- March 23, 2021
Inventory Management 101
What is Inventory Management?
Written By Stephanie Chan
If you are a retailer or supplier, you have goods that you handle on a regular basis, including ordering, storing, and selling. Managing that process is what business inventory management is all about. It is the act of keeping track of your inventory of goods, including storage of stock, number of order fulfillment, and amount of product for sale. As part of the supply chain management process, stock inventory management is the part where business supervises the flow of goods from manufacturers to warehouses, and finally to the point of sale.
Inventory being tracked might be raw materials that you buy and assemble into a new product, or might be a finished product, or even something intangible like a software. The biggest function of stock inventory management is to keep a detailed record of every product as it enters or leaves its respective location, whether it be warehouse, fulfillment center, or point of sale. That includes reverse logistics as well when products are being returned at the point of sale and back to the warehouse.
The main goal of effective inventory management is to minimize the cost of holding too much inventory by matching supply and demand through real time data updates on current stock and customer needs. Ultimately, you want to provide customers products with the right quality, at the right place, and at the right time. Whether you are a supplier or retailer, small or large scale, you can take advantage of inventory management to manage the flow of goods to achieve cost efficiency and customer satisfaction. There is a sub part of inventory management called inventory control that is concerned with the actual process of keeping the right number of products in stock to avoid shortages, overstocks, and other problems.
|Inventory management is the process of keeping track of flow of goods from manufacturing to point of sale. The goal is to minimize cost and maximize ability to deliver products to customers in a timely manner.|
Advantages of Inventory management
Inventory management is a crucial part of the supply chain process, and it ensures a business is able to meet customer demand with the stock in hand while preventing too many stocks from piling up which cuts into the profit margin. Not having a proper warehousing and inventory management system in place reduces the amount of visibility within the supply chain, ultimately causing loss in sales, stalling inventory, and many other problems.
Three major advantages of having a good inventory management system are ensuring smooth business operation, high customer satisfaction, and support company growth. It does so by eliminating inefficiencies in the supply chain process, reducing holding costs thus increasing profit margins. With higher profit margins, the company has more chances to grow its product line, sale channels, and ultimately increase revenue. Meeting the customer demand will increase satisfaction, retention rate, which helps grow the brand and customer base.
CBX software helps our customers plan and control product flow for on time supply, which ultimately reduces time to market, increase revenue and customer experience. Here are specific ways our solutions can help you optimize your inventory and supply chain process.
Prevent Dead Stock or Spoilage
Deadstock refers to inventory that has low demand, doesn’t sell, and doesn’t have a high chance of being sold anytime soon. They take up space in a warehouse or stockroom which increases holding costs. Spoilage products are generally grocery or makeup that has an expiry date. If you don’t sell it on time, it will go bad and end up wasting money. For these two types of products, it is particularly important to know when and how much to stock.
Maintain Alignment with Demand
Many businesses, while having inventory management methods in place, are generally still using spreadsheets or end of year stock count to predict future demands, which increase inaccuracy in the forecasting. Automated inventory management services such as the one that CBX software provides, allows for a high degree of accuracy through real time data tracking.
With improper customer demand forecasting, a business will either not stock enough of desired products and lose sales in the short term and loyal customer base in the long run. Overstock, on the other hand, has the risk not only of building up cost for storage, but also negatively impact a business’s cash flow. A digital inventory management system allows user to set reorder points based on real time data.
Reduce Manual Labor and Human Error
As mentioned before, many businesses still use traditional methods for counting stocks, which is not very efficient and accurate. A good, automated inventory management system should help to reduce manual labor and human errors, which reduces human resources costs, increases the speed of the operations, and lowers the risks. It is important to keep in mind that adapting a new management system also requires proper training for staffs so that they can maximize the benefits of the system
Reduce Storage Cost and Improves Cash Flow
Knowing the exact amount of stock you need helps to reduce warehousing costs. It also improves cash flow by keeping only stocks you need and free up the cash for investing elsewhere.
Types of Inventory
There are many different types of inventory, and the method of handling is different depending on what type of good you sell. Here are some common types of inventory.
The type of inventory you use to make finished goods or resell to other businesses for their production.
Work in Progress
Unfinished goods that are going through the manufacturing process or reselling to another business for their finished goods.
These are complete products that are available for sale to a customer.
The is additional inventory you keep to deal with shortages or surges in demand.
Inventory Management Techniques
There are many inventory management techniques and methods you can utilize to increase effectiveness of your own system. Depending on the type of operation, scale of business, and other factors you may find one or two more suitable for your business.
ABC analysis, also known as Always Better Control Analysis, is a technique where inventory is classified into three categories, A, B, and C.
A: High priced and lower number inventory that are closely monitored.
B: Moderated number and priced inventory that are moderately controlled
C: High number and low-cost inventory that requires minimum amount of control
Just in Time Method (JIT)
Just in Time method of control implies that the company only keeps as much inventory as it needs for the production process. It is a great way to reduce inventory cost as inventory is only supplied on a needed basis which avoids dead stock. The problem with JIT is running the risk of failing to meet surging demand. A good example was during the early pandemic where supply was unable to meet demand for many sanitation products.
Economic Order Quantity (EOQ)
Economic Order Quantity focuses on how much inventory and when exactly a company should place the order. In this model, inventory will be reordered when it reaches the minimum level. It helps to save ordering and carry costs.
Material Requirements Planning Method (MRP)
This is a planning and decision tool used to calculate the materials and components needed to manufacture a product. It is mainly used in the production process to analyze current inventory level versus production capacity and the need to manufacture goods based on sale forecasts. It consists of 1) taking inventory of materials and components on hand 2) identify which additional materials are needed 3) Schedule production or purchase
Minimum Safety Stocks
This is the level of inventory that a business maintains to avoid a stock-out situation.
VED stands for Vital, Essential and Desirable. This technique is mainly used to control spare parts of inventory. A business will focus on vital and essential parts of the inventory that are crucial to the production process while maintaining just enough amount for desirable parts that are not absolutely necessary.
Fast, Slow and Non-moving Method (FSN)
This analysis method is used to give accurate inventory control by considering quantity, rate of product consumption, their movement rate, and using this information to guide product placement inside a warehouse. It can greatly reduce time for time and labor, reorder frequency and even phase out unwanted items.
There are many other useful techniques for inventory management that you can explore further including FIFO and LIFO, reorder point formula, batch tracking, consignment inventory, perpetual inventory management, drop shipping, lean manufacturing, demand forecasting, cross docking, cycle counting, and bulk shipments.
It is easy to confuse inventory control with inventory management. Inventory control methods are ways to regulate inventory you have on hand inside the warehouse while stock inventory management actively forecasts, replenishes inventory, and analyzes stock to decide when, how much, from whom to order. Inventory control methods are essentially one part of the management system, but the scope of inventory management is much wider.
Inventory Management Process
The inventory management process involves recording, analyzing, and managing stock. It can be broken down into five stages for easy understanding.
This can either be buying raw materials to manufacture products or finished goods depending on the nature of your business
For business that deals with production, this part of the process involves making finished goods from all the parts.
The act of storing materials or finished goods at a warehouse before they are sold.
Orders are placed by customers and finished products are delivered to them
Reporting. Sale records are updated and shared with all relevant stakeholders to be used for forecasting and restocking purposes.
Effective Inventory Management Best Practices
To ensure effective inventory management, there are few tips and tricks to get you on track.
Develop an Inventory Management System
The best way to make sure you are doing it right is of course starting an inventory management project. Automate your system to minimize the labor needed to calculate order quantities, replenishment cycle times, safety stocks etc. Automation can help streamline selling, track revenue and goals, automatic restock, and other supply chain activities.
Focus on Your Needs
Not all of your products will need the same amount of attention. Focus on the ones with the highest turnover rate and weed out items that are not selling.
Engage with Suppliers
As a retailer, maintaining good relationships with suppliers is crucial to your business success. It will ensure you get reliable and high-quality supply with competitive pricing. Through your suppliers, you may even get inside trends and news that may get your ahead of your competitors.
Utilize Real Time Data
Real time data will help you keep current inventory in check as well as forecast future demand so you can set up automatic ordering and safety stock to reduce labor. You can use perpetual inventory management services such as CBX Cloud to get information whenever and wherever right at your fingertips.
Inventory management is the activity of tracking, recording, and analyzing the level of stocks to optimize operation, minimize costs as well as increase customer satisfaction by giving them what they need when they need it. Getting started with inventory management may seem like a daunting task, especially when you are still working with manual processes such as spreadsheets. Investing in inventory management software is a great place to get started as you will receive help from industry professionals to ensure your operations are set up to run smoothly and automatically without the need for too much manual intervention. At CBX software we help you understand the inventory management techniques and methods suitable for your business and we offer customized solutions tailored to your needs. Contact us today to learn more about business inventory management and how we can help you succeed!