If you don’t have a solid inventory management system, you might end up with too much stock or selling more than you actually have. These issues can cause cash flow to tighten, profit margins to shrink, and customer satisfaction to plummet.
This guide simplifies inventory management, showcasing handy systems and techniques to boost efficiency in your inventory workflows.
Key Points
- Inventory refers to all the materials, goods, and products that a business manages, ranging from raw ingredients to finished goods.
- Inventory management ensures a business keeps the right amount of stock to meet demand while avoiding overstock or stockouts.
- Effective inventory management improves cash flow, reduces storage costs, and prevents wastage by optimizing stock turnover.
- Techniques like Just-in-Time (JIT), FIFO, and inventory optimization can streamline operations and enhance customer satisfaction.
What is Inventory?
To get a grip on inventory management, the first thing you need to do is figure out what inventory actually is. People usually see inventory as just the finished products. For a business, inventory is simply anything that needs to be restocked. If a company makes soup, its inventory could include everything from tomatoes to packaging cans to the fuel for the delivery trucks that transport the soup to the grocery store.
What Is Inventory Management?
Inventory management lets companies figure out what stock to order, how much to get, and when to do it. It keeps tabs on inventory from the moment you buy it to when you sell it. The practice spots trends and reacts to them, making sure there’s always enough stock to meet customer orders and giving a heads-up when supplies are running low.
When you sell it, that inventory turns into cash in your pocket! Before it gets sold, inventory (even though it shows up as an asset on the balance sheet) locks up cash. So, having too much stock can drain your wallet and squeeze your cash flow.
A key sign of effective inventory management is how quickly inventory turns over. Inventory turnover is an accounting measure that shows how frequently stock is sold within a certain timeframe. A business doesn’t want to have more stock than it sells. Slow inventory turnover can result in deadstock, which is just unsold items hanging around.
To simplify your inventory management process, download this Basic Inventory Checklist and start tracking your stock efficiently today!
Basic Inventory Checklist.PDF
Why Is Inventory Management Important?
Basically, inventory management is all about striking the right balance between what a company has in stock and what customers actually want to buy. Inventory can be a company’s shining star, but it can also turn into a troublesome burden. Inventory costs cash, and if it’s not managed well, it can get out of whack—either locking up funds in too much stock or causing lost sales when items run out.
Smart inventory management keeps those pesky costs and risks of excess stock at bay, including:
- Storage
- Spoilage or theft
- Waste and sustainability issues
- Declining demand/value
- Tax ramifications
Smart inventory management keeps companies from facing the pitfalls of running low on stock:
- Stalled production lines
- Missed production and delivery windows
- Loss of customer loyalty, reputation, and market share
- Lower profits
Figuring out what to order and when is no walk in the park, no matter how big or small the company is. Inventory management is a tricky business—it’s all about juggling finance, operations, budgeting, planning, supply chain, and logistics.
5 Benefits of Inventory Management
Optimizing your stock control processes and using the right inventory system can unlock a treasure trove of benefits for inventory management.
Here are the five key benefits in a nutshell:
#1. Boosts how smoothly things run
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Inventory management’s main perk? It makes keeping track of stock smooth and efficient!
When you optimize inventory levels, storage spots, and stock control processes, your operational efficiency gets a boost—leading to lower costs and quicker order fulfillment.
#2. Increases stock visibility
Real-time inventory management shows you exactly where your items are and how many you have on hand.
This info is key for two reasons: keeping customers in the loop and making savvy buying choices.
Having a solid inventory system means you can keep customers in the loop about what’s available and when to expect new arrivals. You’ll know just when to restock your inventory so you don’t run out of supplies.
#3. Boosts profit margins
Inventory management cuts out the waste that causes lost stock, overstocking, and stockouts – slashing carrying costs and boosting profit margins.
Stock management teams up with purchasing and supply chain management to cut down on the cost and effort needed to get goods ready for sale. It cuts down on the time and effort usually spent on inventory management.
#4. Boosts customer happiness
Your daily inventory management can either boost or tank your customer satisfaction levels. A late delivery can really throw a wrench in a consumer’s day.
No one enjoys getting the wrong orders or waiting forever for deliveries. If your customers see that you reliably deliver orders on time and keep them in the loop about what’s available, they’ll be much more inclined to return for more!
#5. Boosts eco-friendly business expansion
As businesses grow, their inventory management needs become trickier too.
With fresh product lines, a growing team, new production facilities, and a bunch of new customers, managing inventory just got a whole lot trickier! Getting a solid stock system up and running from the start is crucial.
Procrastinate, and watch the price tag grow while your time shrinks!
Inventory Management Techniques
Regardless of how big your business is, using these popular inventory management techniques can really help you get a handle on your stock.
Check out these essential inventory management techniques to keep in mind:
#1. Just-in-time inventory
Just-in-time (JIT) inventory means keeping stock levels super low, which helps dodge the costs and risks that come with having a big stash of products lying around. The idea is simple: you order and use goods and materials only when you actually need them.
#2. Just-in-case stock control
Just-in-case (JIC) stock control is a savvy inventory management strategy used to guard against surprise demand spikes and hiccups in the supply chain. It helps businesses dodge stockouts and the sales they miss out on, plus it lets them haggle for better prices with suppliers.
#3. ABC inventory management
ABC inventory analysis helps you spot which items are boosting your profits by sorting them into various tiers. It’s kind of like the Pareto principle—you know, the idea that most of the wins come from just a few efforts.
This inventory management method helps you make smart choices about budgeting, marketing, and buying for each product.
This inventory management method helps you make smart choices about budgeting, marketing, and buying for each product.
#4. First in, First out (FIFO)
First in, First out (FIFO) is a method for figuring out how much your inventory is worth by using the order in which items were added. In FIFO, the first items that are bought or made in a product line are the first ones to be sold to customers.
This method makes inventory accounting a breeze and guarantees you’re putting the right price tag on your cost of goods sold (COGS).
#5. Last in, First out (LIFO)
Last in, First out is an inventory costing method that flips the script on FIFO by selling the newest items first while holding onto the older stock until the fresh stuff is gone.
This technique has a few drawbacks: it paints a misleading picture of a business’s inventory value and doesn’t meet the standards set by International Financial Reporting or the tax laws in many countries.
#6. Weighted average cost
Weighted average cost is a method for valuing inventory. It takes the total value of goods ready to sell and divides it by the number of units available, giving you a weighted average cost per unit for your stock. It helps figure out the price for what’s left in inventory and what’s been sold.
#7. Economic order quantity (EOQ)
The economic order quantity is the best amount to order at any moment. The best EOQ keeps your total holding and ordering costs as low as possible.
EOQ is a smart inventory management trick that uses a formula to figure out the perfect reorder amounts for each SKU. By doing this, you’ll keep your replenishment process running smoothly.
#8. Vendor-managed inventory
Vendor-managed inventory, also known as consignment inventory management, lets a wholesaler hand over their goods to a retailer without the retailer having to pay for them right away.
#9. Cross-docking
Cross-docking is a savvy inventory management trick that almost completely cuts out the need to store inventory.
Products arrive at a warehouse, where they get sorted and prepped for shipment right away. They’re typically reloaded into different trucks at the same warehouse and shipped out for delivery right away.
#10. Cycle counting
The inventory cycle count method is all about tallying a little bit of stock on a chosen day, skipping the whole stocktake hassle. This method keeps your business on point by regularly checking that your inventory levels are spot on in your inventory management software.
#11. Dropshipping
With dropshipping, your supplier takes care of storing and managing products until they find a new home with a buyer. When a customer orders something, you send that order to your supplier, and they ship the goods straight to your customer.
How to Choose an Inventory Management System
Inventory management systems aren’t one-size-fits-all, and businesses face different inventory hurdles. That’s why businesses need to pinpoint their main inventory headaches before hunting for a solution.
Check out these questions companies should toss at vendors when they’re on the hunt for candidates for their inventory management system:
- Integration: Can this solution smoothly connect with your current setup, like POS systems, e-commerce platforms, ERP software, and other important apps? Do we really need pricey custom interfaces?
- Features and functionality: Does the solution provide essential capabilities like stock tracking, barcode scanning, automated reorder points, demand forecasting, lot and serial number tracking, and reporting?
- Scalability: Is the solution equipped to manage the current inventory size and complexity, while also being ready to grow for the future?
- Cost: Are there any extra charges beyond the sticker price, like subscriptions or fees for implementation, integration, or customization?
- Reviews and reputation: Are there any reviews or testimonials from current customers that showcase a history of successful implementations and dependable customer support?
- Support and training: Does the solution come with a helpful support team and clear documentation to ensure a smooth deployment and user adoption?
Inventory Management Methods and Strategies
There are tons of clever ways to store and sell your products more effectively.
When choosing what to implement, think about your big business goals and the resources you have on hand.
#1. Periodic inventory management
There are two popular ways to handle inventory: Periodic and Perpetual.
Periodic inventory management is a method for tracking inventory and its value at specific intervals.
In periodic inventory management, the staff counts every item in stock at the end of a specific time frame—usually once per accounting period. This gives you an ending inventory balance that you can compare to the opening inventory balance to figure out the average inventory.
You can use the average inventory along with inventory accounting metrics like Cost of Goods Sold (COGS) to figure out things like the inventory turnover ratio.
#2. Perpetual inventory management
Perpetual inventory management is a method that keeps track of inventory and its value on a continuous basis.
In perpetual inventory systems, the count of goods is monitored almost in real time. Stock-on-hand values get updated in real time too.
COGS is usually figured out using the average landed cost method, which averages the various prices paid for goods to determine their value.
#3. Demand planning
Demand planning is all about a business trying to guess what customers will want in the future for each product they offer. This strategy helps businesses spend their money and resources more wisely while getting a grip on future storage needs.
#4. Inventory optimisation
Inventory optimization means smartly managing your stock to keep costs down and avoid having too much on hand, all while making sure customers are happy and getting their orders on time. It also makes sure there’s plenty of capital on hand for a business to grow strong and healthy.
#5. Warehouse optimisation
Warehouse management is key to keeping inventory in check and running smoothly.
Optimizing your warehouse layout, processes, and staff training can really cut down on the time and costs involved in managing your inventory.
Conclusion
Managing inventory is a key player in the game of business operations. How well you manage your inventory really hinges on your business type and what you’re selling. There’s no one-size-fits-all when it comes to inventory management; each type has its ups and downs. Using the right type of inventory management can really boost a company’s success.
Related Articles
- SIMPLE INVENTORY SOFTWARE: Top Best Inventory Management Software 2023
- INVENTORY CONTROL MANAGEMENT & SYSTEM: Best Practices
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