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What is Inventory Management and How Can It Help Your Business?

A scanner is used to determine economic order quantity

Inventory management can be the difference between a profitable company and an unprofitable one. It is vital that inventory is managed and forecasted with precision to satisfy customer demands and be a point of profit. Let’s break down what inventory management is and how your companies can use it to maximize profits.

What Is Inventory Management and How Can It Help Your Company to Grow?

Inventory management is the process that allows both raw materials and finished goods to be sourced, stored and eventually sold as inventory. In other words, it is how a company can control their inventory – how much it currently has in its warehouse, on its store shelves and in backrooms, as well as with its distributors? How can it ensure it has the right amount of product to meet customer demand if inventory sells out? All these questions are critical to address for a retailer to be successful, but now the question is, how do retailers achieve inventory management and what does that really look like for them?

Common Inventory Management Terminology and Definitions

  • ABC Analysis – identifies the most popular as well as least popular types of stock
  • Batch Tracking – items are grouped together based on similar qualities
  • Bulk Shipments – a shipment that involves buying, storing, and shipping inventory in large quantity. It involves unpacked materials that are directly loaded into ships and trucks by the supplier
  • Consignment – a form of inventory management where suppliers are not paid until the business sells that product. The supplier also holds ownership of that product until the point of sale
  • Cross-Docking – eliminating warehouse storage and instead, stock moves from supplier truck directly onto delivery truck
  • Demand Forecasting – predictive analysis used to calculate customer demand
  • Dropshipping – items are shipped from the supplier directly to the customer from thei suppliers’ warehouse
  • Just-In-Time Inventory (JIT) – a feature that helps minimize inventory while increasing efficiency by sending an alert to restock just as an item sells out
  • Lean Management – a method that removes waste or any item that is not giving the customer value from the manufacturing system
  • Materials Requirements Planning (MRP) – a system that manages planning, scheduling and inventory control for manufacturing
  • Perpetual Inventory Management – technique that records stock sales in real time
  • Six Sigma – data-based method for removing inventory waste from business
  • Lean Six Sigma – a method to remove waste and raise efficiency by combining lean management with Six Sigma

Retail vs. Wholesale Inventory Management

When looking at retail vs. wholesale inventory management, it is important to know the difference between the two for general knowledge. Retail inventory management is a broad topic that refers to business-to-consumer (B2C) selling. This is when a business sells a product directly to a consumer, either online or via a physical storefront. Wholesale inventory management deals with business-to-business (B2B) selling. B2B selling is when companies sell products and services directly to another business, eliminating the consumer aspect. Both require strong planning and demand forecasting systems to make informed inventory purchases.

What Are the Benefits of Good Inventory Management?

There are main benefits to strong inventory management and ensuring you can fulfill incoming and open orders, leading to increasing profits. Overall, understanding your inventory trends and knowing how to do predictive analysis will allow you to save time and money. This is especially important for small businesses with less margin for error.

1. Costs will decrease as you can better monitor how much inventory you need, eliminating excessive inventory and excess handling of non productive product.  

2. Cash flow will improve. Cash will constantly be moving through your business because you are only spending money on inventory that is selling.

3. Finally, and most importantly, having effective inventory management capabilities will satisfy customers and create brand loyalty. When a customer knows that they can come to your business and always be able to find what they are looking for and it is in stock, they will continually come back to your business.

What Are the Most Common Challenges in Inventory Management?

It is vital to have a strong system for a few reasons which will make or break your inventory management. Some challenges include having too much unproductive inventory on hand, inadequate quantities of inventory to satisfy the demand of your sales channels or difficulty locating inventory. In addition, your business needs accurate inventory details. If your system is out-of-date and not properly tracking inventory, it will be impossible to know when to restock or to know if products move. This also plays a part in having your processes updated so that you are not making errors, resulting in slow operations. Another challenge you may face with inventory management is not having the ability to detect when customer demand changes. Your system should be able to track when trends change, alerting you if you need to adjust your inventory accordingly to meet future demand. Finally, it is important for management systems to use their programming to be able to locate inventory in the warehouse immediately, eliminating any wasted time.

Common Inventory Management Techniques

Inventory management only will be useful if you know how to properly take advantage of all the proper inventory management methods and techniques to optimize your spend and enhance your service levels.

  • Cycle counts simply divide your inventory into smaller, focus groups, usually by classifications of high risk or high value counts. This is like batch tracking; simplifying the process to allow your business to know exactly which products to track down if needed.
  • Surplus inventory describes an excess of inventory, which can eventually lead to dead stock if there is too large of a surplus. Dead stock is overage that never sells; either because it is outdated or no longer fits consumer demands.
  • ABC analysis divides inventory into three classifications to categorize them based on their impact to overall inventory cost. Category A are your most valuable finished products that will impact overall profit. This category holds a 70 percent value level in overall importance and impact on inventory. Category B can be valuable but not always. This category holds a 20 percent value level in overall importance and impact on inventory. Category C are smaller transactions that impact profit, yet do not impact the company individually. This category holds a 10 percent value level in overall importance and impact on inventory.
  • Just-In-Time (JIT) Management schedules raw materials from suppliers to be directly sent to production, reducing inventory carrying costs.
  • Safety stock identifiesextra inventory ordered beyond forecasted demand. This technique is used in case the forecast is wrong or demand is higher because of changing customer demands. To calculate how much safety stock to order, use the following: Safety Stock= 1.65 x Square Root of Lead Demand.
  • FIFO (first-in, first-out) and LIFO (last-in, first-out) refer to accounting methods to determine the cost of inventory. FIFO is designed to keep inventory fresh while LIFO helps prevent inventory from going bad.
  • Par levels are the minimum amount of quantity you should have in stock for a particular quantity at one time. If sales cause your stock to go below the par level, your inventory management system will alert you to reorder that product.
  • Contingency planning helpsprepares the business for any unexpected changes in supply and demand to ensure that physical inventory and operations are available in the event of an emergency.
  • Consignment inventory is when you sell products that you do not own on behalf of another provider. Profits will be shared but selling on consignment does not require an investment to purchase the inventory.
  • Dropshipping is utilized when a system forwards sales orders directly from a manufacturer to the customer. This technique eliminates storage costs, resulting in less asset management involved.
  • KPI analysis is vital for inventory management as it allows an understanding of how your current inventory strategies are performing. KPI analysis tracks variants such as sell-thru rate, units per transaction, rate of return, perfect order rate and lead time.
  • Returned inventory needs to be dealt with quickly and easily as customers prioritize shopping at retailers where they know they will have an easy return process to build brand loyalty. There are two types of returned inventory:
  • Authorized returns are when customers are required to request a return through the website directly, emailing the company, or calling them.
  • Blind returns are when a return slip is included in the packaging, or the customer can immediately download it from your website.

Inventory Management FAQs

Why is inventory management so important in supply chain processes?

Inventory management is important because it gives businesses insight into their entire supply chain, providing useful visibility. Knowing how to predict supply and demand allows businesses to make the most of their investment.

What are the goals of inventory management?

The goal of inventory management is to understand current inventory levels and location. This allows you can satisfy customer demand and optimize your reorder process while maximizing profits.

What are the best ways to improve inventory management?

Begin with strong planning and demand forecasting systems to make informed inventory purchases and then be as organized as possible. Have your warehouse manager keep accurate and current records of inventory levels and warehouse storage capacity to ensure real-time inventory visibility and tracking.

What are some signs of poor inventory management practices?

A sign that your inventory management is not being effective is when you consistently have too much or not enough stock. The goal of inventory management is to find a balance to quickly adjust stock levels to demand changes and inventory turnover. When there is an imbalance, it means your system is not tracking information correctly to provide proper inventory forecasting.

Why Your Company Needs an Order Management System to Manage Inventory

All companies whose goal is to have a functioning supply chain need to invest in a strong order management software. These inventory management software systems allow businesses to manage and fulfill orders successfully, while also increasing profits. Cost savings is a major benefit of order management systems, as you can follow trends in supply and demand and act accordingly to invest in the proper amount of inventory. Cash flow will also be improved, because you are purchasing inventory that is more likely to sell. Finally, all businesses have customer satisfaction as a goal. Investing in a system is also an investment into your customers, so they can receive the desired customer service and satisfaction when purchasing from your brand. Although adjusting and investing in an order management system initially may seem daunting, the benefits your business will receive from it will be worth it in the long run.

How enVista Can Help Your Organization Manage and Optimize Inventory

The goal at enVista is to improve efficiency, profitability and customer service for all our clients. We focus on both the physical and digital sides of the business to provide you with top inventory management software solutions and expertise.

Learn about our inventory optimization solutions and contact our inventory management team today to learn more.

Let’s have a conversation.TM

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