Inventory management is a critical component of any business. If you don’t have an effective system in place for tracking and managing your inventory, you will quickly find yourself losing money.
This guide will discuss inventory management’s basics, types, and techniques.
What is inventory management?
Inventory management is the process of tracking and managing your company’s inventory. This includes items that are currently in stock and those that are on order.
It’s essential to have a system for Inventory Management because if you don’t track your inventory, you will quickly lose money. Unfortunately, many businesses fail because they do not have an effective Inventory Management system.
There are several vital components to Inventory Management, including:
- Tracking your inventory levels
- Knowing what items you need to order
- Managing your warehouse space
- Keeping track of your inventory costs
Each of these components is important in its own right, but they all work together to ensure that your company’s inventory is managed effectively.
Inventory management systems
Inventory management systems are computer software that helps businesses in the inventory management process. Typically, businesses will use these systems for periodic inventory management.
The most common types of inventory management systems are ERP (enterprise resource planning) software and warehouse management software. ERP software is used by businesses that have multiple locations or supply chains. In contrast, warehouse management software is used by companies that operate warehouses and need to track the movement of goods in and out of their facilities.
Inventory control in Supply Chain Management (SCM)
Inventory management is managing the flow of goods and materials through the supply chain to meet customer demand. It includes forecasting demand, ordering goods, deciding when to produce or purchase specific items, and ensuring that inventory levels are correct.
Inventory management is a critical part of SCM because it helps ensure that the correct amount of inventory is available at all times to meet customer demand. If too much stock is built up, money is wasted on storage costs, and it may be challenging to sell the excess items. On the other hand, if too little inventory is maintained, customers may not get the things they need when they need them, which can lead to lost sales.
Tracking Inventory Levels
One of the most critical aspects of Inventory Management is tracking your inventory levels. This means knowing how much stock you have on hand and how much stock you are expecting to receive soon.
If you don’t track your inventory levels, you won’t know when to order more stock. This can lead to lost sales and wasted money on excess inventory that you don’t need.
Few ways to track your inventory levels,
Manual Inventory Counts
This involves physically counting the number of items in your inventory. This can be time-consuming, but it’s the most accurate way to track your inventory.
Inventory Tracking Software
Inventory management software is a type of software that helps businesses track and manage their inventory. For example, it can help companies keep track of what items they have in stock, how much stock they have of each item, and when items are due to expire or run out.
Some inventory management software also allows businesses to track orders and sales. This can help enterprises see what items are selling well and which items they might order more. Additionally, some inventory management software can generate reports that show how much money a business has made from its inventory.
Most accounting software programs include reports that track your inventory levels. This can be a helpful way to get an overview of your stock levels, but it may not be as accurate as a manual count or Inventory Tracking Software.
Knowing What Items You Need to Order
Another vital aspect of inventory management is knowing what items you need to order. This includes regular orders for items you keep in stock and special orders for items you only need occasionally.
If you don’t know what items you need to order, you may order too much or too little inventory. This can lead to lost sales or wasted money on excess inventory.
Few ways to know what items you need to order,
This is the process of predicting how much inventory you will need in the future. This can be done manually or with the help of inventory tracking software.
Most accounting software programs include reports that track your sales data. This can help you see which items are selling the best, and it can help you determine how much inventory you need to order.
A well-organized inventory list can help you see which items you are low on stock and which items you need to order. This can be helpful if you don’t have access to sales data or if your accounting software doesn’t include Inventory Management features.
Managing Your Warehouse Space
Another important aspect of inventory management is managing your warehouse space. This includes knowing how much space you have and how to utilize that space best.
If you don’t manage it properly, you may have too much or too little inventory. This can lead to lost sales or wasted money on excess inventory.
Few ways to manage it,
This is the process of spacing your inventory items to be easily accessed. It also includes organizing your inventory so that it’s easy to find what you need.
Using racks can help you maximize your warehouse space. Shelves come in various sizes and can store inventories of all shapes and sizes.
Shelving is another excellent way to utilize your warehouse space. Shelves can be used to store inventory that is not being used and inventory that needs to be shipped.
Types of Inventory
Inventory type depends upon the kind of industries and their operations — the inventories in the merchandising sector store the end product.
In manufacturing industries, the inventory has raw materials along with the sub-assemblies.
Below are the types of inventory,
The manufacturing process producing subassemblies or final products uses raw materials. Inventory stocks these raw materials which are available for production.
This type of inventory consists of materials like raw and component materials. The manufacturing process for its end product utilizes these materials.
Once the final quality check gets over, these materials are part of the finished goods.
The finished goods are the end product or the part of another item. Supplies and dealers use the finished goods inventory type to store the bought goods.
MRO stands for Maintenance, Repair, and Operating. The product includes the necessary items used for maintaining and repairing work.
You can see examples of MRO inventory in the clothing industry. This industry usually provides extra items like buttons and the finished product.
Shipment and movement of goods are essential in most companies. This type ships the goods and transports them to different warehouses.
Buffer inventory stores the buffer stock to meet the forecasted demands. As a result, buffer inventory reduces out-of-stock situations and ensures proper business to customers.
This inventory works for manufacturing units. The production process is usually coupled with many methods.
These processes are interdependent. The decoupling inventory separates the inventories of another method.
This type is for a standard business cycle. For every process, the manufacturing of a regular amount of product occurs.
What is Inventory Management Techniques?
For any industry managing the inventory is an important task. There are different techniques to manage inventories efficiently. These are useful in maintaining the profit for a business.
Just in time (JIT)
The company stores the exact amount of inventory required for the production process, avoiding storing the excess.
This technique saves the cost of storage and insurance for the items. In addition, the new stock buying needs to happen only when the older stock is close to replenishment.
This type of management technique is called “zero inventory.” In this type, an order initiates the cascade of events needed for production.
It reduces wastage, eliminates stockpiling, and increases efficiency by maximizing inventory turnover.
Minimum order quantity
It allows you to order the lowest set of amounts of stock a supplier is willing to sell. If a supplier is unwilling to sell below the minimum quantity, you cannot buy the item.
Strong the stock for some time results in a delay in realizing the profit. This method helps the suppliers to maintain healthy cash flow.
ABC stands for Always Better Control analysis. The inventory items are classified into A, B, and C categories. The items in the A category are expensive and strictly controlled.
B category is lesser expensive as compared to A and is moderately controlled. C category items require lesser investments and are highly available.
So the level control level of the C category items is minimal.
FIFO and LIFO
In the case of FIFO ( First-In-First-Out), first utilization happens for the first entered items. The food industry observes this kind of management technique.
In this process, the consumption of the first-in perishable items happens first.
LIFO (Last-In-First-Out) technique is for the non-perishable and homogenous items. These goods are easy to manage and do not need a re-arranged warehouse for each batch or order.
Economic order quantity
Economic order quantity helps to reduce inventory by ordering the lowest amount of stock. As a result, it saves the storage cost and achieves the target during peak demand hours.
This method is the safest. However, it does not drain the inventory items and achieves the required target.
According to Kenneth Boyd, the calculation of EOQ is,
EoQ uses three variables,
D = demand in the units required for the production.
S = Ordering cost per purchase
H = Carrying cost per unit.
Safety stock Inventory
Base stock is stored to deal with the market variations of particular items. This technique deals with serious unexpected business issues.
It stores just the required amount of inventory before completely drying out.
It prevents stock-out and protects against unexpected spikes and demands. In addition, it buffers the stock and helps in compensating the inaccurate market forecasts.
Safety Stock Inventory = (Max Daily Sales x Max Lead Time in Days) – (Average Daily Sales x Average Lead Time in Days)
Dropshipping is in the supply chain management system where the merchant neither owns nor stocked the goods.
Once the merchant receives an order for the goods, the supplier gets the requirement.
The supplier ships them to the customer on behalf of the merchant. This type does not require inventory; instead, the order fulfillment cost is low. Therefore, this type’s risk is low, and the startup cost is low.
It is a business deal between the consignor (vendor) and the consignee (retailer). The consignor delivers the items to the consignee without advance payment.
The consignee pays the amount only after selling the items. It is a win-win situation for both. It improves the cash flow and enhances the partnership between them.
FSN stands for Fast, Slow, and Non-moving inventory items. Therefore, not all the things required for production are needed frequently.
This method classifies the inventory into fast-moving, slow-moving, and Non-moving inventory. In addition, it allows you to order the required amount of inventory items based on utilization.
Reorder Point Formula
This formula identifies the right time to order the inventory item.
More on reorder point.
Batch Tracking is known as a lot-tracking process. This is because it efficiently tracks the goods using batch numbers and other details.
Perpetual Inventory Management System
It is also known as a continuous inventory system. This inventory system tracks the sold and stocked items in real-time.
It helps multiple departments to track the items. For the perpetual inventory management method, ERP inventory modules are prevalent.
Lean Manufacturing System
It is known as lean production. It is a system to maximize product value and minimize waste.
It is a Toyota Production System developed to eliminate three types of deviations. These deviations lead to the inefficient allocation of resources.
These three types of deviations are Muda (waste), Mura (unevenness), and Muri (overburden).
Using the lean manufacturing system, companies adhered to 5 principles. These are,
- Value Stream
The organizations integrate the “lean manufacturing techniques” with these. This combination has been observed to produce the best quality products.
Sigma and Lean Six Sigma
This is a data-driven process. As a result, the product defects are reduced to 3.4 defective parts per million. Therefore, this method enables us to deliver a perfect product.
Statistical models are used to study the data of the given industry. These models help improve the process’s performance until they achieve the six sigma level.
There are two different ways to implement the six sigma model.
- DMAIC: The 5 step process is called DMAIC. It stands for Define, Measure, Analysis, Improve, and Control. This method is used for improving the established process.
- DMADV: This is mainly used to develop a new process. DMADV stands for Define, Measure, Analyze, Design, and Verify.
Lean Six Sigma is the fusion of Lean manufacturing and Six Sigma.
It predicts what the customers may buy, the quantity, and the time. The prediction depends on previous experience, guess, or sales data.
Demand forecasting assists in the decision-making process during the critical stage.
Inventory Management is a critical part of running a successful business. By tracking your inventory levels, knowing what items you need to order, and managing your warehouse space, you can ensure that you always have the right amount of inventory on hand. This will help you avoid lost sales and wasted money on excess inventory.
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