Last Updated on April 26, 2024 by Ossian Muscad
Inventory management is a process that is often taken for granted by business owners. It’s one of those necessary tasks that need to be carried out to keep the business running, but few people know how to do it properly. To improve your business operations and keep your inventory levels in check, you need to understand what inventory management is and how to carry out its process. This article will define inventory management, discuss its process, and outline its various associated techniques. We’ll also take a look at whether or not you’ll need to hire a sorting company for inventory management purposes.
What is Inventory Management?
Inventory management is the process of monitoring and tracking stock levels and the movement of goods—whether it be fulfilling orders for finished products or transporting raw materials to partner manufacturers. This process is a critical component of supply chain management as it ensures that businesses have the necessary inventory levels to meet customer demands.
It serves as the foundation of a business’s overall health and longevity. It helps minimize costs while boosting both cash flow and profitability. When your inventory is organized properly, you better understand what products are selling, how much inventory you need on hand, and where your inventory is located. Without proper management, you can potentially experience several issues, such as:
- Excess inventory that ties up valuable cash flow
- Stockouts that result in lost sales
- Inefficient use of warehouse space
- Miss shipments, shortages, and spoilage
- Long lead times and excessive inventory levels
- Wasted time searching for inventory that’s not properly organized
With so much at stake, it’s essential to understand the inventory management process and how to carry it out effectively.
The Process of Inventory Management
Inventory management involves eight key steps. So, before building an inventory management plan, it’s essential to have a solid understanding of each step of the inventory management process. This knowledge is crucial to minimizing errors and creating your business’s most effective inventory management plan.
- Goods are delivered to your facility: This phase is when raw materials for manufacturers or finished goods for consumers first enter your warehouse.
- Inspect, sort, and store goods: Start checking all of the inventory items as they come in to ensure they’re not damaged and meet your quality standards. Once you’ve determined that the inventory meets your standards, you can begin sorting it and storing it in the appropriate location.
- Monitor inventory levels: As inventory moves in and out of your facility, it’s important to keep track of how much inventory you have on hand at all times. This inventory count should be updated regularly to ensure accuracy.
- Stock orders: Your customers will place orders in-store or on your website. When an order is placed, you’ll need to check your inventory levels to see if you have the necessary items in stock to fulfill the order.
- Stock orders are approved: Once you’ve confirmed that you have the inventory to fulfill an order, you’ll need to get approval from the customer before proceeding with the transaction. This is typically done via email or over the phone. Once your customer confirms the order, pass it to your supplier, or you can automate this process through a POS system.
- Take goods from stock: These goods are found via SKU or barcode and are taken from inventory to be packaged for shipment to the manufacturer or customer.
- Update inventory levels: Using an inventory system or workflow creation system, you can update inventory levels automatically and share this data with the necessary stakeholders.
- Purchase/Reorder: Restock supplies and inventory as needed. Low inventory levels can result in production stoppages, so it’s important to monitor them and reorder when necessary.
Inventory Management Techniques
Implementing effective inventory management techniques is crucial for optimizing operations and enhancing profitability for businesses. From minimizing excess inventory to ensuring timely order fulfillment, various strategies can address distinct aspects of inventory management. Below, we explore nine key inventory management techniques, each tailored to meet specific operational needs and challenges.
Just-in-Time (JIT) Inventory
Just-in-Time (JIT) Inventory is a strategy aimed at increasing efficiency and reducing waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs. This method requires precise planning and a reliable supply chain to avoid stockouts and delays. Companies utilizing JIT can significantly lower their inventory holding costs and increase inventory turnover rates, but they also risk supply chain disruptions that can halt production.
Kanban Inventory
The Kanban Inventory System is a visual approach to managing inventory and production processes. This lean manufacturing tool uses signals, often in the form of Kanban cards, to trigger action points within the production line or inventory system. Signaling when to order new inventory helps maintain optimal stock levels and is effective in reducing overproduction and excess inventory.
Economic Order Quantity (EOQ)
Economic Order Quantity (EOQ) is a formula used to determine the optimal order quantity that minimizes the total costs associated with ordering, receiving, and holding inventory. EOQ considers the cost of ordering and storing inventory to help businesses find a balance that reduces inventory-related costs. This method is beneficial for companies looking to optimize their inventory management and reduce costs.
Minimum Order Quantity (MOQ)
Minimum Order Quantity (MOQ) refers to the lowest set amount of stock that a supplier is willing to sell. Businesses must order at least this quantity to fulfill the MOQ requirement. This technique allows suppliers to increase efficiency by reducing the number of small orders they need to process, though it can lead to higher inventory levels for buyers.
ABC Analysis
ABC Analysis is an inventory categorization technique that divides items into three categories (A, B, and C) based on their importance and monetary value. ‘A’ items are very important, requiring close monitoring and management, while ‘C’ items are the least critical. This method helps businesses prioritize their inventory management efforts, focusing more resources on the most valuable products.
FIFO and LIFO Inventory
FIFO (First-In, First-Out) and LIFO (Last-In, First-Out) are methods used to manage the cost flow assumptions related to inventory. FIFO assumes that the oldest inventory items are sold first, which is beneficial for perishable goods inventory. LIFO, on the other hand, assumes that the most recently produced or purchased items are sold first, which can be advantageous for tax purposes in rising-price environments but may not reflect the actual flow of goods.
Batch Tracking
Batch Tracking, or lot tracking, is a process for efficiently tracking and tracing groups of similar items through production and distribution. It is particularly useful in industries where quality control and expiration dates are essential. By using batch tracking, companies can quickly recall products, manage expiration dates, and enhance product traceability.
Dropshipping
Dropshipping is an order fulfillment method where a business doesn’t keep the products it sells in stock. Instead, when the store sells a product, it purchases the item from a third party and has it shipped directly to the customer. This model significantly reduces the risks and costs associated with holding inventory but relies heavily on supplier reliability and quality control.
Six Sigma
Six Sigma is a set of techniques and tools for process improvement that can be applied to inventory management. It aims to improve the quality of process outputs by identifying and removing the causes of defects and minimizing variability in manufacturing and business processes. Implementing Six Sigma in inventory management can lead to more efficient operations, reduced waste, and lower inventory costs.
Bulk Shipments
Bulk Shipments involve purchasing and transporting goods in large quantities, typically at a discounted rate. This technique can lead to significant savings in both product and shipping costs. However, careful planning is required to avoid excessive inventory and associated holding costs. Bulk shipments are ideal for products with long shelf lives and stable demand.
Inventory Management Methods
Efficient inventory management is pivotal for the seamless operation and financial health of a business. Among the myriad strategies available, Periodic Inventory Management and Perpetual Inventory Management stand out for their distinct approaches and benefits. Below, we detail these methods to offer insights into how they can be effectively used within various business contexts.
Periodic Inventory Management
Periodic Inventory Management is a traditional approach where inventory levels are checked and recorded at specific intervals, such as weekly, monthly, or annually. This method involves physically counting all inventory items to determine stock levels and calculate the cost of goods sold (COGS) at the end of each period. While less costly and complex than continuous monitoring systems, it can lead to discrepancies due to the delay between actual stock levels and recorded figures, potentially impacting ordering decisions and financial reporting.
Perpetual Inventory Management
Perpetual Inventory Management, on the other hand, utilizes software and scanning technology to continually update inventory records in real time as sales and purchases occur. This system offers a more accurate and immediate view of inventory levels, enabling better decision-making regarding restocking, sales, and analysis of inventory-related costs. Additionally, it facilitates more efficient warehouse management by highlighting trends, preventing stock outs or overstocking, and automating reorder processes. However, it requires a significant initial investment in technology and training to be effectively implemented.
Inventory Management Strategies
Inventory management is a crucial component of a successful business, directly impacting its operational efficiency and financial performance. An effective inventory management system ensures that products are available when needed, without excessive overstock or wastage. Among the strategies to achieve this balance, Demand Planning, Inventory Optimization, and Warehouse Optimization stand out for their ability to streamline operations and reduce costs.
Demand Planning
Demand Planning is a proactive approach that involves forecasting demand for products to optimize inventory levels. This strategy integrates historical sales data, market trends, and predictive analytics to anticipate customer demand accurately. Effective demand planning helps businesses prepare for future sales, mitigate the risk of stockouts or overstocking, and align with their supply chain operations. By understanding demand patterns, companies can make informed decisions about production, inventory purchase, and distribution, leading to improved customer satisfaction and operational efficiency.
Inventory Optimization
Inventory Optimization refers to the process of having the right inventory at the right time and in the right quantity to meet customer demand while minimizing holding costs. This strategy relies on a sophisticated analysis of data and algorithms to balance inventory levels with demand forecasts. It involves determining the optimal reorder point (ROP) and safety stock levels for each product. Inventory optimization helps in reducing carrying costs, increasing inventory turnover, and enhancing cash flow. It requires a continuous review of inventory performance and adjustments based on changing market conditions and consumer preferences.
Warehouse Optimization
Warehouse Optimization focuses on enhancing the efficiency of storage and distribution processes to support inventory management. It involves the strategic arrangement of warehouse space, including layout design, shelf and bin organization, and the implementation of automated systems for picking and placing items. Key aspects include:
- Optimizing product placement for faster retrieval.
- Implementing technology for real-time inventory tracking.
- Improving worker productivity.
Warehouse optimization aims to reduce order fulfillment times, increase accuracy in order processing, and decrease operational costs, thereby boosting overall supply chain performance.
10 Key Inventory Management Best Practices
To maintain a competitive edge and ensure operational effectiveness, businesses must adopt strategic inventory management practices. These practices enable more efficient operations, reduce costs, and improve customer satisfaction. Here are ten key best practices to consider:
- Correctly Categorize Your Inventory: Utilize categorization methods such as ABC analysis to prioritize inventory based on value and turnover rates. This helps in focusing efforts on the most impactful items.
- Implement Perpetual Inventory Management Software: The adoption of perpetual inventory management software automates real-time tracking of stock levels, reducing errors and enhancing decision-making capabilities.
- Set Optimal Safety Stock Levels: Determine and maintain an appropriate level of safety stock to protect against stockouts without incurring excessive holding costs, calculated based on demand variability and lead times.
- Perform Regular Stock Takes: Conduct physical counts regularly to verify inventory records, identify discrepancies early, and ensure data accuracy.
- Convert Historical Data into Business Intelligence: Analyze past sales and inventory data to identify trends, forecast demand, and inform strategic decisions about stock levels and reorder points.
- Avoid Unreliable Spreadsheet-Based Inventory Systems: Transition from manual, spreadsheet-based systems to automated inventory management solutions to reduce errors, save time, and enhance scalability.
- Determine and Maintain the Smallest Inventory Levels Required to Meet Demand: Implement Just-In-Time (JIT) inventory practices to minimize stock levels while adequately meeting customer demand, thereby reducing carrying costs and increasing efficiency.
- Mitigate Supply Chain Risks by Prioritising Supplier Management: Develop strong relationships with multiple suppliers, evaluate their reliability, and have contingency plans in place to reduce vulnerability to supply chain disruptions.
- Track (and Improve) the Velocity of Your Goods: Monitor how quickly inventory is sold and replenished and implement strategies to increase turnover rates, which can lead to reduced holding costs and higher profitability.
- Optimize Your Warehouse Layout to Facilitate Faster Fulfillment: Design your warehouse for efficient inventory flow, from receiving and storing to picking and shipping, to expedite order processing and enhance customer satisfaction.
Do You Need a Sorting Company?
If you’re having trouble managing your inventory, consider hiring a sorting company. A sorting company can help you with inventory management, from receiving and storing inventory to shipping and tracking inventory.
Sorting companies can be an excellent option for businesses that don’t have the time or resources to manage inventory. However, it’s important to carefully vet any sorting company you’re considering hiring to ensure they’re a good fit for your business. When you’re considering hiring a sorting company, there are a few things you should keep in mind:
- The size of your business: A sorting company should be able to accommodate the inventory needs of your business, whether you have a small or a large inventory.
- The type of inventory you have: A sorting company should be able to handle the type of inventory you have, whether it be raw materials, finished products, or both.
- Your inventory management needs: A sorting company should be able to meet your specific inventory management needs, whether it be managing inventory levels, tracking inventory movement, or both.
- Your budget: A sorting company should be able to work within your budget, whether you have a small budget or a large budget.
Hiring a sorting company can be a great way to improve your inventory management. However, it’s essential to ensure that you hire a reputable and reliable company. With a little research, you can find the perfect sorting company for your business.
Frequently Asked Questions (FAQs)
Q1: What’s the most effective way to reduce inventory holding costs without risking stockouts?
The most effective method involves optimizing your safety stock levels through accurate demand forecasting. Implementing a Just-In-Time (JIT) inventory system can also significantly minimize holding costs by aligning inventory delivery closely with production schedules and sales demands.
Q2: How can technology improve inventory accuracy?
Adopting an automated inventory management system enhances accuracy by providing real-time tracking of stock levels and movements. Technologies such as RFID and barcode scanning streamline the inventory counting process, reduce human error, and facilitate immediate updates in inventory records.
Q3: Is it possible to optimize inventory management across multiple warehouse locations?
Yes, by implementing a centralized inventory management system that integrates data from all locations, businesses can gain a unified view of inventory. This facilitates better coordination of stock levels, transfers, and replenishment strategies, ensuring optimal inventory allocation across all warehouses.
Q4: How often should inventory audits be conducted?
The frequency of inventory audits depends on the size and nature of your business. Still, it is recommended to perform cycle counts regularly (monthly or quarterly) on different segments of your inventory. This approach minimizes disruption and ensures ongoing accuracy in inventory records.
Q5: Can excess inventory be a sign of deeper operational issues?
Yes, excess inventory often indicates problems such as inaccurate demand forecasting, inefficient supply chain processes, or poor sales performance. Identifying and addressing the root causes of excess inventory can improve both operational efficiency and financial health.
Q6: How does supplier management affect inventory efficiency?
Effective supplier management ensures reliable supply chains and reduces the risk of stockouts or excess inventory. By negotiating better terms, ensuring supplier reliability, and diversifying your supplier base, you can achieve a more balanced and responsive inventory system.
Streamline Inventory Management with DATAMYTE
DATAMYTE is a quality management platform with low-code capabilities. Our Digital Clipboard, in particular, is a low-code workflow automation software that features a workflow, checklist, and smart form builder. This tool lets you easily create custom workflows to streamline inventory checks and audits, optimize inventory allocation and replenishment, and improve overall inventory efficiency. With DATAMYTE’s Digital Clipboard, you can easily track your inventory movements in real time and make data-driven decisions for improved inventory management.
DATAMYTE also lets you conduct layered process audits (LPA), a high-frequency evaluation of critical process steps, focusing on areas with the highest failure risk or non-compliance. Conducting LPA with DATAMYTE lets you effectively identify and correct potential defects before they become major quality issues.
With DATAMYTE, you have an all-in-one solution for streamlining your inventory management processes and improving overall profitability. Book a demo now to learn more about how we can help you optimize your inventory management for faster fulfillment and increased customer satisfaction.
Conclusion
Inventory management is an essential component of proper supply chain management. Through this process, businesses can track stock levels and the movement of goods, whether delivering raw materials to manufacturers or fulfilling orders for finished products. By creating a proper inventory management plan or hiring a professional sorting company, businesses can ensure that their inventory is properly managed, saving time and money in the long run.
