Inventory management takes more than ensuring you have products sitting on your shelves. It is the process that oversees every stage in the product lifecycle from raw materials to finished goods in the factory. The objective of inventory management is to overcome supply chain variability and meet the needs of your customers at different service levels at the lowest, most reasonable cost while maintaining just the right amount of inventory.
What is Inventory?
Before you can understand inventory management, you need to understand inventory. From the customer’s perspective, inventory is considered finished goods. But for businesses, inventory is anything the business must restock, including fuel for the delivery trucks and raw materials to make the products. There are four types of inventories:
1. Raw materials and components
These are all the items that end up in the finished product, and all the components needed to make the finished products, including the ingredients if the final product is a type of foodstuff.
2. Work-in-progress (WIP)
WIP refers to the inventory currently being prepared and packaged. If you’re looking to optimise inventory, this is one of the stages of inventory where you can make your process cost and time-effective.
3. Finished goods
This is the end product in the production process that is ready to be delivered to customers or distributed to resellers. These items are fully assembled, packaged, labelled and checked for quality standards, which makes them ready for use.
4. Maintenance, repair and operating supplies (MRO)
These are all the supporting materials needed in the production and delivery of items, but are not included as part of the final product itself. This can include items such as lubricants for machinery, tools, or cleaning supplies. Items such as trolleys, dollies, cages, and stillages also fall under this category.
Benefits of Inventory Management
Efficient and effective inventory management might not be the most straightforward and easiest undertaking in your business or manufacturing facility, but the effort is not without significant benefits. The time, effort and financial investment in the process and infrastructure prove essential to the business’s success.
Some of the benefits of inventory management to businesses include the following:
- Increased revenue: Inventory management ensures you have the right products available at the right time and place to quickly and efficiently meet customer demand and increase sales and revenue.
- Reduced costs: With inventory management, you can minimise excess inventory, which can reduce wastage and storage costs. Accurate tracking and demand forecasting can help you lower the carrying costs associated with storage, handling and obsolescence.
- Improved customer service: You need to have the right products available when the customers need them. Achieving this feat bolsters trust, loyalty, satisfaction and brand reputation among your customers.
- Heightened efficiency and productivity: Leveraging automated tools for tracking and management significantly improves efficiency, boosts overall productivity, and reduces manual errors while boosting overall productivity within your organisation.
- Freer cash flow: Maintaining optimum inventory levels can prevent excessive investment in inventory, thereby improving cash flow by eliminating stagnant inventory.
- Forecast accuracy: By adhering to an effective inventory management technique, you hone demand forecast accuracy so your business can anticipate market trends and plan inventory levels more effectively.
- Risk mitigation: You need to stay ahead of challenges like seasonal variations, market fluctuations and chain disruptions that can disrupt business. Inventory management helps you mitigate these risks and maintain operational stability even in the midst of these and other disruptions.
- Reduced waste: Cutting the fat and reducing the number of products that become outdated, damaged or expired improves your sustainability efforts and increases overall profitability. You need to deploy strategies like FIFO that help you optimise inventory rotation.
Types of Inventory Management
Depending on your business, the demand levels, product types and supply chain complexities, you can choose to undertake a different type of inventory management. The different techniques vary in application and there’s no single one that works best for every company or even every item in your company’s inventory. There are more than a dozen ways to approach inventory management, and each one works for different businesses with different goals and methods of operations.
Some of the common types of inventory management include the following:
Segmentation
This method prioritises inventory management efforts based on the value and importance of the items. One of the approaches and classes of thoughts in segmentation is the ABC analysis where:
- “A” represents the class of items that are high-value and are in low quantity that bring in the most revenue but require rigorous control and frequent monitoring.
- “B” the items that have moderate value and moderate control needs.
- “C” items are low-value, high-quantity items that require minimal control.
Just-in-time (JIT)
This is a type of inventory management that focuses on production as needed. This method requires precise demand forecasting and having reliable supplier relationships to safeguard timely delivery.
Economic order quantity (EOQ)
This inventory management method calculates the most efficient order quantity using factors like demand variability, order lead time and carrying costs.
First-in, first out (FIFO)
Using this approach, older inventory is sold out first. This method is highly preferred because it allows the cost of goods sold to better reflect the current market prices.
Last-in, first-out (LIFO)
This is an inverse approach to FIFO, where you sell the items that are most recently produced first, assuming that during times of rising prices, they will have higher production costs. It’s a practical approach when you’re looking to reduce taxable income.
Why Inventory Management is Important
When applying inventory management, the goal is simple: to find a balance between the supply of inventory and the buyer demand for it. Inventory can be one of the company’s biggest assets, but it can also be a major liability. That’s because inventory can be a company’s biggest financial investment, and without proper management, it can tie up the company’s cash resources in overstock or drain revenue through lost sales due to stockouts.
Having effective inventory management can help to prevent the many expenses and potential perils involved in carrying excess inventory, such as:
- Storage
- Waste and sustainability issues
- Spoilage or theft
- Tax ramifications
- Declining demand/value
Efficient inventory management also helps companies steer clear of the consequences of not having inventory, such as:
- Stalled production lines
- Lower profits
- Loss of customer loyalty, market share and reputation
- Missed production and delivery windows
Understanding what and when to order is not a simple matter even for smaller companies. The process of inventory management is a complex one that weaves various elements such as finance, operations, planning, budgeting and logistics.
Understanding an Inventory Management System
Inventory management is an overwhelming undertaking especially when attempted without the aid of technology. In the current environment, inventory management can range from a freestanding point product for small and mid-size organisations to a complex enterprise SaaS platform that integrates with systems from all over the business, such as:
- Sales
- Accounting
- Shipping
- Digital supply chain
- Enterprise resource planning
Many inventory management technologies can monitor supply and stock levels, locations, and movement within warehouses, as well as track product receipt, picking, shipping, and packing. Some more advanced systems can go as far as providing some level of automation, cost calculations and even real-time scenario planning.
Some inventory management system vendors can also throw in customisation options to help businesses with specific requirements get more tailored solutions. For instance, a business in food service can incorporate expiry date tracking and alerts to ensure the rotation of perishable goods and minimise food waste. Also, a retailer can integrate real-time demand forecasting and automated reorder points to manage seasonal products during off-peak and on-peak seasons.
Closing Remarks
Considering how essential inventory management is, it is critical for organisations to pick systems that work and are efficient and effective for their operations by considering factors such as integrations, features and functionality, cost and scalability to ensure effective and cost-productive inventory management within their operations.
