As Business Owners are you struggling to combat problems like:
- A high cost of inventory
- Consistent stockouts
- Low rate of inventory turnover
- Huge amount of obsolete inventory
- High requirement of working capital
- High cost of storage
- Data entry errors
- Shipment of wrong items to customers
- Loss of customers
- Imbalanced lead times
Then, there is something seriously missing in your Inventory Management System.
Better locate bottlenecks and take corrective action
lest it gets too late!
Connotation of 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
- Finished Products
- Warehousing and Processing
Inventory Management is the entire process of managing inventories from raw materials to finished products.
It tries to efficiently streamline inventories to avoid both gluts and shortages.
A company’s inventory is one of its most valuable assets.
A company’s inputs and finished products are the core of its business.
A shortage of inventory can turn out to be extremely detrimental.
A large inventory carries the risk of spoilage, theft, damage, or shifts in demand.
Inventory must be insured. If it is not sold in time it may have to be disposed of at clearance prices—or simply destroyed.
Thus, inventory management is crucial t for businesses of any size to ascertain:
- When to restock inventory?
- What amounts to purchase or produce?
- What price to pay?
- When to sell and at what price?
Inventory management helps companies identify which and how much stock to order at what time. It tracks inventory from purchase to the sale of goods. The practice identifies and responds to trends to ensure that there is always enough stock to fulfill customer orders and proper warning of a shortage.
Once sold, inventory becomes revenue.
Before it sells, inventory ties up cash.
Therefore, too much stock costs money and reduces cash flow.
One measurement of good inventory management is inventory turnover.
As an accounting measure, inventory turnover reflects how often stock is sold in a period. A business does not want more stock than sales. Poor inventory turnover can lead to deadstock or unsold stock.
Why Is Inventory Management Important?
Inventory management is vital to a company’s health because it helps make sure there is rarely too much or too little stock on hand, limiting the risk of stockouts and inaccurate records.
Inventory Management Challenges
The primary challenges of inventory management are :
- Carrying too much inventory and not being able to sell it.
- Carrying too little inventory to fulfill orders.
- Not understanding what items are in inventory and where they are located.
Carrying Too Much Inventory: Implications.
- Increased overhead cost.
- Increased financial holding cost.
- Increased risk of loss of market value.
- Decreased inventory flexibility.
- Increased inventory shrinkage.
Carrying Too Little Inventory: Implications
- Increased loss of sales.
- Increased ordering cost.
- Increased risk of supplier hiking the price.
- Increased exposure to non-delivery.
- Decreased bulk order discounts.
Objectives of Inventory Control
- To ensure smooth flow of stock.
- To provide required quality of materials.
- To control investment in stocks.
- To protect against fluctuating demand.
- To protect against fluctuating output
- To minimize risk and uncertainty.
- To guard against risk of obsolescence.
- To minimize material cost.
Nature of Inventories
- Raw materials
- Purchased parts and suppliers.
- Finished goods.
- Work-in-progress
- Items being transported
- Tools and equipment
Inventory Costs
Inventory costs can be:
- Carrying Cost – Cost of holding an item in inventory.
- Ordering Cost – Cost of replenishing inventory.
- Shortage Cost – Temporary or permanent loss of sales when demands cannot be met..
Benefits of Inventory Management
- Saves Money: Understanding stock trends means you see how much of and where you have something in stock so you’re better able to use the stock you have. This also allows you to keep less stock at each location (store, warehouse), as you’re able to pull from anywhere to fulfil orders — all of this decreases costs tied up in inventory and decreases the amount of stock that goes unsold before it’s obsolete.
- Improves Cash Flow: With proper inventory management, you spend money on inventory that sells, so cash is always moving through the business.
- Satisfies Customers: One element of developing loyal customers is ensuring they receive the items they want without waiting.
It is quite evident that Inventory Management enhances business operations with an effective flow of goods and services.
Some of the Major Benefits of Inventory Management and Control can be summarized as:
- Inventory control paves way for competitive strength.
- Inventory planning improves service level.
- Reduces Storage Cost.
- High inventory turnover earns higher revenues.
- Better utilization of warehouse space.
- Easier cost accounting activities.
- Consistent with safety and environmental advantage.
- Regular supply at reasonable prices builds customer confidence.
- Inventory holding leads to effective utilization of human resources and equipment.
- Effective inventory control enhances market share.
- Inventory control enhances product quality.
- Effective inventory control brings savings.
- Inventory control averts costly interruptions in operation.
- Inventory control strategy facilitates purchase economies.
Role and Importance of Inventory Management
The importance of inventory management can hardly be overstressed.
Accurate inventory tracking allows brands to fulfill orders timely and accurately.
A strategic plan optimizes the process of overseeing and managing inventory.
Companies can achieve inventory management benefits that include:
- Better Inventory Planning and Ordering
Striking a balance between demand and supply is extremely crucial for businesses
Inventory management provides aid in better planning and ordering of stock items.
A situation can be avoided where having a huge demand for a particular product but not having enough material to supply it.
Detailed inventory management mitigates these issues.
It is both space and cost-effective.
2. Increased Customer Satisfaction
A systematic and robust inventory tracking system gives a comprehensive view of the stock at hand.
As a result, it yields increased customer satisfaction.
In the retail sector, customers resent late deliveries or “out of stock” notifications and eventually never return to the website to fulfill their shopping needs.
However, good inventory management leads to orders being fulfilled more quickly and shipped out to customers faster.
3. Organised Warehouse
A good inventory management strategy leads to an organized fulfillment center.
An organized warehouse results in the more efficient present and future fulfillment plans.
This also includes cost savings and improved product fulfillment for businesses utilizing the warehouse for managing inventory.
4. Minimise the Blockage of Financial Resources
The importance of inventory control is to minimize the blockage of financial resources.
It reduces the unnecessary tying up of capital in excess inventories and also improves the liquidity position of the firm.
With a proper inventory tracking module, business owners can make quicker decisions about the stock lying in the warehouse more wisely.
5. Better Cash Flow
Inventory control and planning allow small businesses to manage their cash flow opportunities.
SMEs are not always able to purchase large amounts of inventory due to limited capital.
By having better control of their inventory, they can know exactly how much inventory they will need and when they need it.
This can free up other capital to re-invest in other areas of the business.
6. Reduce Labor Costs
Improved inventory planning and control techniques allow small businesses to reduce labor costs associated with inventory.
These include the time spent counting stock and the transportation of stock.
Employing an intelligent inventory planning and control solution can significantly reduce all these labor-intensive activities.
7. Business Intelligence
An inventory control and planning solution allow small businesses to gain insights into fast-selling products.
This allows them to adjust their product line and to make quick and smart business decisions.
8. Profit Maximization
Companies preserve only that stock in their inventory which will only be stock that is selling.
Other stock that does not grab customers’ attention can be deemed obsolete and can be abandoned.
This makes the general business practice more efficient.
9. Limits Employee Mishandling
Inventory planning and control limit the ability of employees to steal from the inventory.
Often employees use items from a business’ inventory for personal use.
This practice ultimately reduces the profitability of the business.
By limiting the ability of the employee to steal, the employer is reducing potential ‘hidden’ costs.
10. Reduce Labor Costs
Improved inventory planning and control techniques allow small businesses to reduce labor costs associated with inventory.
These include the time spent counting stock and the transportation of stock.
Employing an intelligent inventory planning and control solution can significantly reduce all these labor-intensive activities.
11. Accurate Order Fulfilment.
Companies can efficiently avert overstocking, stocking obsolete items, or understocking.
Consequently, the business brand gets prominence as one of the key players in the marketplace.
12. Better Inventory Planning and Ordering
Striking a balance between demand and supply is extremely crucial for businesses.
Inventory management enables better planning and ordering of stock items.
13. Increased Customer Satisfaction
Since a systematic and robust inventory tracking system will give you a comprehensive view of your stock at hand, it yields increased customer satisfaction.
Efficient inventory management leads to orders being fulfilled more quickly and shipped out to customers faster.
14. Organised Warehouse
An organized warehouse results in the more efficient present and future fulfillment plans.
This also includes cost savings and improved product fulfillment for businesses utilizing the warehouse for managing inventory.
15. Minimise the Blockage of Financial Resources
Inventory control helps to minimize the blockage of financial resources.
It reduces the unnecessary tying up of capital in excess inventories
It also improves the liquidity position of the firm.
With a proper inventory tracking module, business owners can make quicker decisions about the stock lying in the warehouse more wisely.
In Retrospect
Inventory Management is an essential parameter for the success or failure of any business. It is, therefore, imperative that efficient Inventory Management should:
- Ensure a continuous supply of raw materials to facilitate uninterrupted production.
- Maintain sufficient stocks of raw materials in periods of short supply and anticipated price changes.
- Maintain sufficient finished goods inventory in the smooth sales operation and efficient customer management service.
- Minimize the carrying cost and the time.
- Control investment in inventory and keep it at an optimum level.
“A mismanaged inventory can lead to an unnecessary increase in the working capital. The excess funds could have been fruitfully directed to fuel the company’s growth initiatives or research and development efforts.
Laran Joseph
