Inventory management helps business identify which and how much stock to order at what time. It tracks inventory from purchase to the sale of goods. The practice identifies and responds to trends to ensure there’s always enough stock to fulfill customer orders and proper warning of a shortage.
Effective inventory management is essential for ensuring maximum profitability for a business. Additionally it also impacts brand loyalty and customer perception. Because it has a large impact on whether your orders are sent to customers’ error-free. Inventory Management also includes the management of raw materials, components, and finished products, as well as warehousing and processing of such items.
What Is Inventory Management?
Inventory management is a part of supply chain management that involves supervising the flow of goods from manufacturers to warehouses to point of sale. A key function of inventory management is keeping detailed records of new and returned products as they are entering or leaving the warehouse or point of sale.
While the inventory management process can be more complex within larger organizations, the basic process is the same. Goods are received into the warehouse and put on shelves or into stock areas. Next, they are then moved to production facilities where they are made into finished goods and then shipped directly to customers. In smaller businesses, goods that are received from the manufacturer may go directly to the stock area. For wholesale distributors, the goods are finished products, as opposed to raw materials.
Why Is Inventory Management Important?
When inventory management is well-organized, the rest of the supply-chain management process will run smoothly. Without it, businesses run the risk of problems like missing shipments, missing picks, out-of-stock items and overstocks.
When warehouses are not properly managed, disorganized shelves, incorrect paper pick lists or a messy warehouse can cause miss picks. Missing shipments, in turn, are a result of miss picks at the beginning of the process. When companies use manual methods for placing orders and don’t have a full understanding of what goods they have in inventory, they cannot properly forecast the inventory they will need. Ultimately, this results in out-of-stocks and overstocks.
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These mistakes impact the profitability of a business, wasting money as well as employee time correcting errors. Furthermore, because of errors like these reflect poorly on the business, it can also result in negative reviews or impact customer loyalty.
Why Is Tracking Inventory Important?
Keeping track of stock helps ensure that you have enough of the products you need to fulfill customer needs. Inventory is often an investment in future sales. Your organization stores products in the hopes that it will use or sell these goods to meet customer needs. Thus, allowing them to see a return on investment (ROI).
Tracking inventory allows you to avoid:
- Running out of products you need
- Having money invested in excess stock
- Dedicating space in a stockroom or warehouse for excess stock
- Having products spoil or become irrelevant before you can sell them
In other words, by effectively tracking inventory, you can minimize the costs associated with storing excess goods while maximizing potential sales.
Fast Moving & Slow-Moving Inventory Items
Another essential tool that a sound inventory management system offers, is analyzing the fast-moving and slow-moving products. Furthermore, when we attach the stock valuation of these slow-moving products, we understand its impact on the financial statements. The right actionable item would be to keep a check on the slow-moving items and order them only when required rather than hold them in the warehouses.
Lead Time
Lead time is the amount of time taken for a particular stock item to reach the warehouses from the date of ordering. This crucial piece of information can help you plan your high value – slow moving products very efficiently.
Longer lead times often result in inefficiencies and wastage of resources. Always companies should review their processing times against benchmarks to identify ways of improving their lead times. Reducing the lead time improves overall productivity, resulting in higher revenues and profits.
Stock Ageing Report
Another essential element is stock ageing reports, which gives a good insight into which inventory has been lying with for the longest time. Regular analysis of this report can provide us with a good understanding of which inventory to keep in our warehouses and the quantum of these stocks.
What are SKUs?
SKU stands for stock keeping unit, and is the number assigned to a product by a store to identify its price, manufacturer and product options. SKUs are typically broken down into classifications and categories. This allows retailers to easily group products together for analysis. Online retailers also use SKUs to make product recommendations. Because products that have similar features can be grouped by using the SKU, the retailer can suggest similar products that a customer might be interested in.
A store might categorize products based on customer type—men, women or children—style, color or material. The retailer can then use the SKUs to create detailed reports that track inventory and sales. These reports can also be used to negotiate better terms with product vendors.
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The process of inventory management requires the use of a variety of types of data to keep track of the goods, including the number of goods, cost of goods, serial numbers, lot numbers and dates.
Formulas for Inventory Management
There are two formulas that are commonly used in inventory management. They include:
Economic Order Quantity
The formula for economic order quantity (EOQ) is the square root of 2DS/H. In this formula, D stands for demand in units, S stands for order cost and H stands for holder costs.
Reorder Point Formula
The reorder point formula is (average daily usage rate x lead time) + safety stock.
Types of Inventory
Your organization might store and track different kinds of inventory depending on the industry and purpose. Some of the main types of inventory include:
Raw Materials
These are the materials that your organization uses to manufacture other products.
Unfinished Products
Unfinished products are goods that have begun the manufacturing process but are still incomplete and not ready for consumers.
Finished Products
These products are ready to be sold and are usually stored in a warehouse until they can be shipped or sold.
MRO Goods
Maintenance, repair and operating supplies (MRO) are the goods that your organization relies on to support operations, namely the production process.
Cycle Inventory
This classification refers to products that an organization receives from a manufacturer or supplier and then sells to consumers.
In-Transit Goods
These are products that are currently being taken to their final destination.
Decoupling Inventory
Decoupling inventory refers to the products, supplies or parts that have been reserved in preparation for an interruption in production.
Anticipation Inventory
When an organization is anticipating a surge in sales, like during the holiday season, they often stock excess products in preparation.
Buffer Inventory
Sometimes referred to as safety stock, this is excess inventory that is meant to protect the organization in case of unexpected needs for more stock or issues.
Because each of these different types of inventory is treated differently, it’s usually helpful to divide your stock into these categories and track them separately.
Inventory plays an important role in nearly every organization, regardless of the industry. To ensure the effectiveness and efficiency of a company, you must familiarize yourself with some of the best methods for keeping track of stock.
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