What is inventory management? Definition and Summary (2023)

Why is inventory management important?

Effective inventory managementIt allows companies to balance the amount of incoming and outgoing inventory. The better a company controls its inventory, the more money it can save on its operations.

A company that has too much inventory is overstocked. Overcrowded businesses have money tied up in inventory, which constrains cash flow and can lead to a budget deficit. Also known as dead stock, this overstocked inventory is often stored, unsaleable, and impacting a company's profit margin.

However, if a business does not have enough inventory, it can negatively impact customer service. Lack of inventory means a business can lose revenue. Telling customers they're out of stock and constantly backordering can lead customers to take business elsewhere.

An inventory management system can help companies find the balance between under-stocking and over-stocking for optimal efficiency and profitability.

The inventory management process.

Inventory management is a complex process, especially for larger organizations, but the basics are essentially the same regardless of the size or type of organization. In inventory management, products are typically delivered to the receiving area of ​​a warehouse in the form of raw materials or components and placed on storage areas or shelves.

Compared to larger organizations with more physical space, products in smaller companies can go directly to the storage area instead of a receiving location. If the company is a wholesaler, the goods may be finished products and not raw materials or components. Unfinished products are then removed from storage areas and transported to manufacturing facilities where they are processed into finished products. Finished products can be returned to storage areas where they are held prior to shipment, or they can be shipped directly to customers.

Inventory management uses a variety of data to track products as they move through the process, including lot numbers, serial numbers, product cost, product quantity, and dates they go through the process.

inventory management systems

Inventory management software systems typically started out as simple spreadsheets that track the quantities of goods in a warehouse, but have since become more complex. Inventory management software can now be multi-layered and integrate with bookkeeping and bookkeepingERP-Systeme (Enterprise Resource Planning).. Systems track goods in inventory, sometimes across multiple warehouse locations. Inventory management software can also be used to calculate costs, often in multiple currencies, so accounting systems always have an accurate estimate of the value of goods.

Some inventory management software systems are designed for large businesses and can be highly customized to an organization's unique needs. Large systems have traditionally run on-premises, but are now also deployed in the public cloud, private cloud andcloud hybridenvironments. Small and medium-sized businesses typically do not require such complex and expensive systems and often rely on standalone inventory management products, usually via software as a service (SaaS) applications.

Inventory Management Techniques

Inventory management uses several methodsto stock the right amount of goods to meet customer demand and operate profitably. This task is especially complex when companies have to deal with thousands of storage units (SKUs) that can span multiple warehouses. Methods include:

• Inventory Check, the simplest and most universally attractive inventory management method for smaller businesses. The inventory check involves a periodic analysis of available inventory versus projected future demand. It uses mostly manual effort, although there may be an automated inventory check to define minimum stock levels, which then allow for regular inventory inspections and re-ordering of supplies to meet minimum stock levels. Inventory auditing can provide a level of control over the inventory management process, but it can be labor intensive and error-prone.
• Just in time(JIT)-Methodology, where products arrive when customers order them and is based on analyzing customer behavior. This approach involves studying purchasing patterns, seasonal demand and location-based factors that provide an accurate picture of what goods are needed, when and where. The advantage of JIT is that customer demand can be met without large quantities of product and in near real time. However, risks include a misjudgment of market demand or distribution issues with suppliers that can lead to out-of-stock issues.
• ABC-Analysemethodology, which divides inventory into three categories that represent inventory values ​​and the importance of the cost of goods. Category A represents high value, low quantity goods, Category B represents medium value, medium quantity goods, and Category C represents low value, high quantity goods. Each category can be managed separately via a merchandise management system. It is important to know which items are bestsellers in order to have enough reserves in stock. For example, more expensive Class A items may take longer to sell but may not need to be held in bulk. One of the benefits of ABC analysis is that it provides better control over high-value goods, but the downside is that it can require significant resources to continually analyze stock levels across all categories.
• Economic Order Quantity (EOQ) methodology., in which a formula determines the optimal time to reorder inventory in ainventory management system. The goal here is to identify the largest number of products that can be ordered at any given time. This, in turn, frees up money that would otherwise be tied up in excess inventory and minimizes costs.
• Minimum Order Quantity (MOQ) methodology., which determines the minimum quantity of product that a supplier is willing to sell. If a company cannot buy the minimum, the supplier will not sell it to them. This method benefits vendors because they can get rid of inventory quickly while weeding out bidders.
• First in, first out (FIFO)-Methodik, in which the oldest inventory is sold first to keep the inventory up to date. This is an especially important technique for businesses dealing with perishable items that will go bad if not sold within a certain timeframe. It also prevents items from becoming obsolete before a business has a chance to sell them. Typically, this means keeping older goods at the front of the shelves and moving newer items to the back.
• Last In First Out (LIFO)-Methodik, where the newest inventory is usually recorded as sold first. This is good practice when inflation is an issue and prices are rising. Because newer stock has the highest production costs, selling earlier than older stock means less profit and less taxable income. LIFO also means that the lower cost of older products remaining on the shelves is reported as inventory. However, this is a difficult technique to implement as older items lying around may become obsolete or spoil.
• safety stock methodology, in which a company reserves inventory for emergencies. The safety stock approach also provides a signal that it is time to reorder the merchandise before it dips into safety stock. It's a good idea for companies to incorporate safety stock into their inventory management strategy in case their supply chain is disrupted.

Inventory Management vs. Inventory Control

Both inventory management and control are essential to running a successful direct sales and channel operation. Inventory management is the overall strategy for ensuring adequate inventory, and inventory control encompasses the processes and tools used to track inventory on hand. Businesses can choose to use an inventory control system alone, but will benefit from using both together. Here are the main differences:

inventory management

Inventory management is a strategy that ensures businesses always have the right amount of inventory in the right place at the right time.inventory management toolsAllow companies:

• calculate safety stock;
• calculate reorder points;
• achieve demand planning and forecasting;
• identify obsolete items;
• warehouse design optimization; Y
• Identify the percent fill rate.

inventory control

Inventory control deals with the inventory that a company already owns. It works in the transaction layer of an ERP system and enables companies to:

• receive inventory;
• process interprofessional transfers;
• process receipts;
• packing and shipping inventory;
• process customer invoices; Y
• Process supplier orders.