the business operations. To conduct an ABC analysis, businesses can put their inventory into the following three major categories:
| Category | Importance level | Example |
| A | High-value and low-quantity | High-end electronic equipment |
| B | Moderate in value and quantity | Office supplies like laptops |
| C | Low-value and high-quantity | Office stationery like cleaning supplies |
ABC analysis helps ensure that regular inventory counts are conducted, especially for high-value items. This way businesses can determine high-priority items and direct resources toward them
2. EOQ model
The Economic Order Quantity model is used when you want to plan and order the inventory in a certain quantity. You decide the amount of inventory that needs to be stocked at any given time. Therefore, the inventory is re-ordered when a minimum order is reached.
3. FSN method
The fast, slow, and non-moving method categorizes the inventory according to their consumption rate. Inventory control is measured by tracking all inventory items that are not used or required all the time. These can be divided into three categories:
- Fast-moving inventory (most-sellable items)
- Slow-moving inventory (on-demand items)
- Non-moving inventory (rarely ordered items)
The FSN method is useful for keeping track of the most active inventory items and improving the stocking of in-demand products frequently.
4. JIT method
The Just-in-Time method helps streamline the inventory management process by optimizing inventory levels based on the quantity required by a business. This way, businesses order new items only when needed – reducing the capital tied up in inventory.
However, JIT can be risky in times of unexpected hikes in demand. A business will not have ample inventory to meet the customer demand, which can put its reputation at risk and decrease its potential profit.
5. Minimum order quantity
Minimum order quantity allows businesses to maintain the minimum level of inventory by assessing which units of inventory they can, or need to add. This way, businesses reduce inventory holding costs as minimal capital is tied up in inventory.
By following the MOQ technique, businesses produce in batches and consistently sell in large quantities. This way, businesses establish a regular flow of inventory as they can predict future demand. So, they order just the right amount of inventory to prevent stockouts, while also ensuring consistent production.
MOQ helps streamline budget and financial planning as companies know how much they have to invest in stock.
6. Materials requirement planning (MRP method)
This method focuses on sales patterns and forecasts i.e., businesses have an exact prediction of future sales so they can match inventory levels to the forecast. It helps ensure that businesses always have the required inventory levels before the next order so they can cater to all customers.
MRP is particularly helpful for manufacturing businesses as it helps maintain a consistent flow of production through regular inventory supply. Purchase orders can be planned based on the materials required so inventory can be updated immediately.
7. VED analysis
VED stands for Vital, Essential, and Desirable. As the name suggests, businesses can prioritize the type of inventory they want according to the importance of their business operations. It’s a common technique used to keep inventory in control. The most desirable spare parts or vital components of inventory required for production are the focus. This inventory management technique is a lot helpful for healthcare, manufacturing, and retail.
8. Batch tracking
To track a group of products during a specific period, you can use the batch tracking method. Businesses can easily monitor the product batches from the time of production to the time they are sent to the warehouse. Batch tracking is commonly used in pharmaceuticals, and food industries for tracking of goods.
9. Consignment inventory
In this method, a supplier remains the owner of the goods until they are sold. The retailer will pay the supplier only once. Because there is no upfront payment, the risk of loss is low for the retailer. Consignment inventory is most commonly used in fashion, electronics, and auto parts.
10. Reorder point formula
To avoid any stockouts, businesses determine the inventory level at which new orders can be placed. Using the best asset management system can come in handy to keep track of all of the inventory at the warehouse, and those items that are reaching the minimal inventory level point.
11. FIFO and LIFO
Also known as First In, First Out, it is an inventory management technique where the oldest stock is sold out first. You can not only keep track of the inventory sales but use it in ascending order at the time it was received. This method helps manage the perishable goods.
Whereas, the Last In, First Out is the inventory management method where the most recently received inventory items are sold first. At the time of inflation, this technique can be pretty useful in reducing taxable income.
12. Dropshipping
It is an order fulfillment method where the supplier ships products directly to the consumer. Usually, the product is purchased from a third-party source instead of picking the product from their stocks. It minimizes the storage costs, and requires less inventory control on part of the production business.
13. Demand forecasting
Every business has fast-selling and slow-moving products. Based on the trend, you can predict customer demand for the products based on their buying behavior, and market trends. This method helps businesses to keep their inventory at optimal levels, and minimize shortages, and excess stock. Quantitative models such as time-series analysis can be used for demand forecasting.
14. Cross-docking
It’s a straightforward method where the supplier sends the product directly to the consumer or retail store without storing it. Products are loaded from inbound transport to outbound transport reducing the storage costs, and increasing efficiency.
Take control of your inventory with inventory management software
Are you a brick-and-mortar, or a multichannel retail? Then inventory management is important for your operations. You want to give customers the experience they desire, and you can do so by taking control of the inventory with a fast, reliable, and efficient inventory management software by EZOfficeInventory.Â
You can achieve your inventory management goals with customizable inventory reports to consolidate the data and execute the workflows efficiently. You can also incorporate inventory management techniques like JIT into your daily workflows, to utilize the inventory to maximum without losing track of information.
