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What Is Inventory Management?

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What Is Inventory Management

Inventory management is the process of ordering, storing, and using the inventory within a company. One of the main objectives of inventory management is to have sufficient quantities of the right product available when you need them, at a good cost.

Proper management of inventory is essential to every company’s bottom line. When there are complex supply chains and production processes with lots of moving parts, this can be challenging.

To avoid running out of goods, and stockpiling inventory, businesses use different inventory management techniques – but it can be tricky to find the right balance.

What is inventory management?

Inventory management is the tracking of products, raw materials, sales, and orders. This is an ongoing process that involves ordering, storing, and shipping a product or service. 

Good inventory management is essential for businesses that provide products and services to customers and clients. The inventory management processes influence how businesses order raw materials, manufacture finished products, and fulfill customer orders.

In the manufacturing industry, inventory management is the practice of maintaining enough materials on-hand to fulfill orders. This helps managers easily view stock levels and track raw materials, work-in-progress parts, and finished goods.

The importance of inventory management

The two goals of inventory management are to improve and maintain customer satisfaction and cash flow. 

Inventory management can involve a lot of moving parts. Upstream and downstream movement, shipping, returns, human mistakes, unpredictable delays, etc. When it’s not done properly, businesses struggle with cash flow, and their customers don’t have a good experience. Good inventory management is important in every business—even when the business isn’t selling physical products.

Good inventory management helps companies:

  • Reduce operating costs
  • Provide better customer service
  • Improve order fulfillment
  • Avoid inventory damage and loss
  • Improve their operation insights

You’ve probably experienced side effects of poor inventory management.

You wanted to buy a new pair of sneakers, but the store was sold out of your size. If you really wanted the shoes, you’d need to wait 2-3 weeks for the restock to arrive. That means you have a poor experience as a customer, and the company loses out on a potential sale.

The functions of inventory management

The four primary functions of inventory management are ordering, processing, storing, and fulfillment.

Ordering is usually the first step of inventory management. This is when the business orders raw materials from their suppliers. There are different systems that help make orders at the right times so the business has enough of the right things on hand.

Processing is when the business turns the raw materials into the finished products. This looks different depending on the business. For example, a machine shop takes bars of metal and machines them into finished parts. A grocery store has very few processes. They might get large boxes of granola bars and open the boxes to sell them individually. A car manufacturer is somewhere in the middle. They order machined parts from suppliers and then assemble them to make the finished car.

Storing is how the business keeps the raw materials, work-in-progress parts, and finished products. Storage requires space and organization. It requires a balance of keeping enough inventory on-hand, while not leaving excess inventory sitting for too long. 

Fulfillment is when orders are sent to customers. The goal is to get the product or service to the customer as quickly and efficiently as possible. 

These four functions all work together. If there are issues at one of these steps, the other steps will be thrown off as a result.

The 4 Functions of inventory management

Types of inventory management

There are different types of inventory and two common ways that businesses manage their inventory: periodic and perpetual. The process used typically depends on the nature of the business, their systems, and their customers.

Each business also handles different types of inventory. 

The four types of inventory are: raw materials, work in progress parts, finished products, and maintenance, repair, and operations (MRO) goods. Most of these are self-explanatory. MRO is the materials used to help process raw material into the finished products. Even though the MRO isn’t sent to the customer it’s just as important to track because it’s needed to fulfill customer orders.

Periodic inventory

Periodic inventory is when inventory is counted manually at a set time. For example, every Friday the team takes an inventory of what’s on-hand, what was sent to the customer, what needs to be ordered, and what has been ordered and is in transit. 

Periodic inventory works better for smaller businesses where things are easier to count and keep track of. Or when inventory lasts a few months. Systems are still used to track inventory, but there are more manual processes involved compared to perpetual inventory.

Perpetual inventory

Perpetual inventory management uses more automated systems to track inventory as soon as it moves. Usually a barcode system is used to scan and track the inventory as it moves in and out of a business. 

Whenever you buy something from a store, the barcode is scanned, and the system knows that the item has left the store. 

This type of inventory management is more accurate and requires less manual work. Once an inventory management system is established, it also makes tracking many different items much easier. And it’s updated constantly. 

Perpetual inventory systems do require more upfront work because each new item needs to be added to the system and have some sort of barcode or ID.

Inventory management best practices

Good inventory management doesn’t happen by accident. There are different methods and techniques to manage your inventory effectively. It requires systems and structures, but the benefits are worth the effort. 

Of course, the starting point of inventory management is tracking your inventory.

Here are some other best practices:

Carrying buffer stock

Buffer stock, or safety stock, is an extra supply of high-demand items. Inventory management relies somewhat on predictions of future demand. Those can’t always be accurate—a customer might place a big order that you weren’t expecting. Having some buffer stock on-hand can help lessen the impact of this, but there are also inventory carrying costs that can’t be ignored.

Using an inventory management system

Modern inventory tracking systems help businesses track inventory in real-time. This info helps companies be more responsive, stay up-to-date, and remain flexible. It also helps keep everyone within the organization on the same page.

Use batch/lot tracking

As a manufacturer, we don’t deal with a lot of perishable goods like a grocery store. We still use lot numbers to track groups of parts. This helps keep track of the part costs, how long they’re on the shelf, and provide customers with more data.

Spex has served as a local manufacturer since 1946. If you want to learn more about how we can help optimize your supply chain, and provide a range of manufacturing service, reach out to one of our team members.

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