What is inventory management?
Inventory management is the process of ordering, storing, using, and selling a company's inventory. This process involves managing raw materials, components, and finished products, and even warehousing and processing these items.
In a lot of business models, the company’s inventory is one of its most critical assets. For businesses in the retail, eCommerce, manufacturing, and food services industries (along with many other sectors), the company’s raw materials and finished products are the most vital parts of their business. If they fall short of inventory when customers need it, these companies risk more than just losing that sale, they might be sacrificing the entire relationship which they have with those customers. If your customers don’t get what they want, they would feel bad about your company, and it’s very likely that they would go to do business with another company. This could be the start of a long relationship between that new company and your former customer (who won’t really bother coming back, because, in their minds, they expect your company to be out of stock).
But while falling short of stock can be dangerous, carrying too much stock could also be a problem. There is the risk of the stock getting spoilt, stolen, or damaged. There’s also the risk that customers’ tastes and preferences might change, causing a reduction in demand, leaving you with dead stock.
You might also need to insure your stock and pay holding costs to store it.
What are the two main concerns of inventory management?
Inventory management has two very important concerns. One of these is to make sure that you always have enough stock to fulfill your customers’ orders instead of making them have to go to another vendor who has enough inventory to handle their orders. This concern is about making the immediate sale, as well as earning your customers’ loyalty and retaining them for a long period of time.
The other concern of inventory management is about not ordering so much inventory that you would not be able to sell it, leaving you stuck with deadstock that you’d have to sell at clearance prices, sometimes even at a loss, or sometimes, just discarding stock as waste.
What is the role of inventory management?
The whole role of inventory management is to increase customer satisfaction while reducing inventory costs. If you don’t have enough inventory, you’ll see a major dip in your customer satisfaction levels, but if you have too much inventory, you might end up wasting it or it might go bad.
The whole process of inventory management is a question of how much inventory you should order, when you should order it, and how you can control the ongoing activities. It’s about having the right inventory levels at all times to minimize inventory costs and wastage while maximizing customer satisfaction.
Why is inventory management important?
The main benefits of inventory management are:
When you understand stock trends and monitor the flow of your inventory, you’ll be able to use your inventory in a better manner. You’ll be able to make do without keeping too much inventory on your hands, thus reducing the cost of purchasing inventory and storing it.
Since you’ll be able to place orders on time before you run out of inventory, you’ll also save on the opportunity cost that you’d incur if all your stock was sold out when a customer came with a big order.
Enhances cash flow
Inventory management helps you track your inventory levels and stock trends. It will help you understand which items sell faster and so you’ll be spending your money buying items that sell faster, thus improving your cash flow.
Inventory management will also help you understand which of your products are slow-moving so that you can engage in product bundling to sell them faster and stop them from turning into dead stock.
Increases customer satisfaction
Inventory management helps you ensure that you customers can get the products that they want, without having to wait for them to come back in stock. It helps avoid the frustration involved during the wait and thus increases your customer satisfaction levels.
How is inventory management done?
There are many activities involved in inventory management. To do inventory management right, you need to categorize the types of inventory you hold, figure out which of these categories are higher up on the priority list, track all your product information like SKUs, barcode data, countries of origin, suppliers, etc. You’ll also need to audit your inventory periodically and make sure that the actual count matches up with what you think you have.
You’d also want to track your sales and understand how fast different products move.
Inventory management can even be automated with artificial intelligence that tracks inventory levels and places orders when you’re running low on certain items.
What are the 3 major inventory management techniques?
Here are the three most prominent inventory management strategies:
The pull strategy
In following this inventory management strategy, brands manufacture their inventory on the basis of a clear demand from their shoppers. The customers are basically pulling the products from the brand. The brand only supplies a product when customers demand for it. The pull inventory management strategy is very useful for companies that are looking to keep their inventory management costs low.
The issue that you could face with this strategy is that if consumer demand spikes suddenly, you might not be able to keep up with it, thus causing you to stock out.
The push strategy
This inventory management strategy involves forecasting or estimating the expected demand in advance and then pushing products out based on those forecasts and expectations. Instead of waiting for customers to ask for a product, the brand manufactures or purchases as many products as they expect customers to buy from them and then wait for orders to come in from customers.
It gives you economies of scale and helps you reduce your operational costs, but if the demand is lower than your forecasted levels, you could find yourself left with a whole bunch of inventory sitting around in your warehouses as deadstock.
The just-in-time strategy
The just-in-time inventory management strategy involves keeping raw materials on hand, but only creating the products when the demand comes in. It can keep your overhead costs low, but might lead to delays in delivering your orders.