Businesses that effectively use inventory management are destined to succeed. With the help of inventory management software, companies can automate the process of ordering, storing, and optimizing their goods in a single place. In this article, we will expand on the importance of inventory management, as well as the different inventory management techniques, benefits, and examples managers need to know. Keep reading to learn the key to inventory management that will give you a competitive edge.
What is inventory management?
Inventory management refers to the process of storing, ordering, and selling of goods and services. The discipline also involves the management of various supplies and processes.
One of the most critical aspects of inventory management is managing the flow of raw materials from their procurement to finished products. The goal is to minimize overstocks and improve efficiency so that projects can stay on time and within budget.
The proper inventory management technique for a particular industry can vary depending on the size of the company and the number of products needed. For instance, an oil depot can store a huge inventory for a long time. Or for businesses that deal in perishable goods, such as fast-fashion items, keeping on top of your inventory can be very costly.
One way to account for inventory is by grouping it into four categories: first-in-first-out, last-in-first-out, weighted-average, and first-in-first-out. Raw materials are the components used by a company to make its finished products.
Depending on the type of company that it is dealing with, different inventory management methods are used. Some of these include JIT, material requirement planning, and days sales of inventory.
Other methods of analyzing inventory can also be used depending on national and local regulations. For instance, the SEC requires public companies to report the existence of a so-called LIFO reserve.
Having frequent inventory write-offs can be a red flag that a company is struggling to sell its finished products or is prone to inventory obsolescence.
Learn even more about inventory management from Walton College’s Supply Chain Management program’s introduction on the subject covering everything from forecasting to point models:
Why is inventory management important?
One of the most valuable assets of a company is its inventory. In various industries, such as retail, food services, and manufacturing, a lack of inventory can have detrimental effects. Aside from being a liability, inventory can also be considered a risk. It can be prone to theft, damage, and spoilage. Having a large inventory can also lead to a reduction in sales.
Regardless of the size of your company, having a proper inventory management system is very important for any business. It can help you keep track of all your supplies and determine the exact prices. It can also help you manage sudden changes in demand without sacrificing customer experience or product quality. This is especially important for brands looking to become a more customer-centric organization.
Balancing the risks of overstocks and shortages is an especially challenging process for companies with complex supply chains. A company's inventory is typically a current asset that it plans to sell within a year. It must be measured and counted regularly to be considered a current asset.
What is the goal of inventory management?
The goal of any good inventory management system is to help warehouse managers keep track of the inventory levels of their products. This means allowing them full transparency into their chain to monitor the flow of goods from their supplier.
The benefits are both operational and financial. Not only will it serve to improve performance, but it’s also useful for preventing theft with the help of product tracking and security.
Managers can also aim to use their inventory management plan to monitor sales procedures which leads to better service. Inventory management is especially useful for businesses that want to effectively manage seasonal items or new bestsellers throughout the year without disrupting the rest of their chain.
Benefits of inventory management
The main benefit of inventory management is resource efficiency. The goal of inventory control is to prevent the accumulation of dead stocks that are not being used. Doing so can help prevent the company from wasting its resources and space.
Inventory management is also known to help:
- Order and time supply shipments correctly
- Prevent theft or loss of product
- Manage seasonal items throughout the year
- Deal with sudden demand or market changes
- Ensure maximum resource efficiency
- Improve sales strategies using real-life data
Inventory management system examples
Although inventory management can change from industry to industry, there are some big-picture themes worth learning about. Here are three major retail categories with real inventory management system examples:
Grocery store chains
Modern groceries have managed to manage inventory coming in from different suppliers all over the world. Giving consumers several different types of internationally-grown produce in both organic and non-organic varieties at an affordable price, even when the fruits and vegetables aren’t in season, is a modern marvel thanks in part to inventory management.
Overseeing stock in real-time and even setting up automated replenishment systems is mission-critical to many.
On average, Amazon ships approximately 1.6 million packages from their brand to third-party sellers per day. Their Smart Warehouse uses robot and human help to get the job done, but it’s inventory management that keeps it all rolling. According to Tech Vision, “Amazon’s management technique, along with all that automation, have made the business astonishingly lean and mean by historic standards.”
Toilet paper companies
The inventory management of toilet paper companies was in the hot seat in early 2020 as panic-buying led to shortages nationwide. As demand outgrew supply beyond anything the brands had seen before (about 845%), it’s no surprise why there has been an increased focus on inventory management since.
Their secrets to overcoming this unprecedented event? Temporarily narrowing down their portfolio of products, sending out “defective” yet functional rolls, and even transitioning to a direct-to-consumer model, all with the help of strong inventory management systems.
Steps and types of inventory management
Most product inventory management systems follow the same basic steps for finished products:
- Products arrive at your warehouse
- Products are checked and stored
- Managers or crew update inventory levels
- Customers place an order
- Orders are approved based on inventory
- Products are pulled and packaged
- Inventory levels are updated again
This process is fairly straightforward and often involves help from software. There may be variations depending on what type of inventory management you are doing. Here are the main types you should know:
- Raw materials
This refers to pieces of your product that need to be shipped to you and assembled by your team. Inventory systems that track these must account for supplier timelines.
- In progress
Products made from raw materials and are currently being assembled or grouped fall under this category. This stage of inventory management may have one or several active projects at a time.
Scheduled maintenance, updates, and refurbished goods all count toward this segment. Repairs may be handled in-house or in collaboration with a third party.
- Finished goods
Any good that is ready to ship to businesses or consumers is considered finished. These need to be updated regularly and constantly monitored to meet demand.
Inventory management techniques
Without accurate inventory information, it can be very difficult to make decisions that affect your business. There are two main methods of keeping track of inventory: periodic and perpetual. The main difference between these is how often data is updated. Regardless of how often you track inventory, you may want to use one of the following inventory management techniques:
- ABC Analysis
ABC (Always Better Control) Analysis is inventory management that separates various items into three categories based on pricing and is separated into groups A, B, or C. The A category is usually the most expensive one. The items in the B category are relatively cheaper compared to the A category. And the C category has the cheapest products of all three.
- EOQ Model
Economic Order Quantity is a technique utilized for planning and ordering an order quantity. It involves making a decision regarding the amount of inventory that should be placed in stock at any given time. The order will be re-ordered once the minimum order has been reached.
- FSN Method
This method of inventory control refers to the process of keeping track of all the items of inventory that are not used frequently or are not required all the time. They are then categorized into three different categories: fast-moving inventory, slow-moving inventory, and non-moving inventory.
- JIT Method
Just In Time inventory control is a process utilized by manufacturers to control their inventory levels. This method saves them money by not storing and insuring their excess inventory. However, it is very risky since it can lead to stock out and increase costs.
- Minimum Safety Stocks
The minimum safety stock refers to the level of inventory that an organization maintains to avoid a possible stock-out.
- MRP Method
Material Requirements Planning is a process utilized by manufacturers to control the inventory by planning the order of the goods based on the sales forecast. The order is usually based on the data collected by the system.
- VED Analysis
VED is a technique utilized by organizations to control their inventory. It mainly pertains to the management of vital and desirable spare parts. The high level of inventory that is required for production usually justifies the low inventory for those parts.
How to improve inventory management with Wrike
One of the most critical factors that a company should consider is the accuracy of the information presented in its inventory databases. The data should be updated regularly to prevent it from getting distorted. Wrike is a project management solution that can help you do exactly that.
With Wrike's product management tools, you can manage all of your product team's activities in one place and get the most out of every project. Wrike's product launch automation helps accelerate product launches with a streamlined approach. Managers can easily keep inventory and shipping processes in check by planning and allocating tasks to the right people all from one central dashboard.
Wrike also makes it possible to create workflows that keep everyone up-to-date with the latest inventory progress. Tools like interactive charts and task dependencies help team members at every level identify and prevent delays. You can communicate with both vendors and clients through the advanced CRM built directly into the platform.
Plus, Wrike's advanced insights tools allow you to track progress in real-time, which is important for any successful inventory management strategy.
Why choose Wrike as your inventory management software?
Wrike is a project management solution that makes it possible to achieve all your inventory management goals while also maximizing the benefits of the process. Regardless of which inventory management technique you use, Wrike can help you take the process step by step to ensure your inventory is always accurate regardless of what type you’re managing. Improve your inventory management plan today with Wrike’s two-week free trial.