What is inventory management?

Inventory management is a systematic approach to sourcing, storing, and selling inventory. Effective inventory management involves optimizing the flow of goods within an organization, from purchase right through to sale, always ensuring that an appropriate quantity is available in the right place and at the right time to meet customer demand.

Inventory in this context refers to the goods handled by a business with the intention of selling, the raw materials that they use in production, finished products, or even products they purchase in bulk to break down into parts to sell separately.

The approach a business takes to inventory management determines how these materials, goods, and products are sourced, stored, and sold. Importantly, an effective approach to inventory management should align with the overall goals of the business.

For example, if a business is looking to minimize their costs, their approach to inventory management might involve reducing the amount of safety stock they have on hand, and therefore minimizing inventory storage costs.

On the other hand, if a business is keen to ensure they can continue to fulfil customer demand even in the event of supply chain disruption, their inventory management strategy might involve holding on to more stock than is necessary to prevent stock-outs.

Many business choose to use a dedicated inventory management system to gain more control over their inventory. These platforms can provide a company with the ability to get a top-down view of inventory throughout the supply chain, which can be extremely useful in determining the right inventory replenishment strategy.

How does inventory management work?

It basically works by tracking products, components, and ingredients across suppliers, production, sales and stock on-hand to make sure it is being used effectively and efficiently. It can be as deep a process as you want or need it to. For example, it can look at the difference between dependent and independent demand, or forecasting your sales to plan ahead.

However, it all goes back to your stock. It will track and control your inventory as it moves from your suppliers to your warehouse, then on to your customers.

Why is inventory management important?

Inventory management is important because it outlines how you can run your business, grow your sales, and serve your customers. Managing inventory is crucial for businesses that are based on the sale of products. Putting a system in place that does not require manual stocktaking, which can be a time consuming and disruptive process, can allow for more accurate figures that are instantly available.

Inventory management also allows you to build good relationships with customers, because it will tell you exactly how quickly you can fulfil orders. This promotes consistency, and customers are more likely to return to a business when they know they can deliver orders on time. This is particularly true when it comes to business-to-business transactions.

Additionally, it can help your company to grow. When organisations begin to grow, they become more complex and may add more products. Therefore, managing inventory early on in the company will help to retain control as the company begins to scale up.

Benefits of inventory management

1. Greater cost savings
   By streamlining any inventory management processes, you can eliminate any inventory costs associated with human error. Automation means that a business can reduce excess and obsolete stock, and then reduce any costs incurred by that stock in space consumption or warehouse fees.
2. Better business negotiations
   Because products will be more traceable, negotiations with suppliers and buyers will be considerably easier. Companies could also gain a better understanding of which suppliers are more beneficial to the business, and which could be improved on.
3. Reduces the risk of overselling
   Overselling is a major challenge for online sellers, which can result in loss of control and being suspended from marketplaces like Amazon or eBay. Inventory management can allow businesses to synchronise orders and inventory across each eCommerce platform, ensuring that stock levels are adjusted when a sale comes through.
4. Profitable business decisions
   Using the data provided by an inventory management system can allow for more data-driven business decisions, with a better-informed understanding of supply and demand. Many inventory management systems will equip companies with the tools needed to make strategic decisions, such as forecasting sales trends.

Inventory financing

Strong inventory management practices can also include unlocking the potential benefits of inventory financing. Inventory financing is a form of working capital that allows businesses to purchase inventory on credit, using the purchased stock itself as collateral for the loan.

It’s often used by medium-sized companies looking to boost their stock reserves in preparation for demand, without drastically affecting their cash flow. By boosting stock levels without the usual up-front cost to working capital – businesses using inventory financing methods can ride out seasonal cash flow fluctuations and fulfil higher demand during busy periods.

Inventory finance techniques include reducing long lead times by owning goods in-transit, ensuring access to nearby safety stocks, and embracing a vendor managed inventory (VMI) approach. All forms of inventory finance help to optimize available inventory, ensure the continuity of production, and strengthen working capital management.