In this article, learn about inventory management and its related disciplines from inventoryexperts. At the end, you will find an FAQ list on inventory.
What Is Inventory Management?
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 respondsto trends to ensure there’s always enough stock to fulfill customer orders and properwarning of a shortage.
Once sold, inventory becomes revenue. Before it sells, inventory (although reported as anasset on the balance sheet) ties up cash. Therefore, too much stock costs money and reducescash flow.
One measurement of good inventory management is inventory turnover. An accountingmeasurement, inventory turnover reflects how often stock is sold in a period. A businessdoes not want more stock than sales. Poor inventory turnover can lead to deadstock, orunsold stock.
Why Is Inventory Management Important?
Inventory management is vital to a company’s health because it helps make sure there israrely too much or too little stock on hand, limiting the risk of stockouts and inaccuraterecords.
Public companies must track inventory as a requirement for compliance with Securities andExchange Commission (SEC) rules and the Sarbanes-Oxley (SOX) Act. Companies must documenttheir management processes to prove compliance.
Benefits of Inventory Management
The two main benefits of inventory management are that it ensures you’re able tofulfillincoming or open orders and raises profits. Inventory management also:
Saves Money:
Understanding stock trends means you see how much ofand where you have something in stock so you’re better able to use the stockyouhave. This also allows you to keep less stock at each location (store, warehouse),as you’re able to pull from anywhere to fulfill orders — all of thisdecreases coststied up in inventory and decreases the amount of stock that goes unsold beforeit’sobsolete.Improves Cash Flow:
With proper inventory management, you spendmoney on inventory that sells, so cash is always moving through the business.Satisfies Customers:
One element of developing loyal customersis ensuring they receive the items they want without waiting.
Inventory Management Challenges
The primary challenges of inventory management are having too much inventory and not beingable to sell it, not having enough inventory to fulfill orders, and not understanding whatitems you have in inventory and where they’re located. Other obstacles include:
Getting Accurate Stock Details:
If you don’t have accuratestockdetails,there’s no way to know when to refill stock or which stock moves well.Poor Processes:
Outdated or manual processes can make workerror-prone and slow down operations.Changing Customer Demand:
Customer tastes and needs changeconstantly. If your system can’t track trends, how will you know when theirpreferences change and why?Using Warehouse Space Well:
Staff wastes time if like productsare hard to locate. Mastering inventory management can help eliminate thischallenge.
Learn more about the challenges and benefits of inventorymanagement.
What Is Inventory?
Inventory is the raw materials, components and finished goods a company sells or uses inproduction. Accounting considers inventory an asset. Accountants use the information aboutstock levels to record the correct valuations on the balance sheet.
Learn more about inventory in the article “What Is Inventory?”.
Inventory vs. Stock
Inventory is often called stock in retail businesses: Managers frequently use the term“stockon hand” to refer to products like apparel and housewares. Across industries,“inventory”more broadly refers to stored sales goods and raw materials and parts used in production.
Some people also say that the word “stock” is used more commonly in the U.K. torefer toinventory. While there is a difference between the two, the terms inventory and stock areoften interchangeable.
What Are the Different Types of Inventory?
There are 12 different types of inventory: raw materials, work-in-progress (WIP), finishedgoods, decoupling inventory, safety stock, packing materials, cycle inventory, serviceinventory, transit, theoretical, excess and maintenance, repair and operations (MRO). Somepeople do not recognize MRO as a type of inventory.
Learn more about the 12 different types ofinventory.
Video: What Is Inventory Management?
Inventory Management Process
If you produce on demand, the inventory management process starts when a company receives acustomer order and continues until the order ships. Otherwise, the process begins when youforecast your demand and then place POs for the required raw materials or components. Otherparts of the process include analyzing sales trends and organizing the storage of productsin warehouses.
How Inventory Management Works
The goal of inventory management is to understand stock levels and stock’s location inwarehouses. Inventory management software tracks the flow of products from supplier throughthe production process to the customer. In the warehouse, inventory management tracks stockreceipt, picking, packing and shipping.
Inventory Management Techniques and Terms
Some inventory management techniques use formulas and analysis to plan stock. Others rely onprocedures. All methods aim to improve accuracy. The techniques a company uses depend on itsneeds and stock.
Find out which technique works best for your business by reading the guide to inventorymanagement techniques. Here’s a summary of them:
ABC Analysis:
This method works by identifying the most andleast popular types of stock.Batch Tracking:
This method groups similar items to trackexpiration dates and trace defective items.Bulk Shipments:
This method considers unpacked materials thatsuppliers load directly into ships or trucks. It involves buying, storing andshipping inventory in bulk.Consignment:
When practicing consignmentinventory management, your business won’t pay its supplier until agivenproduct is sold. That supplier also retains ownership of the inventory until yourcompany sells it.Cross-Docking:
Using this method, you’ll unload itemsdirectlyfrom a supplier truck to the delivery truck. Warehousing is essentially eliminated.Demand Forecasting:
This form of predictive analytics helpspredict customer demand.Dropshipping:
In the practice of dropshipping, thesupplier ships items directly from its warehouse to the customer.Economic Order Quantity (EOQ):
This formula shows exactly howmuch inventory a company should order to reduce holding and other costs.FIFO and LIFO:
First in, first out (FIFO) means you move theoldest stock first. Last in, first out (LIFO) considers that prices always rise, sothe most recently-purchased inventory is the most expensive and thus sold first.Just-In-Time Inventory (JIT):
Companies use this method in aneffort to maintain the lowest stock levels possible before a refill.Lean Manufacturing:
This methodology focuses on removing wasteor any item that does not provide value to the customer from the manufacturingsystem.Materials Requirements Planning (MRP):
This system handlesplanning, scheduling andinventory control for manufacturing.Minimum Order Quantity:
A company that relies on minimum orderquantity will order minimum amounts of inventory from wholesalers in each order tokeep costs low.Reorder Point Formula:
Businesses use this formula to find theminimum amount of stock they should have before reordering, then manage theirinventory accordingly.Perpetual Inventory Management:
This technique entails recordingstock sales and usage in real-time. Read “The DefinitiveGuide to Perpetual Inventory” to learn more about this practice.Safety Stock:
An inventory management ethos that prioritizessafety stock will ensure there’s always extra stock set aside in case thecompanycan’t replenish those items.Six Sigma:
This is a data-based method for removing waste frombusinesses as it relates to inventory.Lean Six Sigma:
This method combines lean management and SixSigma practices to remove waste and raise efficiency.
Inventory vs. Cycle Counting
“Taking inventory” is the process of physically counting all stock, once a yearin mostcases. Cycle counting is the practice of counting a selected set of stock more often. Cyclecounting serves as an important means of checks and balances to ensure the amount ofinventory represented in the inventory management system is what you have on the shelf.
A cycle counting best practice is to count specific SKUs regularly and integrate it into thedaily tasks of warehouse staff. Companies may determine different standards for differenttypes of inventory, such as performing a cycle count of top-moving SKUs or higher-valueitems. Learn more about the benefits of cycle counting.
Demand Planning and Inventory Management
Demand planning is an important part of successful inventory management. It is the process ofdetermining how much of each item you anticipate selling, and when. Once demand isdetermined, inventory management follows the flow of goods from the supplier throughproduction and ultimately fulfilling customer orders.
Find out more about how demand planning and inventory management work together in the“Essential Guide to InventoryPlanning.”
Inventory Management Formulas
Understanding inventory management formulas is crucial to optimizing stock levels. Multipleinventory and accounting professionals have vetted formulas to make inventory calculationseasier.
Inventory Management KPIs
Effective inventory management plays an important role throughout the supply chain. There aremany key performance indicators for measuring inventory management success throughout thedifferent organizations in the business. Understand which calculations return the mostinsight into your business processes is important. To learn more, see inventory managementKPIs.
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How Is Inventory Management Different From Other Processes?
People sometimes confuse inventory management with related practices. Inventory managementcontrols all stock within a company. Supply chain management manages the process fromsupplier to delivering the product to the customer. Warehouse management is a part ofinventory control and focuses on stock in a specific location.
Inventory Management vs. Inventory Control
inventory control is a part of the overall inventory management process. Inventory controlmanages the movement of items within the warehouse.
Learn more about how these practices work together in our article on inventory controlvs. inventory management.
Inventory Management vs. Inventory Optimization
Inventory optimization is the process of using inventory in the most efficient way, and as aresult minimizing the dollars spent on stock and storing those items.
You can also think about inventory optimization as seeing inventory across all locations andselling channels, being able to use any of it to fulfill customer orders—in doing so,youcan hold less stock overall.
Inventory Management vs. Order Management
Inventory management is responsible for ordering and tracking stock as it arrives at thewarehouse. Order management is the process of receiving and tracking customer orders.Software often combines both tasks.
Inventory management plays an important role in order management. As orders are received,inventory can be allocated to specific orders, and then the status can be changed in theinventory record to essentially put it “on hold” for that order. Furthermore,when the ordermanagement system and inventory system are integrated, the inventory system can recommendwhich location should fulfill the order, based on where all the items in the order areavailable—this eliminates multiple shipments for a single order.
Inventory Management vs. Supply Chain Management
Supply chain management is a process of managing supply relationships outside a company andthe flow of stock into and through a company. Inventory management may focus on trends andorders for the company or a part of the company.
Inventory management is essential for a properly running supply chain. Inventory managementfollows the flow of goods to, through and out of the warehouse. The supply chain includesdemand planning, procurement, production, quality, fulfillment, warehousing and customerservice—all of which require inventory visibility.
Inventory Management vs. Warehouse Management
Warehouse management complements inventory management. Warehouse management organizes stockin a warehouse. Inventory management manages stock and trends for many warehouses or anentire company.
The key to streamlining your warehouse operations is a thoughtfully laid out and meticulouslyorganized facility. When each product has a specific place in the warehouse, it preventsstaff from moving about inefficiently and maximizes labor efficiency. But these processesare only as good as the inventory records that drive them.
Learn more about how warehousemanagement and inventory management work together.
Inventory Management vs. Logistics
Logistics is the practice of controlling processes in a warehouse and in the replenishmentand delivery systems. Inventory management maintains stock levels and manages stocklocation.
Inventory management is a crucial part of how companies manipulate their logistics. Therelationship between inventory management and logistics is interdependent. Logistics needinventory management to perform their activities. Good logistics systems improve warehouseand operational activities.
Find out more about this topic by reading “The Benefits ofIntegrating Your Inventory Software With Your Accounting and Back-OfficeProcesses.”
Inventory Management vs. ERP
An enterprise resource planning (ERP) system is software that manages business activitiessuch as accounting, purchasing, compliance and supply chain operations. By contrast,inventory management is a part of a modern ERP system, providing insight into stock levels,inventory en route and the status of current inventory—this makes it visible acrosstheorganization in real time.
Inventory management helps to properly plan a company’s replenishment orders. ERPsystemsgive companies accurate inventory data, so they have the most current information for theirinventory management plan. ERP systems optimize the data so inventory management issuccessful.
Retail Inventory Management
Retail inventory is the stocking of products that you sell to consumers. Use the system toset profitable prices and ensure you have the right amount of stock to meet demand.
Learn more about retail inventorymanagement.
Manufacturing Inventory Management
Manufacturing inventory management is the practice of keeping enough stock on hand soproduction lines can fulfill orders. The process helps managers see stock levels at a glanceand tracks raw materials, parts, work-in-progress and finished goods.
Find out more about manufacturing inventory management.
What Is Multi-Location Inventory Management?
Multi-location inventory management is the process of managing stock across multiplelocations, warehouses, and retail stores or across multiple selling channels. Withmulti-location management, you can watch stock levels in all locations and optimize yourinventory to fulfill orders.
What Is an Inventory Management System?
An inventory management system combines varying software packages to track stock levels andstock movements. The solution can integrate with multichannel sales systems or shippingsystems.
An inventory management system optimizes inventory levels and ensures product availabilityacross multiple channels. It provides a single, real-time view of items, inventory andorders across all locations and selling channels. This enables businesses to carry lessinventory on hand and frees up cash to be used in other parts of the business. An inventorymanagement system helps keep inventory costs low while delivering on customer expectations.
Learn about all inventory management systemfeatures and how to pick a solution that’s right for your company.
How to Choose an Inventory Management System?
Choosing an inventory management system is a matter of identifying the features your businessneeds. Do you need to track stock movements and location within a warehouse, or planinventory and track trends, or both?
Read “Choosing the Right InventoryManagement System” for answers to your research questions. When evaluating asystem,remember to look for three key features: real-time demand planningfunctionality, data analysis tools and near- and real-time data reporting.Learn about each by reading “Three Must-Haves for Your InventoryManagement Software Shopping List.”
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Inventory Management FAQs
There are many questions in a broad and complicated topic like inventory management. Here areanswers to a few:
What Are the Objectives of Inventory Management?
One objective of inventory management is to keep enough stock to satisfy customers. Anotheris to invest as little as possible in stock while still earning the most profit.
Why Inventory Management Is Important in the Supply Chain
Inventory management is vital in the supply chain because a company must balance customerdemand with storage space and cash limitations. Inventory management provides visibilityinto the supply chain (procurement, production, fulfillment, etc.) so managers cancoordinate lead times for deliveries with production timetables.
How Can Inventory Management Be Improved?
Keeping accurate accounting records and taking regular physical stock counts can improve yourinventory management efforts. A system that provides your organization with real-timevisibility into inventory can help stakeholders make critical business decisions. You shouldalso be aware of a stock’s condition, especially if you’re dealing withperishables.
How Inventory Management Affects the Working Capital
Real goods in warehouses tie up working capital until they sell. Making the supply chain moreefficient keeps you from holding too much stock. Improving inventory management processeshelps you prevent storing, picking and shipping errors that reduce sales.
What Are Inventory Management Policies?
Inventory management policies are plans for how to use inventory to make customers happy andreduce costs. Policies outline such things as the stock management method the company uses.
What Are the Types of Inventory Management Systems?
There are several types of inventory management systems that businesses use depending on howthey operate. Three examples are manual inventory, periodic inventory and perpetualinventory. Manual methods are the least sophisticated and least accurate, and perpetualsystems are the most sophisticated and most accurate.
Manual Inventory System: This involves physically counting items andrecording them on paper or in a spreadsheet. Small businesses may use manualsystems.
Periodic Inventory System: Periodic inventorysystems include manual and periodic counts. Periodic counts record itemdetails as items move in and out of stock. Barcodes simplify stocktaking. A databasecontains the records of stock levels and locations.
Perpetual Inventory System: Perpetual inventorysystems provide real-time stock data, as they rely on active radio frequencyidentification (RFID) tags that are always on and sending updates on item movements.Passive RFID tags, meanwhile, use a scanner to send stock information to thedatabase.
What Is Service Level in Inventory Management?
A service level for inventory management is how much a company believes it can successfullystore a particular stock.In other words, it’s the probability a company will avoidstockoutsand support sales.
How Does ERP Help in Inventory Management?
Enterprise resource planning (ERP) is helpful for inventory management because it tracks andprovides insights into supply chain operation, accounting and purchasing, consolidating theinformation and making it visible in one place.
What Is Poor Inventory Management?
Poor inventory management is an imbalance between keeping too much and too little stock. Thedefinition of a perfect balance can change as demand changes: Sales change when trends orseasons change. Poor stock management increases costs and thereby reduces profits.
Bring the Benefits of Inventory Management to Your Business With NetSuite
Decision-makers know they need an inventory management system that can grow with them. Withautomated replenishment and lot tracing and tracking in multiple locations, NetSuiteprovides cloud-based inventory management solutions that are the perfect fit for businessesof any size. NetSuite offers a suite of native inventory management and control features,including multiple location planning, warehouse and fulfillment management, automated stockreplenishment, lot and serial tracking and cycle counting. Learn more about how you can use NetSuite to manageinventory automatically, reduce handling costs and increase cash flow.
