Inventory management is necessary not just for the efficient running of a business but also for accelerating growth and improving the bottom line.
It involves managing, storing, sorting, counting and maintaining goods — both raw materials and finished items — that are required and manufactured by a business. It includes the supervision of movement of materials from suppliers to manufacturers and from there on to distributors up to points of sale.
Effective inventory management solutions are a combination of smart strategies, best practices and technology. There are various methods to manage inventory, and businesses must choose inventory management techniques that are best suited for their products and markets.
Some popular inventory management strategies include:
- Setting par levels, where the minimum quantity of product that must be in stock is pre-set
- Following the Materials Requirement Planning method (MRP) in which companies schedule material deliveries based on sales forecasts
- Using Vendor Managed Inventory (VMI), where suppliers manage inventory levels that have been pre-determined
- Conducting ABC analysis, where inventory is divided into three categories of descending value to identify what affects costs and different management levels are used for these items
- Opting for the Just-In-Time formula (JIT), which is ordering only when you need; that is, aligning ordering to production schedules and customer sales
- Deploying the First-In-First-Out (FIFO) method, where the oldest stock is always sold first
- Practicing drop shipping to eliminate the need to hold inventory and manage warehouses; here, orders and shipment details are directly transferred to the supplier (who is the manufacturer), who ships the goods directly to customers
- Adopting the cross-docking method, in which incoming materials are unloaded directly onto outbound trailers and trucks to avoid warehousing
Here are some potential improvements and new capabilities that inventory management, done correctly, can bring to a business:
Companies that have tight control over their inventory, through sound tracking methods and strategies, will know what and how much they have in stock, where it is, and when it needs to be replenished; thus, they can avoid overstocking as well as outages. Inventory theft is a very real problem for businesses, and visibility of movement of goods can be an effective deterrent. Having system-wide visibility of your inventory allows you to plan better and look at long-term goals and strategies. It also reduces operational inefficiencies.
The only real way to gain this visibility and control would be to use inventory management software that will centralize, collate, analyze and interpret your data.
Studying inventory patterns and movement will give businesses a better sense of their market, and a forewarning of changing trends, though it will not help them anticipate every spike and dip. Demand-supply indicators can enable more focused inventory planning and decision-making.
The supply chain network is fraught with unpredictability and risks. While anticipating demand reduces risk of outage, observing inventory flow will give you a better understanding of market conditions and a keener sense of potential risks and delays — whether these relate to suppliers, logistics, regulations, or anything else — and thus, the flexibility to make alternative plans.
Improved Cash Flow, Reduced Costs
Good inventory optimization will prevent overstocking, which unnecessarily ties up working capital that could be better utilized elsewhere. You can also avoid the other risks related to overstocking, such as damage and wastage through expiry of products and spoilage. Similarly, by making buying activity more efficient and accurate, you can cut costs. If you don’t have high inventory, you’ll spend that much less on warehousing and security, though those are generally not avoidable expenses since there’s always a need for buffer stock. You’ll also save time spent on auditing and inspections, which are important if you store lots of stock over extended periods of time and want to avoid inventory shrinkage.
Enhanced Customer Satisfaction
If there are no stockouts in getting your finished products to points of sale, your customers will get what they want every time they want it, without delays. The ability to fulfill orders quickly translates to more satisfied customers. When assured of quality and reliability, customers tend to keep going back to the same products and become repeat customers. They can also bring in new customers as they spread the word about your business and make recommendations.
Supplier Performance Indicators
You need to have a good relationship with your suppliers to manage your inventory efficiently. The reverse also holds true: Monitoring your inventory will give you insight into your best and most reliable suppliers. It will make it easier to gauge where and how problems arise. Do your materials get delayed frequently with one particular supplier? Do damages occur more frequently with materials supplied by a specific vendor? You can focus on developing long-term supplier relationships based on your supplier evaluation.
A good way of managing inventory is through collaborating with your suppliers on a vendor-managed inventory (VMI) system, in which the supplier is responsible for maintaining a pre-determined inventory level at the buyer’s location. The benefits of vendor-managed inventory include lower risks of stockouts and lower inventory in the supply chain.
Proper inventory management facilitates an organized warehouse, which means the storage, picking, packing and shipping processes will be faster. Based on trends and seasonal sales, your inventory can be organized in the warehouse based on what is in demand, what products tend to be ordered together, and how you package and sell different combinations of products. And a well-run warehouse makes it easier to manage returns, a critical requirement for ecommerce, online and retail businesses.