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Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy
Inventory Management — Everything You Should Know
Key takeaways
- Managing a company’s parts, raw materials, and finished products while optimizing order quantities with methods like JIT and ABC analysis is known as inventory management.
- It plays a major role in overall business success and customer satisfaction.
- Methods are used to reduce risks and optimize inventory control.
Inventory management enables companies to ensure that they always have enough stock to fulfill customer orders. However, what is it?
In this article, we will tell you what inventory management is. We will tell you the importance and some of the most common methods used in inventory management. Additionally, we will tell you the benefits of managing your inventory effectively.
Reading this article will enable you to manage and monitor your inventory better. Thus, ensuring that you can always fulfill the demands of your customers. So, without further ado, let us now start!
What is Inventory Management?
Inventory management refers to the process of handling a company’s inventory, which includes raw materials, parts, and finished products. It also includes ordering, storing, using, and selling these items.
Businesses use various methods of inventory management, each with its own advantages and disadvantages, depending on what they require.
Inventory management is a way for companies to figure out what and how much they should order, and when to do it.
It keeps track of inventory from the time it is purchased until it is sold to customers. This helps companies ensure they always have enough stock to meet customer demands and warns them if they are running low.
The goal of inventory management is to strike a balance between having enough inventory to meet customer demand and minimizing the costs associated with carrying excess inventory.
Why is it Important?
Keeping track of inventory is an important part of running a business. It can have a big impact on how successful and profitable the business is.
One reason why inventory management is so important is that it helps ensure that there are enough products available for customers to buy. Customers expect to find what they want when they go to a store.
By knowing how much inventory there is and understanding what customers want, businesses can ensure they have the right products in stock at the right time. This makes customers satisfied, keeps them coming back, and helps the business make more sales.
Preventing stock-outs is another crucial aspect of inventory management. Stockouts occur when a company runs out of a product, leading to missed sales opportunities and frustrated customers.
Inventory management is also important for controlling costs and making the business run more smoothly. Keeping a lot of extra inventory on hand costs money, because there are expenses like storage, insurance, and the value of the inventory going down over time.
By managing inventory carefully and only having what is needed, businesses can save money on these costs and ensure they have enough without having too much.
In addition, inventory management helps businesses plan for production and ordering materials. By understanding how much they need and when they need it, businesses can make better decisions about how much to produce or order.
This saves time and money by reducing the amount of materials wasted and ensuring things are ready when they are needed.
Overall, inventory management is essential for businesses. It helps them keep customers satisfied, make more sales, save money, and run things smoothly.
The Most Common Methods Used In Managing Inventory
Here are some of the methods that you can use to manage your inventory:
1. ABC Analysis
The ABC analysis categorizes inventory items into three groups based on their value and importance. “A” items are high-value, critical items that require close monitoring. “B” items have moderate value and importance, while “C” items are low-value and less critical.
2. Just-in-Time (JIT)
This is a strategy where inventory is ordered and received just in time for production or customer demand. This approach helps reduce carrying costs and decreases the need for large inventory levels.
3. Economic Order Quantity (EOQ)
EOQ is a formula used to calculate the optimal order quantity that minimizes total inventory costs, considering factors like ordering costs, carrying costs, and demand.
4. First-In, First Out (FIFO)
This method is used to determine the order in which products are sold or used. With FIFO, the oldest items in inventory are sold or used first, while the newest items are retained for a longer duration.
5. Safety Stock
This refers to the extra inventory held to mitigate the risk of stockouts due to uncertainties in demand, supply, or lead times. It acts as a buffer to ensure customer satisfaction and prevent disruptions.
6. Lead Time Management
This technique refers to the time it takes from placing an order to receiving it. Managing lead times effectively ensures that inventory is available when needed. Strategies may include negotiating shorter lead times with suppliers or finding alternative suppliers with quicker delivery times.
7. Minimum Stock Levels
This technique involves setting minimum inventory thresholds for each item to avoid stockouts. When inventory levels reach the minimum, new orders are placed to replenish the stock.
The Benefits of Managing Your Inventory
The following are some of the benefits that you can gain when you manage your inventory effectively:
1. Control Costs
Effective inventory management helps control costs by minimizing the carrying costs associated with excess inventory. Therefore, reducing your storage costs and depreciation expenses in your inventory.
2. Meet Customer Demands
inventory management ensures that businesses have the right products in stock to meet customer demands. By accurately tracking inventory levels and analyzing demand patterns, companies can avoid stockouts, fulfill orders swiftly, and enhance customer satisfaction.
3. Reduces Waste
Effective inventory management helps reduce waste by minimizing the risk of products being outdated, expired, or damaged. By ensuring proper rotation and usage of inventory through methods like FIFO, businesses can reduce waste and improve profitability.
4. Improved Efficiency and Productivity
With proper inventory management, businesses can streamline processes, reduce manual errors, and improve overall efficiency.
Additionally, integrating automated systems and tools for inventory tracking and management can increase productivity by saving time and providing real-time visibility into inventory status.
5. Enhanced Cash Flow
Inventory management improves cash flow by minimizing excess inventory and optimizing the timing of purchases. Holding excessive inventory restricts the availability of capital, while efficient management of inventory levels ensures that resources are allocated wisely.
Inventory Management Software
Check out these inventory management software. We made a comprehensive list to make it easier for those interested to find them.
1. NetSuite Inventory Management
NetSuite Inventory Management is a robust cloud-based solution that offers end-to-end inventory management features. It includes demand planning, procurement, order fulfillment, warehouse management, and integration with other business processes.
2. SAP Inventory Management
SAP Inventory Management is an enterprise-level inventory management solution offered by SAP. It provides comprehensive inventory control, stock tracking, procurement, and warehouse management functionalities for large-scale businesses.
3. InFlow Inventory
InFlow Inventory is a user-friendly inventory management software suitable for small and medium-sized businesses. It offers inventory tracking, order management, reporting, and integration capabilities to help businesses efficiently manage their inventory operations.
4. Cin7
Cin7 is a cloud-based inventory management platform tailored for retail, e-commerce, and wholesale businesses. It provides extensive inventory control, order management, warehouse management, and integration functionalities to ensure smooth operations.
5. Zoho Inventory
Zoho Inventory is a cloud-based inventory management software that helps businesses streamline their inventory operations. It offers features such as order management, inventory tracking, warehouse management, and integrations with popular e-commerce platforms.
Conclusion
Effective inventory management is crucial for business success, ensuring the right products are available to meet customer demands while controlling costs. This article outlines the definition, importance, and common methods of inventory management, highlighting its benefits, including cost control, waste reduction, and improved efficiency.
Frequentlyasked questions
What is inventory management?
It is a way for companies to figure out what and how much they should order, and when to do it.
Why is it important?
It is important as it ensures that there are enough products available in your inventory for customers to buy.
How does inventory management contribute to customer satisfaction?
By accurately tracking inventory levels and analyzing demand patterns, businesses can ensure the availability of desired products. This leads to satisfied customers who find what they need when they want it which enhances their overall experience.
About the author
My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.
