Inventory Management Definition
Inventory management is an essential aspect in big companies that help identify the amount of stock to order at any particular time. It helps to track the flow of goods from purchase to sale. Most companies use it to identify trends and ensure that consumers have enough stock to satisfy their needs.
An inventory turns to revenue once sales are made. Before sales are made, business experts term it as an asset. However, when the stock is high, the cash flow reduces. One of the primary importance of good inventory management is turnover. The inventory turnover and accounting management give a clear picture of the stock’s sales.
A business should balance the stock and sales. Poor turnover can result in unsold or dead inventory.
The Importance of Inventory Management in Companies
Inventory management plays a crucial role in the success of any company. It helps to ensure a proper balance between revenue and the stock available, reducing the risks of inaccurate data or stock depletion.
Inventory tracking is required to ensure companies comply with the Securities and Exchange Commission. It helps to monitor compliance by companies.
Advantages of having an Inventory Management System
It helps the Company Save money.
Inventory management helps you understand the current trends and see the amount of stock required at each time. It helps to decide the number of stock to purchase each time that will enable you to fulfill your orders.
It promotes proper Cash Flow.
Good inventory management will assist you in identifying the best ways to spend money. It prevents you from making unnecessary purchases that may lead to unsold goods or dead stock.
It ensures Customer Satisfaction.
Inventory management helps you to keep enough stock for your customers. One of the best ways to ensure customer satisfaction is by making goods readily available. It can only be achieved through inventory management.
The Working Mechanism behind Inventory Management
Inventory management begins when a company forecasts on-demand and places an order for the raw materials. However, the process starts when a client makes an order for companies that produce goods on demand.
Inventory management also involves other processes such as:
- Sales analysis
- Product organization
- Storage organization
How does an Inventory Management Work
Inventory management’s main objective is to understand the available stock and the location in different storage facilities. It uses software that tracks the flow of goods from the supplier to the customer. Inventory management helps in stock receipt tracking, picking, packing, and delivery at the storage facility.
Top 10 Inventory Management Tricks and Techniques
The inventory management technique aims to improve accuracy. While some methods plan stock using formulas and analysis, some rely only on the procedure. Companies choose the most appropriate way depending on their stock and needs.
Below are the top10 Inventory Management techniques
1. The Minimum Order Quantity
The minimum order quantity, abbreviated as MOQ, is the lowest amount of goods a supplier can sell. The buyer cannot purchase a product if the amount required is less than the MOQ. Products with high production costs have a smaller minimum order quantity than goods with a lower production cost.
2. Economic Order Quantity
Abbreviated as EOQ, it is a formula that indicates the amount of inventory a company should order and purchase to minimize holding and associated costs. The main goal of having an economic order quantity is to reduce cost. It helps to reduce making unnecessary purchases by identifying the highest amount of units to purchase.
It also uses the number of products in the storage and delivery of unit costs to help free tied cash for most companies.
3. Just In Time Inventory Management
Just-in-time is an inventory management technique used by production companies to manage orders for raw materials from suppliers to match the production schedules. It Is one of the best ways that help in minimizing inventory costs.
In this case, companies only receive the items when needed preventing them from overstocking on a particular raw material containing wasted stock. Deadstock is an inventory that was never utilized by a company or purchased by consumers, leading to the removal of its sale status.
4. The ABC Analysis
This technique works by splitting subjects into three categories. It helps identify the products that significantly impact the inventory price. These categories include:
- Category A consists of the most valuable products that bring high profits to your company
- Category B includes items that range between the high and low valued products
- Category C mainly consists of small transactions that are essential to the firm. However, they have less impact on the company.
5. FIFO and LIFO
These two techniques’ primary objective is to identify the inventory cost. FIFO, also referred to as first in, first out, considers the sale of the older inventory first. It helps to maintain fresh merchandise.
Last–in, First-out, abbreviated a LIFO, assumes the newer inventory’s sale first. It prevents the stock from reaching its expiry date.
6. Safety Stock Inventory
The safety stock inventory comprises the goods ordered above the speculated demand. The main aim of this technique is to prevent stock depletion due to incorrect forecasting. Unseen fluctuations in customer demands can also lead to stock depletion hence the importance of having a safe stock inventory.
7. Consignment Inventory
A consignment inventory is the best system to incorporate into your local store. It builds the relationship between the cosigner(wholesaler) and the consignee (retailer). In this case, the wholesaler agrees to supply goods to the retailer without receiving any payment upfront.
The wholesaler or supplier remains the sole custodian of the goods. However, the retailer pays for the goods once customers purchase the goods from the store.
8. Batch Tracking
Batch tracking involves a quality control inventory technique where particular store groups monitor certain goods using a specific characteristic. This technique helps to keep track of the expiry date of goods. Companies could also use it to identify defective products and trace them back to the original batch.
9. Re-Order Point Formula
This technique is unique inventory management that relies on the purchases made by a business and the sale pattern that is unique on each product basis. The reorder point technique is usually higher than the safety stock number when you factor in the lead-time.
The ultimate objective of this inventory management technique is to ensure the amount of product in the store meets the current demand.
In dropshipping inventory management, the firm does not store the products it sells. Once a client makes an order and makes the payment, the company buys the god from a third party and delivers them to the customer.
Most companies using dropshipping technique operate online. They act as a link between the producer and the client. Once the client makes an order, they find the item through different methods such as:
- Searching from the website
- Directly contacting the supplier
- Suppliers directory
- Contact other dropshipping companies
How to Measure the success of your Inventory Management
Measuring the success of your inventory management choice is easy. Numbers alone can act as proof of success rate. Once you implement a new technique, it is essential to make a data comparison before and after.
It is vital to check on some factors to ensure successful inventory management. Some of these factors include;
- Check whether the inventory has led to the reduction in wrong shipments
- Are there any available dead stocks in your company
What are the Challenges of Inventory Management?
Some of the main challenges of inventory management include:
- A company having too much inventory and unable to sell it
- Lack of enough stock to meet customers’ demand
- Lack of information on the type and amount of inventory available and their location
- The inability of the system to track changes in customer demands
- Use of outdated systems
Final Word on Inventory Management
An inventory is the biggest asset for any company. However, it needs proper inventory management to save money and make profits. Having an outdated system that steers your company in the right direction, you will face difficulties in managing your company.
Visit Sonary and find different inventory management systems to help your company meet its objectives. The website provides you with a detailed review of other software that will help your company’s inventory management.