What is inventory management?

Inventory management is a systematic approach to sourcing, storing, and selling inventory. It provides a company with the ability to oversee the ordering and storing of business supplies or products and helps to understand both stock levels and the location of stock in a warehouse.

An effective inventory management system manages the entire flow of goods within your organisation, from purchase right through to sale, always ensuring that you have the appropriate quantities of an item, in the right place, at the right time. Inventory management can effectively work out when a company needs to reorder items, or what the demand is for end-result products.

What counts as inventory?

Inventory is the goods handled by your company with the intention of selling. This might apply to raw materials that you turn into something new, or finished products, or even products you purchase in bulk to break down into parts to sell separately.

Inventory also applies to intangible things, such as software. Every venture handling inventory will require a way of managing their stock.

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.