Inventory management plays a vital role in efficient business operations. It is about counting stock, maintaining optimal inventory levels, and optimizing processes for improved business performance.
Most business tasks are reliant on inventory, or in other words, use inventory items, and the completion of these tasks is imperative to meeting organizational goals. Additionally, to help businesses meet customer demand on time, it is important to maintain the right quality and quantity of inventory.
In this article, we will explore what inventory management is, its techniques, and how modern inventory management systems can help conduct it.
What is inventory management?
Inventory management is the process of tracking and monitoring supplies from the manufacturer to the point of sale. It also involves managing in-house inventory to support everyday operations.
Inventory management follows dedicated procedures to enhance inventory visibility i.e., ensuring how, when, and where to store inventory.
What are the 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:
-> 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.
-> Stock level monitoring
Businesses monitor their 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.
-> 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.
-> 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.
-> 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.
What are some common inventory management techniques?
Businesses require an accurate and holistic view of their inventory to minimize stockouts and overstocks. To achieve this, they often leverage advanced systems like inventory management solutions to ensure that they can consolidate inventory data and leverage it to conduct various workflows.
By utilizing inventory management systems, businesses can manage their inventory from one platform – developing greater control over internal processes involving inventory.
Let’s first look at some basic inventory management techniques:
-> Just in time (JIT)
JIT 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.
-> ABC Analysis
ABC analysis is an inventory management technique that helps decide the value an inventory item has 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:
|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 towards them.
-> Minimum Order Quantity (MOQ)
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.
-> Materials Requirement Planning (MRP)
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.
What are the types of inventory management?
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:
- 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.
- 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.
- 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.
These types of inventory management systems have their own advantages and disadvantages depending on their use and the requirements of a business.
What are the benefits of inventory management?
Inventory management, if done correctly, yields long–term returns. Adopting an inventory management system, such as an inventory management software to achieve accuracy in business operations is a trending global practice.
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.
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, 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 also 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 actually 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 custom 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.
Mastering inventory management is the linchpin of today’s fast-paced business operations.
Inventory management is an intricate process requiring systems that can support a myriad of workflows – from purchasing inventory to disposing it off.
Asset management systems provide a perfect platform for consolidating inventory data and executing several workflows to handle inventory smoothly. These systems enable businesses to incorporate inventory management techniques, like JIT, as mentioned above, to strategically utilize inventory.
Using efficient systems to manage inventory is the new way forward! Cloud-based systems not only ensure efficiency but help businesses upscale and improve their bottom line.
Frequently Asked Questions (FAQs)
1. What are the fundamentals of inventory management?
Some basic steps involved in conducting inventory management include forecasting demand, ordering stock, storing and handling inventory, and regularly monitoring inventory levels. It also includes reordering stock when required.
2. What is the inventory management process?
The inventory management process includes receiving and identifying inventory, recording and tracking it, monitoring inventory levels, re-ordering stock levels, and reporting its performance over time.
3. Why is inventory management important?
Inventory management is a process dedicated to maintaining optimal inventory levels by preventing overstocking and understocking, and meeting customer demand through efficient delivery.
EZOfficeInventory is a leading asset tracking software. It allows you to track, maintain, and report on inventory from anywhere, at any time. We offer a free 15-day trial – no credit card required!