Inventory management is a crucial investment for businesses that want to increase productivity, cut expenses, and deliver top-notch customer service.
Understanding needs and making the best decisions for the company’s performance are made possible by effective product management.
Following that, we’ll define inventory and go over its different types and management methods.
What is Inventory Management?
The procedure that makes it possible to plan, carry out, and regulate the resources kept on hand by a business is known as inventory management.
The following decisions are made during these processes:
What to supply?
How much to supply?
And when to supply?
3 main goals of inventory control are as follows:
- Increase service quality or the ability to meet demand by keeping inventory on hand.
- Reduce total inventory costs by increasing turnover or by lowering expenditures and investments.
- Reduce expenses while increasing the operational effectiveness of supply processes.
It should be noted that these goals are in opposition to one another, which means that if one is improved, the performance of the others may suffer.
The definition of inventory management, however, is the skill of managing these conflicting aims, directing strategies, and appropriately prioritizing objectives in the face of this scenario.
Why is good inventory management important for your company?
When done correctly, inventory management shows how much you’ve lost due to ineffective product control. If you’re still unsure as to why your business has to engage in inventory management, we’ll explain its significance in the points below:
- Maintains productive tasks in motion;
- Increases client happiness when they discover the goods on the shelf;
- It is directly related to the business’s financial performance;
- It serves as a key competitive edge.
Now that you are aware of the significance of this activity inside an organization, it is critical to grasp all of its variations and which one your company falls under. Discover which sort of stock best suits the timing and structure of your firm by reading about the various varieties below.
What are the main types of stock?
It is a form of inventory that a company keeps on hand as a preventative step to make sure there are enough products on board to fulfill potential demand.
When a rise in demand is anticipated or when there is a question mark over the availability of raw materials or finished goods in the future, this inventory is typically retained.
Consignment inventory is a business strategy where a manufacturer or supplier distributes their goods to a retailer or reseller who sells them in their enterprise or store but has not yet made a purchase.
Instead, the retailer pays the manufacturer or supplier on a consignment basis only for the goods that are actually sold.
With this strategy, the shop may maintain a wide range of products in stock without having to make significant upfront purchases.
The supplier or manufacturer, on the other hand, gets an additional sales channel for their goods without having to assume the financial risk of maintaining a sizable inventory.
Businesses that sell products with sales cycles use it. Since the corporation must keep stocks vigilant to prevent losses, it is one of the most challenging forms of inventory to handle.
With cycle inventory, a company may efficiently satisfy consumer demand without running out of products when demand is strong or having extra inventory when demand is low. This might be particularly crucial in sectors like the retail business where demand is highly unpredictable or seasonal.
Inventory that has not been sold or used for a long time is referred to as inactive inventory. This may happen when a product is rendered obsolete, no longer desired by consumers, or when demand for a specific product has sharply declined.
Inactive inventories are a common source of trouble for businesses since they need storage space and money that could be used to purchase other goods with higher demand.
These inventories may also become out of date or expire, which could cause the business to lose money.
When a consumer puts an order, the retailer buys the product from a third party – usually a wholesaler or manufacturer – who then distributes the product directly to the end customer. This business model is known as dropshipping.
The supplier manages every aspect of the process, so the retailer need not worry about product storage, management, or shipment.
Dropshipping enables retailers to sell a wide range of goods without needing to make significant inventory investments.
The quantity of extra inventory kept in addition to regular inventory to fulfill unforeseen demand or changes in market demand is referred to as protective stock, also known as safety stock.
Buffer stock is used to guarantee that there are adequate products on hand to fulfill client orders and to prevent supply chain disruptions.
Based on the demand’s cyclical nature and the time needed to refill the stock, the protective stock is determined. Depending on the type of product, the predictability of demand, and the accessibility of suppliers, a different amount of protective stock may be necessary.
In order to deal with unanticipated occurrences that can impact the supply chain, the supplementary stock is kept in addition to normal stock and protective stock.
These occurrences could include strikes, natural catastrophes, delays in raw material supplies, production interruptions, or other unforeseen circumstances that could have an impact on product supply.
Contingency stock, as opposed to protective stock, which is intended to handle typical variations in demand, is kept in expectation of events that could impair the company’s capacity to complete customer orders.
What are the main methods of inventory management?
Inventory management tools are available on the market, and they make up a crucial part of management control. Therefore, we shall discuss the six methods used in the market in this context.
Specific cost or specific price method
Each unit of inventory is given a value using this procedure. It is therefore only applied in situations when it is possible to calculate the price or cost of each item. The remaining steps involve adding everything up to determine the stock’s final worth.
Due to the high stock movement, it is not a recommended strategy for retail. Just imagining it makes you exhausted, having to price one item at a time.
Using the ABC curve, inventory items are divided into three groups according to their monetary value or significance to the company.
Inventory items falling under Category A tend to be more valuable or significant, making up typically 20% of total inventory but 80% of its worth.
The products in Category B, which account for about 30% of the inventory’s total items and 15% of its worth, are intermediate items.
The remaining goods, which make up around 50% of the stock items and amount to about 5% of the stock’s overall worth, fall under category C.
The ABC curve is beneficial to businesses because it enables them to concentrate their inventory management efforts on the most significant or valuable products, ensuring that these things are always available and reducing the risk of production or operational interruptions.
PEPS stands for the “First In, First Out” methodology, which suggests that older things should be used or sold before more recent ones.
In this method, older stock products won’t go out of date or expire, which could result in a loss for the business.
One strategy for regulating the output of stock items and preserving the accuracy of the business’s accounting data is the PEPS methodology.
The average cost can also be referred to as the average price or weighted moving average, which means that a new cost average is calculated for every new transaction.
In this method, the value of the recently purchased items is added to the previously purchased ones to determine the ultimate price of the sold goods.
It is also possible to fix the average price. If this approach is used, the permanent inventory should have a single average applied to it, and interim sales should not be taken into account.
This concludes our post on everything you need to know about inventory management. We hope we managed to educate you further on the subject of Inventory Management and that you gained knowledge and insights that you can apply to your company’s operations.