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What Is Inventory Management?

You might be wondering, what is inventory management? Inventory management refers to the process of ordering, storing, using and selling a company’s inventory. This includes the management of raw materials, components and finished products as well as warehousing and processing of such items. It tries to efficiently streamline inventories to avoid both surpluses as well as shortages. A company’s inventory is one of its most valuable assets. In retail, manufacturing, food services and other inventory intensive sectors, a company’s inputs and finished products are the core of its business. A shortage of inventory when and where it’s needed can be extremely damaging.

That is to say, inventory can be thought of as a liability if not in an accounting sense. A large inventory carries the risk of spoilage, theft, damage, or shifts in demand. That is to say, Inventory must be insured and if it is not sold in time, it may have to be disposed of at clearance prices or simply destroyed.

While the inventory is generally counted by hand, in the modern era, inventory management software has started to make work easier for a lot of businesses. It is a software system for tracking inventory levels, orders, sales and deliveries that isn’t all it can be used for. For example, inventory management software can be used in manufacturing industries to create a work order, bill of materials and other production-related documents. In addition, many companies use it to avoid product overstock and shortages. Now that you know what is inventory management, let us move forward to learning more about it.

What Are The Different Types Of Inventory Management?

While you know, what is inventory management, next we will move on to what are the different types of inventory management. Depending on the type of business or product being analysed, a company will use various inventory methods. While these methods are a sub-category of inventory management, most companies have started going digital. SIPL offers custom inventory management software that suits your needs. Below are some of the methods of inventory management:

  • Just-in-Time Management (JIT)

This method allows companies to save significant amounts of money and reduce waste by keeping only the inventory they need to produce and sell products. This approach reduces storage and insurance costs, as well as the cost of liquidating or discarding excess inventory. But this method can be risky. That is to say, if demand unexpectedly spikes, the manufacturer may not be able to source the inventory it needs to meet that demand, damaging its reputation with customers and driving business toward competitors. As a result, the smallest delays can be problematic as if a key input does not arrive in time, a bottleneck can result.

  • Materials Requirement Planning (MRP)

This inventory management method is sales forecast dependent, meaning that manufacturers must have accurate sales records to enable accurate planning of inventory needs and to communicate those needs with materials suppliers in a timely manner. Inability to accurately forecast sales and plan inventory acquisitions result in a manufacturer’s inability to fulfil orders.

  • Economic Order Quantity (EOQ)

This method is used by calculating the number of units a company should add to its inventory while assuming constant consumer demand. The costs of inventory in the model include holding and setup costs. This method aims to ensure that the right amount of inventory is ordered per batch so a company does not have to make orders too frequently and there is not an excess of inventory sitting on hand.

  • Days Sales Of Inventory (DSI)

This method is a financial ratio that indicates the average time in days that a company takes to turn its inventory including goods that are a work of progress into sales. Indicating the liquidity of the inventory, the figure represents how many days a company’s current stock of inventory will last. Generally, a lower DSI is preferred as it indicates a shorter duration to clear off the inventory, though the average DSI varies from one industry to another.

Now that you know what is inventory management and the different methods, let us move forward to what it can do for your business.

What Are Its Benefits?

You have learnt what is inventory management above but you might still be wondering what are its benefits. Accurate inventory management is the key to running a successful business. Tracking stock regularly can help avoid stock errors and other problems. The following are some of the benefits of strong inventory management:

  • Better Inventory Accuracy

With solid inventory management, you can know what is in stock and order only the amount of inventory you need to meet the demand.

  • Reduced Risk Of Overselling

It helps you track what is in stock and what is on backorder so you don’t oversell products.

  • Cost Savings

Stock costs money until it sells. That is to say, carrying costs include storage handling, transportation fees, insurance as well as employee salaries.

  • Avoiding Shortages & Overstocking

Proper planning and management help a business minimise the number of days that an item is out of stock and avoid carrying too much inventory.

  • Greater Insights

With inventory tracking and stock control, you can also easily spot sales trends or track recalled products or expiry dates.

  • Better Terms With Vendors & Suppliers

It provides insight about which products sell and in what volume. This knowledge is used as leverage to negotiate better prices and terms with suppliers.

  • More Productivity

Proper inventory management solutions save time that can be spent on other activities.

  • Increased Profits

A better understanding of both availability and demand leads to higher inventory turnover which leads to greater profits.

  • More Organised Warehouses

An efficient warehouse with items organised based on demand, which items are often sold together and other factors reduces labour costs and speeds up order fulfilment.

  • Better Customer Experience

Customers that receive what they ordered on time are more loyal to your store.

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