Inventory management refers to the process of managing products, tracking their movements, storing them, and then shipping them. Inventory management helps prevent the loss of products, enhances your ability to track products, simplifies order fulfillment, and maintains appropriate inventory levels. There are many ways to manage inventory. The best one depends on your business and the products that you sell.
Every business selling physical goods requires a place to store its products, whether it’s in a warehouse or in your store. Inventory management is essential to prevent items from being lost, Customers can be satisfied quickly and you will know when they need more of a product.It is essential for profitability. Without an inventory management system, no business can scale.
What is inventory management?
Inventory management refers to managing an organization’s physical stock and controlling its inflow and outflow from point of purchase to the final sale. This includes tracking inventory and submitting purchase orders when appropriate, and fulfilling sales efficiently.
“Inventory Management is the management of physical stock or products you purchase for sale,” stated Mohammed Ali, senior vice president, head, SME, and direct at Delhivery. “Inventory management involves procuring, stocking, managing, and ensuring that the product is available when the customer is ready to purchase it.”
David Singletary, CEO and founder of DJS Digital stated that “being able to know exactly where your pieces are at any time is pretty much the key.”
What is the importance of inventory management?
A wide variety of businesses need to manage inventory, including shipping and logistics companies, manufacturing businesses, and retail businesses. The type of inventory required by a business will determine the nature of its inventory management process. A retail business may only need to keep track of the final goods it sells, but a manufacturer must account for both raw materials as well as finished products.
Ali stated, “Say that you’re selling jeans.” The first thing to do is predict how many units you will sell each quarter. These items can be ordered.
- Where will the product be stored? Think about whether you need a warehouse, or if your inventory can be kept in a physical retail setting. Online businesses selling products on an e-commerce platform should consider whether they need separate storage or enough space in their main office.
- How much are you going to store at one time? You can use accurate sales projections to help you understand how much product you will need to buy and keep. This is called inventory control. Balance is important. You don’t want to have too many inventory units at once, also known as “deadstock”, but you want enough to meet sales needs quickly.
- How can you store your inventory? Storage is more than just a place to store items that are not yet for sale. This includes setting up bins and aisles. ensuring storage locations are clean and free of moisture or contaminants, and Establishing a quality control process to ensure that suppliers deliver products in a salable condition.
Also read: Consignment Inventory: Definition, Advantages, and Management
POS inventory management
Point-of-sale inventory management allows business owners to keep track of inventory across multiple locations from one central system. A POS system is a great complement to inventory management. It helps you keep a precise count of all your inventory for every sale.
POS systems automate the tracking process, which helps to reduce human error. Search for transactions, and get updates about inventory and sales trends for your products. These insights will make it easier to manage your business and provide you with real-time information that can be used to support business decisions. To find the best fit for you, check out our top POS systems reviews.
7 inventory management techniques
These seven inventory management techniques can be very useful if you’re looking to establish a new process for inventory management or improve an existing one.
1. FIFO vs. LIFO
Accounting methods such as “costing” and first in, first off (FIFO) are based on the movement of products through your warehouse.
FIFO is a good system for businesses that sell their oldest inventory first. It should be the first product to leave the warehouse when someone orders the product. This is important for expiring or perishable goods.
LIFO is an alternative to FIFO. It ensures that the latest inventory received is the first one out of the door. FIFO is the default costing system. However, LIFO can be used by businesses that do not ship perishable goods. The way this accounting method reports income could have tax benefits.
2. Demand forecasting
Forecasting or sales projections are a way to determine how many of each product you should have in order to meet customer demand.
Demand forecasting for established businesses should be based upon historical sales data. Businesses that are newer might have to rely on industry data and assumptions until they have their own sales history.
Inventory management is based on demand forecasting. This helps you to determine how much product you need and establish reorder targets once you have reached that amount. Your demand forecast should be reviewed quarterly in order to adjust your minimum quantities or reordering targets.
3. Minimal order quantity vs. economical order quantity
A business can choose to use two methods to decide when it should reorder products: minimum order quantity (MOQ), and economic order quantity.
MOQ is a way to ensure that a seller can only sell the minimum amount of each product type. Items that are expensive tend to have a lower minimum order, while items that are more affordable have a greater number of orders. This is an important consideration when ordering products from suppliers. You should compare the MOQ of a supplier for a product to your sales projections.
Manufacturers who have to consider variable costs such as raw materials, production, and fluctuating demand are more likely to use the EOQ method. This method is used by companies to reduce costs and to purchase as many product units as possible to avoid the need to reorder individual items.
4. ABC analysis
An ABC analysis will help you determine which products are the most profitable and most expensive. It breaks down products into three categories, as the name implies.
- A: These products are the most expensive and the easiest to store over the long term. These products are a major contributor to a company’s profitability.
- B: These are mid-range products that can be sold, but are not as lucrative as those in the A category.
- C: These are usually small-ticket items that have a high turnover. These products aren’t as important for a business as those in the A and B categories. However, high volumes of C product sales are crucial to profitability.
5. Safety stock inventory
Your sales projections are tied to safety stock inventory. This will influence your reorder quantities. This is particularly important for essential or bestselling products.
Safety stock is inventory that you order more than your anticipated demand. Although it’s not a good idea to order more than you need, it can be useful to have some extra inventory if the item is expected to continue to be popular.
Dropshipping refers to receiving an order directly from the customer and having your supplier ship the products directly. Dropshipping eliminates the need to store inventory or have a storage unit. This is best used for items or rare orders that you can’t accommodate in your warehouse. It also means that your customer’s satisfaction will be in the hands of your supplier, not your business.
Cross-docking allows for efficiency and is an efficient method. Cross-docking is a method that allows delivery trucks to unload your goods at your location and then transport them to the trucks that will deliver your products to your customers. This removes the need for you to transport new items into your storage unit and streamlines your inventory management. Instead, you can ship the items as soon as they arrive. This is the best option for items that are “just in time” shipped.
Also read: Top 10 Inventory Management Software
How to improve inventory management
These policies will help you ensure that your inventory is accurately and efficiently managed.
1. Project accurate sales numbers.
How much inventory you have on hand and how quickly you plan to sell it is directly linked to how much.
Projections can be difficult for new businesses. Get as much data online as possible to create a baseline projection. Then, adjust your expectations every 90 days based on actual data.
You can use your sales history and projections to calculate how much inventory you need and when to order each piece. Be sure to pay attention to your most popular items.
2. Appoint a warehouse manager.
The warehouse manager is responsible for overseeing the day-to-day operations of the warehouse. He also ensures that all workers on site are up to date with software and follow company policy. This includes scanning the products when they arrive at the warehouse for delivery. It also involves moving the products around the warehouse and delivering them to customers. Also, the warehouse manager ensures that quality assurance checks are carried out and that regular inventory audits are conducted.
3. Establish regular inventory cycle counts.
While inventory is sitting in storage, It is vital to take inventory of all products that are in stock. Ali stated that businesses can lose between 2 and 10 percent of their products each year if they don’t have a cyclical, recurring inventory process. Regular inventory audits are essential to reduce the number of lost goods.
4. Set up a tracking system.
While tracking can still be done manually, it’s far easier to use an inventory control system. This software allows you to automatically update your inventory by scanning items and locations in your storage facility.
Find the right techniques to help your business succeed
Effective inventory management is essential to keep your business running smoothly – and your customers happy – no matter whether you are an online, brick-and-mortar, or multichannel company. You should regularly evaluate how these techniques are working for you and your team. You can then make adjustments to your systems and processes and optimize them whenever you need.