8 min read
10 Sep 2021
8 min read
10 Sep 2021
The inventory management process is a hugely important procedure for almost all businesses. Learn everything you need to know about the process here.
Inventory management is an essential process for almost every type of business. Inventory is often the largest current asset and poor or ineffective management of stock can lead to large losses or in some cases, business failure. Having the right quantity of materials on hand is essential for smooth operation and so good inventory management should be at the core of every business’ trading activity.
Yet the successful organization of inventory is not without its challenges. Inaccurate data, shifting customer demand, manual documentation, inefficient space management, expanding product portfolios, and inadequate software are just some of the issues that companies face when attempting to manage or improve their stock processes. Making use of potential solutions like inventory management software and overcoming such issues can result in huge boosts to operational efficiency.
Inventory management is how a business controls and tracks its stock – both raw materials and finished goods. It refers to the entire process of sourcing, manufacturing, storing, and finally selling products and components. In business terms, inventory management often more specifically refers to the idea of having the correct amount of stock, in the right place, at the right time, and at the right cost. It is a key component of supply chain management and can be a critical element of working capital optimization, as it governs the entire flow of goods from purchasing through to sale.
Many companies need inventory in order to make sales. A company cannot sell what it does not have. Yet retaining too much can also be damaging, as it can lead to outdated stock, spoilage, or unnecessary storage costs. Effective inventory management, therefore, can be seen as a way of maximizing potential sales through an understanding of the stock levels required.
In addition to its importance in relation to sales, having the correct quantity of goods is also crucial for the planning and budgeting of financial expenditures. A business that fully understands its stock levels can better manage other debts and obligations. For example, if a shoe company that is in debt has two months’ worth of inventory, it can choose to pay its debts sooner, knowing that it has time before it must purchase more shoes. A shoe business with poor inventory management processes may only have a few days worth of stock and must prioritise goods over other possible expenses, which could lead to cash flow issues.
For more about the basics of inventory management, please read our glossary page covering the question ‘what is inventory management?‘ in more detail.
Inventory comes in a wide variety of shapes and forms. How it is defined may vary depending on the industry. However, generally speaking, inventory is categorized depending on where it stands in the production process. The five basic types of inventory are:
There are also several additional classifications, which include:
It is important to note the difference between inventory management and inventory control, as the two are often mistaken.
Inventory control refers to regulating existing goods, which is to say, managing inventory already on-hand. This includes knowledge of what is in stock and how much is available.
This differs from inventory management, which is more predictive and refers to the forecasting, ordering, replenishment of product. It determines when to order (or reorder), just how much is needed, and the most effective source of supply.
There unfortunately is no particular set structure for how this process should operate, and the methods used by each business will vary greatly depending on the industry and size of business. However, in general, the process is likely to look similar to the following:
There are two main established methods of managing inventory: periodic and perpetual. Overall, the perpetual inventory system offers more benefits and is used by most major retailers. However, the periodic inventory system is occasionally favored by small businesses that are not able to justify the slightly higher cost associated with the perpetual system.
In order to understand stock levels, occasional physical stock counts will be performed. Imagine, for example, a stationer that has to count every pen they have for sale. Now multiply that process across the supply chain. As businesses will often have levels of stock that rise into the thousands, this process can be difficult and time-consuming. Consequently, a periodic stock count may only happen a few times per year, which leads to inaccuracies.
In contrast, the perpetual system will continuously keep track of stock and update when a product is sold or received. An inventory management system will automatically update to ensure more accurate and up-to-date information. Businesses with high levels of sales or multiple retail outlets require perpetual inventory management systems to better time purchases, reduce human error, to better monitor issues such as theft, and more.
√ 2 x S x D / H
Inventory is a core component of the supply chain and so more reliable inventory leads to a healthier supply chain, both for the supplier and the customer. Order fulfilment is vitally important for all businesses. Whether a company is large or small, maintaining the appropriate levels of stock leads to happier and more loyal customers, a crucial part of supply chain management. Likewise, making reliable, on-time purchases can lead to stronger relationships with suppliers.
Storing goods can be expensive. For industries such as agriculture where the goods have a brief shelf life, this is even more pronounced. Inventory management techniques are essential for making sure just enough product is stored to reduce any unnecessary waste.
Inventory management techniques such as automation can also reduce the likelihood of potential human error, shorten supplier lead time, and avoid warehouse charges; all costs that can be avoided.
Inventory management is about balance. With the use of good inventory management software, a company can keep better track of stock levels and can order just what is needed, as well as reduce the risk of overselling. Better planning and management also makes it far less likely to be burdened by either excess stock or stockouts.
A comprehensive inventory management system such as one that Taulia offers, can lead to:
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