What is Inventory Management?

Last Updated : 14 Mar, 2024

Inventory management can be stated as the products and supplies that a company keeps with the ultimate intention of reselling, producing, or using them. The discipline of inventory management is mostly concerned with defining the location and form of stored products. In this article, we will understand the workings of inventory management, the purpose of inventory management, and more.

What is Inventory Management?

Inventory management is the process of placing orders, keeping inventory, utilizing it, and selling it for a business. This includes the processing, storage, and handling of finished items, raw materials, and components. There are several types of inventory management, each with pros and cons, depending on the needs of a business. Safety stock should always be the top priority in inventory management to guarantee that there is additional stock on hand in case the business is unable to restock those things.

Purpose of Inventory Management

When a business has too much goods, overstock happens. Businesses that are overstocked risk having money tied up in inventory, which restricts cash flow and might result in a budget deficit.
Businesses may balance the quantity of inventory they have coming in and leaving out by using effective inventory management.
A company may save more money on operations the more effectively it manages its inventory.
Customers may choose to conduct business with someone else if you keep back ordering things and tell them you don’t have what they’re looking for.

How Does Inventory Management Work?

In inventory management, items are transported to a warehouse’s receiving area. Usually, these items are components or raw materials, which are then placed in stock areas or on shelves.
In smaller businesses, the items could move straight to the stock area rather than a receiving place, in contrast to bigger organizations with greater physical space.
If the company is a wholesale distributor, the items could be completed rather than components or raw materials.
The final products can either be dispatched straight to the client or returned to the stock areas where they are kept until being shipped.
A range of information is used by inventory management to monitor the items as they pass through the process, such as lot and serial numbers, cost, quantity, and the dates on which they pass through.

Types of Inventory Management

Materials Requirement Planning (MRP): Materials Requirement Planning is an inventory management technique, based on sales forecasts which means that to accurately estimate inventory needs and promptly communicate those needs to material suppliers and manufacturers must manage accurate sales records.
Days Sales of Inventory (DSI): This financial ratio shows how long it typically takes a business including products that are still in production to convert its inventory into sales. There are distinct methods to clarify days sales in inventory which is also referred to as the average age of inventory, days inventory outstanding, days in inventory, and also days inventory.
Just-in-Time Management(JIT): By maintaining just the inventory mandatory to make and sell goods and the strategy helps businesses save a lot of money and cut waste. The largest contributor to its creation was Toyota Motor.
Economic Order Quantity (EOQ): This inventory management model determines how many units a business should add to its stock with each batch order to lower overall inventory costs while assuming steady demand from customers. The holding and setup expenses are included in the inventory costs in the model.

Techniques of Inventory Management

Below are some techniques of inventory management

Safety stock methodology: A company uses the safety stock approach to reserve items in case of unanticipated circumstances. This method also recommends when it is sensible to order new products before running out of safety stock.
Minimum order quantity methodology: The minimum quantity of a product that a supplier is willing to sell is determined through the minimum order quantity approach. The supplier won’t sell to a firm if they can’t make the required minimum buy.
ABC analysis methodology: The ABC analysis process is also referred to as SIC or selective inventory control. The ABC analysis approach separates inventory into three groups (A, B, and C) based on decreasing value.
Stock Review: The simplest inventory management system is a stock review, which tends to appeal more to smaller organizations. A stock review is a routine comparison of current stock levels with anticipated future demands.

Advantages of Inventory Management

Savings on costs: Until it is sold, stocks are expensive. Carrying expenses comprise personnel pay, insurance, and the costs of handling, storing, and shipping goods. In addition inventory is accessible to obsolescence, theft, and loss from natural devastation.
Increased Productivity: Time that could be spent on other tasks is saved by effective inventory management systems.
Preventing Stockouts and Overstock: An organization may reduce the amount of time an item is out of stock, if at all, and prevent holding excess inventory by practicing better planning and management.
Better Inventory Accuracy: When you practice good inventory management, you keep track of what’s in stock and place orders for just the quantity of goods required to satisfy demand.

Disadvantages of Inventory Management

Malicious hacks: Every business is vulnerable to malicious hacks. The intricacy is increased further by the Internet of Things (IoT).
Diminished Physical Audits: It’s simple to neglect a physical inventory check while automating some warehouse tasks. Put in place routine audits to address this.
System Crash Risk: Software can malfunction. However, by utilizing cloud-based solutions, you can eliminate the danger of losing data and productivity.
Expensive for Small Businesses: While the price of inventory management software may seem prohibitive to a startup, it frequently pays for itself in more revenue and happier clients.

Frequently Asked Questions on Inventory Management – FAQs

What is the main aim of inventory management?

Inventory management’s main goal is to make it simple and effective for firms to order, stock, store and use their inventory.