Introduction

Inventory management is a crucial stage in the supply chain of all goods and manufacturing companies. For these companies, inventory means raw materials, components, and finished goods. Even in the case of digital services, inventory can be software, subscriptions, computing power, storage, internet bandwidth, etc. Hence, inventory management is one of the most important aspects for businesses to keep track of and function effectively. Due to market fluctuations, transportation delays, and the high uncertainty of demand and supply, inventory management must be a well-thought-out plan with constant corrections and adaptations according to the times. In this article, you will revisit the essentials of inventory management and the benefits it offers to businesses.

What is Inventory Management?

Inventory management is the process of ordering, storing, using, and selling a company's inventory. This includes the management of raw materials, components, and finished products. It also includes the warehousing and processing of this inventory (Source: Investopedia). There are several types of inventory management. Depending on a company's needs, each can be adapted and utilised, as each has its advantages and disadvantages.

Types of inventory

There are several types of inventory in the supply chain. Here are four major types (Source: Katana):

1. Raw Materials

These are the basic building blocks used in the production process. They can be anything from agricultural products and minerals to crude oil, transistors, steel, rubber, plastics, etc. All these are used to produce a finished product.

2. Work-in-Progress (WIP)

These are unfinished goods that are in the process of being manufactured. This includes partially completed products that require further processing before they can be sold. It can be automobiles or electronics that need final assembly before they can be sold.

3. Finished Goods

Finished goods are fully completed products that are ready for sale. These can be petroleum products like gasoline or diesel, finished automobiles, computers, electronics, clothing, etc.

4. Maintenance, Repair, and Operating (MRO) Supplies

These are supplies and materials used to maintain and repair equipment, facilities, and other physical assets. This type of inventory includes items such as tools, spare parts, and cleaning supplies.

There are also other categories of inventory, like safety stock and obsolete stock. Safety stock is an inventory held as a buffer to ensure that a company can meet customer demand even in the face of unexpected disruptions. Obsolete or expired Inventory refers to products that are no longer in demand or have been replaced by newer, more advanced products. These are significant burdens for companies, as they are difficult to sell and may have to be written off as losses. Often, e-commerce companies sell them through clearance sales with heavy discounts to minimise losses.

The Benefits of Inventory Management

Inventory is the company's most important asset, as it is what makes a company a profit through sales. A shortage of inventory can be detrimental to the business's industry competence. Accurate inventory management with regular stock tracking helps companies adjust their manufacturing according to customer needs. Here are the major advantages of inventory management according to NetSuite.

1. It gives better inventory accuracy.

Accurate management of inventory helps companies plan more efficiently. Especially in today's volatile market conditions, companies can predict a surge or sudden decrease in demand. Having the right knowledge and predicting the market with it is the first step. Having the right amount of inventory when opportunity knocks is the second step that distinguishes your organisation from the rest. Having the right idea about your inventory will put you in a position to take calculated risks like giving discounts and offers during festival seasons.

2. Inventory management reduces the risk of overselling.

Overselling can put a company's reputation at risk. If you sell what you don't have, customers who do not receive their products at the right time will be disappointed, which is a major turnoff for any business-related relationship. As a business, it must be your number one priority to retain paying customers and give customer satisfaction before, during, and after sales. However, poor inventory management makes it easier for overselling to creep in. This can effectively spiral down to the organisation's dwindling sales. Good inventory management reduces this risk and boosts your organisation's efficiency.

3. Inventory management can save costs.

Having inventory costs money in itself. From transportation and warehouses to insurance and salaries, goods of any form require companies to spend money on inventory processing and safekeeping. It can also be depleted with time, weather conditions, and poor management. Apart from these threats, inventory is also susceptible to losses arising from the theft and natural distress. Having a competent inventory management strategy helps reduce these costs and save time and money for businesses.

4. It avoids stockouts and excess stock.

Better planning in inventory management will allow companies to glide through market conditions and use the volatility to their advantage. Controlling the stock can be highly profitable if done properly and ethically. Avoiding stockouts and excessive stock are both hallmarks of high supply chain efficiency. Companies will lose out in markets when they have limited or no stocks to sell while there is high demand in the market. Conversely, holding excessive stock during normal market conditions will incur extra costs for storage, transportation, and maintenance of the products. Products with expiration dates or near expiration dates are wasted in warehouses. Moreover, if the company decides to sell its stock at reduced prices to reduce maintenance costs, the market prices will also get affected. In extreme cases, this reduction of stock prices will only lead to unhealthy competition between companies selling the same product, which results in none of them getting any profit at all. Inventory management will avoid all these undesirable scenarios without struggle, competition, or disappointment.

5. Inventory management strengthens the company's relationships with vendors and suppliers.

Having a legacy of competent inventory management will build your reputation among vendors and suppliers, which is an underrated asset in the supply chain of a company. Having the trust and respect of these two groups will help companies take calculated risks, experiment, and have leverage on the market from the ground up. It also provides insider information about trending products and sales volumes. You can use this knowledge to plan and negotiate in your future sales and marketing campaigns. You can also hold better terms in negotiations with a better industry reputation in managing your inventory.

6. It boosts productivity.

Inventory management gives managers time to manage other important tasks rather than chase stocks. It reduces time and resources spent on manual inventory tracking and increases the accuracy of inventory data. The complete automation of the inventory processes empowers businesses to eliminate manual errors, streamline inventory tracking, and improve overall workflow efficiency, leading to increased productivity. Implementing real-time inventory tracking provides businesses with a clear understanding of their inventory levels, allowing them to make informed decisions that minimise downtime and maximise productivity.

7. It increases profits.

A well-planned inventory management system leads to increased profits by reducing the cost of excess or obsolete stock. It will also increase sales through demand-oriented product availability. It improves the decision-making process in ordering, storing, and distributing goods, leading to increased operational efficiency and higher profits. Businesses can also increase profits by regularly monitoring inventory levels, trends, and sales data, which helps them make informed decisions on inventory replenishment and avoid stockouts and overstocking. Ultimately, it results in a boost to their bottom line.

8. Inventory management results in a highly organised warehouse.

Inventory management opens ways to maintain warehouses in an organised manner. As inventory management needs order in every aspect of the warehousing process, productivity and competence in the organisation can only increase. With additional industry-standard software, organised warehouses will function efficiently. It also ensures faster packing and delivery times during surges in demand. As a result of organised labour, labour costs can also be saved.

9. It ensures a better customer experience.

All these above-mentioned points greatly minimise the time between order and delivery. Having competent delivery times builds trust among your customers and thus builds customer loyalty, which is a major advantage of inventory management. Inventory management keeps track of returned or damaged goods after the delivery, which makes them easier to identify.

10. Inventory management ensures product quality.

Products are at risk of theft, spoilage, damage, and shifts in demand. Hence, products must be insured against the unexpected. As they have expiry dates, inventory management makes it easier for companies to dispose of them at clearance prices or destroy them after the expiry date.

How will inventory management software multiply these benefits?

All the above-mentioned benefits of inventory management require highly experienced professionals in large numbers if done manually. While firms with a limited number of products or simpler supply chains can easily manage their inventory without any delays, complexity, or large paperwork, companies with complex supply chains struggle with inventory management. This is where inventory management software saves time, manpower, and investment. While smaller companies rely on common software like Excel sheets to keep track, it is highly unproductive for the largest companies. Many of the largest companies use enterprise resource planning software (ERP), while even larger companies use sophisticated SaaS solutions. With the increasing complexity of supply chains and the growth of e-commerce, the importance of software in inventory management has increased.

Nowadays, even smaller shops and individuals can open an e-commerce store with multiple products at reasonable prices. While setting up a shop is simple, keeping track of orders, returns, payments, shipments, and inventory can become a time-consuming task. For all businesses, the use of software in inventory management has several advantages. Software in inventory management will automate processes and reduce manual effort. This not only saves time and reduces errors, but also frees up staff to focus on other important tasks. For example, the software can be used to automate the ordering process, ensuring that the right products are ordered at the right time and in the right quantities. This helps businesses maintain optimal inventory levels and avoid overstocking or stockouts without additional paperwork or multiple visits to the warehouse.

Inventory management software can also access real-time data, which provides insights into inventory levels, sales trends, and other critical metrics. These help businesses make informed decisions about their sales strategy. For example, the software can help businesses identify which products are selling well, which are not, and why, allowing them to make adjustments in their business and marketing strategy. With the help of software, businesses can improve the accuracy of their inventory records. With manual systems or human labour, errors are common, which can lead to incorrect inventory levels and inefficiencies in the supply chain. Software, however, minimises these errors, and businesses can rely on accurate and up-to-date inventory data.

In the case of companies with multiple branches, departments, or warehouses in distant locations, software greatly improves collaboration and communication between different management, departments, business owners, and stakeholders. For example, the software can be used to share inventory data between sales, marketing, and production departments, ensuring that everyone is working with the same information and towards the same goals. Using software will also make it easier to keep track of tax and other legal procedures available across the globe. It makes it easier for other departments to do research, file taxes, and measure the progress of the company, to name a few.

Conclusion

Inventory management is a crucial part of business operations and maintaining supply chains. Proper inventory management depends on the type of business and the type of product it sells. Proper inventory management has several benefits that will boost a company's productivity and industry competence. Knowing when to restock inventory, what amounts to purchase or produce, and what price to pay - as well as when to sell and at what price - can easily become complex decisions. It increases profits and saves costs. It will help companies avoid overselling or shortages of stocks. Having the right inventory management will build confidence with vendors and suppliers, which indirectly benefits your company.

Companies will organise their warehouses to make their inventory management product, which will ensure faster delivery speeds for the right products. Ultimately, it boosts customer engagement with the brand and profits the company. While small businesses keep track of stock manually and determine the reorder points and quantities using spreadsheet (Excel) formulas, larger businesses will use specialised enterprise resource planning (ERP) software. Manual inventory management can be time-consuming and heavy on company resources. This is why inventory management software is becoming popular. Other, bigger corporations use sophisticated software-as-a-service (SaaS) applications.

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Citations

Investopedia, Investopedia. “Inventory Management Defined, Plus Methods and Techniques.” Investopedia, 7 Dec. 2022, www.investopedia.com/terms/i/inventory-management.asp.

NetSuite, NetSuite. com. “The Trick to Keeping Accurate Stock Levels.” Oracle NetSuite, 18 Aug. 2020, www.netsuite.com/portal/resource/articles/inventory-management/inventory-management-benefits.shtml.