Having well-organized stock on hand can simplify many aspects of running a business. Good inventory management is the first step toward establishing sound financial footing and handling of loans.
While this may be one of the most tedious parts of running a business, it could ultimately determine the fate of your company. Most business owners would rather avoid dealing with inventory management than any other aspect of running a company.
Understanding what is inventory management can impact your business, so you need to understand what it is and how it works.
The Inventory Management System
Keeping track of inventory levels and needs at all times is a crucial part of any successful business. It keeps tabs on stock levels from arrival to departure. By anticipating and acting on trends, the practice guarantees adequate supply to meet demand and early warning of impending shortages.
As soon as products are sold, money is generated from inventory sales. Although inventory is an asset on the balance sheet, it can’t generate revenue until it’s sold. Having excess inventory also reduces cash flow.
Inventory turnover is a common metric used to evaluate warehouse management. Inventory turnover, a metric used in accounting, measures the frequency with which stock is sold over a given time. Overstocking is bad for business. Poor inventory turnover can lead to unsold stock and holding inventory for too long.
What Is Included in Inventory Management?
There are various methods of inventory management to choose from, and the specifics will vary from company to company. You’ll be responsible for a variety of stock, including:
- Raw materials. In the manufacturing process, raw materials are the first building blocks. Products begin life as raw materials, which might be anything from wood to metal to plastic to fabric. One or more manufacturers and suppliers provide these.
- Works in progress. WIP is shorthand for something that isn’t yet complete. Inputs such as labor, machinery, raw materials, and other equipment are all included in the total cost of work in progress. Then, the expenses are moved to the finished goods account and classified as a sales expense.
- Completed products. The quantity of goods in stock is the total number of items that can be purchased by customers. Once a work-in-progress has been completed, it can be counted among the finished goods.
- Products for maintenance, repair, and operation. Materials and tools used in manufacturing but not included in the final product are known as maintenance, repair, and operation supplies (MRO). Personal protection equipment, cleaning materials, office supplies, and electronic devices all fall under this category.
Why Is Inventory Management Important?
The health of a business depends on accurate and efficient inventory management, which ensures there is never too much or too little stock on hand. To stay in good standing with the SEC and the Sarbanes-Oxley (SOX) Act, publicly traded companies must maintain an accurate inventory system.
To demonstrate compliance, businesses must keep records of their management procedures. But even if you aren’t publicly traded, you must have an inventory management practice in place.
Here are some reasons why it may be important, whether or not you are publicly traded:
- Repeat Customers: You want repeat business from your customers so they will recommend you to others. Having everything ready for them each time they visit is one way to guarantee this. Drop shipping and backordering are two methods you can use to maintain customer satisfaction.
- Accurate Forecasting: If you want to stay ahead of the demand curve, you need better inventory management software than just looking at last month’s numbers to predict what will sell and how much to stock up on. You can use this information to determine optimal reorder and safety stock levels.
- Inventory Turnover: Assets include inventory. Using some inventory management strategies, you can improve your inventory turnover ratio by decreasing your supply of slow-moving products and boosting your stock of profitable ones.
- Cutting Costs: More stock requires more space, more guards, and more hands. The proper amount of stock can be maintained, money wasted on slow-moving products can be avoided, and resources may be allocated to areas with the most potential for return with the help of efficient inventory management.
- Employee Efficiency: Distribute authority and responsibility for inventory management throughout your staff. Staff training on advanced inventory management software and other time-saving devices.
3 Types of Inventory Management
1. Periodic Inventory Management
The periodic inventory system is a way to value stock for bookkeeping and reporting purposes by taking stock at regular intervals. The cost of goods sold (COGS) is calculated by first determining the stock on hand at the start of the accounting period. You will then add in any new purchases made during the period, and finally subtract out any stock at the end of the period.
2. Barcode Inventory Management
Each item sold by a company is given a unique number using barcode inventory management systems. Multiple pieces of information, such as the manufacturer, size, and stock level, can be linked to a single number.
3. RFID Inventory Management
Radio frequency identification, or RFID, is a system that uses serial numbers to wirelessly transmit the identity of products so that they can be tracked and extensive information about those products can be made available. RFID-based warehouse management systems can facilitate faster self-recording of receiving and delivery, greater inventory visibility, and greater efficiency.
Inventory Management Techniques
Companies use a wide variety of inventory management techniques, each optimized for a specific industry or line of goods. Just-in-time production, material requirement planning, economic order quantity, and day sales in inventory are all examples of such inventory management strategies.
These are just the four most widespread techniques for assessing stock, but there are many more:
1. Just-in-Time Management (JIT)
This method of production was developed in Japan in the ’60s and ’70s, helping businesses save a ton of money and cut down on waste by limiting stock to what was needed for production and sales. By taking this route, you can save money on insurance, warehousing space, and getting rid of old stock.
It’s important to consider the potential dangers of JIT inventory management. Manufacturers risk losing customers and business to rivals if they are unable to keep up with sudden increases in demand by securing sufficient supplies on time. As little as a one-second delay can cause a bottleneck if a crucial input is late.
2. Materials Requirement Planning (MRP)
Manufacturers need up-to-date sales data to use this method of inventory management effectively, as doing so allows for more precise forecasting of inventory requirements and more timely communication of those requirements to their material suppliers. When a manufacturer is unable to meet demand, it is usually due to poor sales forecasting and an inadequate inventory management plan.
3. Economic Order Quantity (EOQ)
Assuming constant consumer demand, this model is applied in inventory management to determine how many units to add to the stock with each batch order to minimize total inventory costs. In the model, inventory costs consist of both holding and setup fees.
The objective of the EOQ model is to minimize the frequency with which orders must be placed and the accumulation of surplus stock by ensuring that just enough stock is ordered with each shipment. It presumes that there is a trade-off between the costs of setting up and maintaining an inventory and that the best way to reduce overall inventory expenditures is to do so by minimizing both of these.
4. Days Sales of Inventory (DSI)
The inventory turnover ratio measures how long it takes a business to convert its finished and unfinished goods into revenue on average, measured in days. Days sales in inventory (DSI) can be understood in a variety of ways, including as the average age of inventory, as days inventory outstanding (DIO), as days in inventory (DII), as days sold in inventory, and as days inventory.
As a measure of inventory liquidity, this number indicates how long a company can operate on its current stock of inventory. However, the average DSI varies by industry, so it’s important to consider both the average DSI for your specific market as well as the average DSI for related markets.
What Are the 4 Main Steps in Inventory Management?
The value of inventory management is only fully realized in retrospect when a company needs to determine the value of its stock to do something like apply for a loan or balance its books. Those with sufficient capital to hire an inventory manager can safely delegate all inventory-related tasks to that person.
Although those with just starting or are not ready to outsource this task will benefit from learning effective inventory management techniques. The steps below will help you understand successful inventory management:
1. Quantify Your Inventory
Quantifying your stock is the first step in efficient inventory management. Putting the value of your company’s assets in numbers can help you avoid a lot of potential headaches in the future. An inventory loan is a good idea when your company is running low on cash and you need to buy supplies but don’t have enough money.
However, if you don’t know how much inventory you have, it may be difficult to get a loan from a financial services company. Before agreeing to lend you money, a service that specializes in inventory loans will typically review a document that lists all of your company’s inventory and the value of each item.
2. Keep Good Inventory Records
Keeping clear records of your stock levels can streamline inventory-related tasks and simplify business management overall. Inventory issues, like incorrect calculations or conflicting bookings, can be resolved with the aid of the records you’ve kept.
Products stocked, refunded goods, damaged goods, etc. are just some of the many aspects of inventory management that can be documented. In essence, your records can act as backup for your software and tools used for inventory management.
3. Track and Respond to Industry Trends
If you run a business that depends on shifting consumer tastes or technologies, you’ll need to monitor the market closely and be prepared to quickly adjust your inventory levels. In this industry, sales are driven by consumer demand, which in turn affects inventory turnover.
As a first line of defense against falling behind the market, you should monitor and react to market trends by clearing out slow-selling stock in favor of in-demand stock.
4. Use Inventory Management Tools and Software
With the help of technology, many previously tedious business tasks are now relatively simple. Managing stock remains an integral part of the picture. To ensure a smooth accounting and inventory management process, your company should take advantage of the most up-to-date technological tools and software available.
You may not be interested in using complex inventory management tools, but you can use trustworthy accounting software from market leaders like Intuit and Mint.
5 Benefits of Inventory Management
Effective inventory management can lead to a wide variety of positive outcomes. Aside from some of the benefits we’ve already mentioned, like better access to business loans and financing, here are some of the key benefits of proper inventory management:
1. Improved Order Fulfillment Accuracy
Good inventory management relies on precise records of product orders, stock levels, and movements. An efficient fulfillment partner will use real-time software and systems to monitor inventory levels and ensure that no products are lost along the way.
2. Improved Warehouse Organization
An efficiently run warehouse or distribution center begins with careful inventory management. A well-organized warehouse allows for more effective fulfillment strategies both now and in the future. For companies using the warehouse for inventory management, this means reduced expenses and better product delivery times.
3. Increased Warehouse Efficiency
When inventory is well-managed, less time and resources are wasted on the process, freeing them up for use elsewhere. Tracking and shipping processes can be sped up with the help of technology, and stock levels can be accurately recorded.
4. Save Time and Money
Good inventory management saves time and money by reducing waste and maximizing the efficiency of ordering and product distribution.
5. Improved Customer Satisfaction
Correct inventory control and management prevent the shipment of defective or incorrect items to consumers. This ensures a positive customer experience, prevents problems like refund requests, and boosts sales.
Challenges in Inventory Management
Too much stock that can’t be moved, not enough products to meet demand, and a lack of visibility into stock levels and locations are the three biggest obstacles to effective inventory management. Other challenges you may face with inventory management include:
- Accurate Stock Levels: Lacking precise stock data makes it impossible to predict demand and restock popular items.
- Bad or Inefficient Processes: Manual or antiquated methods of doing things increase the opportunity for error and decrease productivity.
- Changing Customer Demands: Customers’ preferences and requirements are always evolving. Your system’s inability to monitor patterns will leave you in the dark about why and when customer tastes shift.
- Efficient Warehouse Organization: If employees have a hard time tracking down similar items, they waste time. The ability to efficiently manage stock levels is key to overcoming this obstacle.
Outsourcing Inventory Management to a 3PL
Lack of space or personnel to handle inventory is a common cause of sloppy stock management. It’s possible you don’t have the resources to handle a rush of returns or make sure inventory is allocated evenly.
For this reason, outsourcing fulfillment represents a distinct approach to stock management. Using a fulfillment partner can boost revenue and customer satisfaction, but it may not be free. And it can come with an additional challenge: inventory management of distributed inventory.
Managing stock across numerous outlets, whether they be physical stores, warehouses, or online marketplaces, increases the complexity of inventory management. To guarantee you have enough stock everywhere you sell, this kind of inventory management necessitates control at the location level in addition to a global view of all your goods. The success of this system relies on the ability to keep a clear, consolidated view of stock at all times.
3 Benefits of Using 3PLs for Inventory Management
- Having access to a 3PL’s global network of fulfillment centers and other warehousing and distribution facilities, as well as specialized logistics resources and personnel, is arguably the greatest benefit of outsourcing your inventory management to a 3PL.
- Third-party logistics providers (3PLs) can streamline your stock-keeping processes. 3PLs can also facilitate inventory optimization by increasing the degree of automation in your storage and shipping procedures.
Third-party logistics providers (3PLs) can help you implement cutting-edge, automated inventory management software so that you no longer have to rely on time-consuming and error-prone manual processes and procedures to forecast customer demand and determine what products to stock, where to store them, and when to pick, pack, and ship them.
- A 3PL can help you save money on inventory and increase productivity. You may maximize both operational and cost-effectiveness in your inventory management by working with a 3PL, which has access to a global network, logistical knowledge, and the most advanced software technology.
Rely on AMS Fulfillment For Accurate Inventory Management
We at AMS Fulfillment know that our customers’ inventory availability and status are major factors in many of their business decisions. Our warehouse management system’s inventory data must be reliable so that our customers can make informed purchasing decisions. Because of the stakes involved, every member of the AMS team is personally responsible for all aspects of inventory management in our fulfillment services.
We take an active role as a business partner for you, so you may focus on expanding your company. No matter how many or how few SKUs you carry, we can advise you on the best warehouse and inventory management systems to meet your needs.
In reality, AMS handles clients who stock anywhere from 10 to 20,000 items. No matter the size of your inventory, let us help you find the right inventory management practices so you can have a competitive advantage. Contact Us today to get started!
