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Inventory Management: The Complete Guide

Jacob Roseburrough
Jacob Roseburrough Director of Marketing

What is inventory management?

Inventory management is the process of overseeing the flow of goods in and out of a business. It involves managing inventory levels, tracking products, and ensuring that there is always enough stock to meet demand. Effective inventory management can help firms optimize their operations and reduce costs.

How inventory management works

Inventory management works by tracking the flow of goods from the point of production to the point of sale. The process begins with the procurement of raw materials or finished goods, which are then stored in a warehouse or distribution center.

As orders come in, the inventory management system tracks the movement of goods and updates inventory levels in real-time. This allows businesses to monitor their stock levels closely and ensure that they have the right amount of inventory on hand to meet customer demand.

Additionally, inventory management systems can help businesses to identify trends and patterns in customer demand, which can be used to inform purchasing decisions and optimize inventory levels. By effectively managing their inventory, businesses can improve their cash flow, increase profitability, and enhance customer satisfaction.

Different type of inventory

Raw goods

Raw goods refer to materials or resources that are in their natural or unprocessed state and have not yet been transformed or refined into a finished product. Examples of raw goods include timber and agricultural produce such as crops and livestock.

Work-in-progress goods

Work-in-progress goods, also known as WIP, are partially finished products that are still undergoing production or manufacturing processes. These goods are not yet ready for sale or consumption but are in the process of being transformed into finished products. Examples of WIP goods include partially assembled cars, semi-finished textiles, and unfinished electronic devices.

Finished goods

Finished goods, also known as final goods, are products that have completed the production or manufacturing process and are ready for sale or consumption. These goods are in their final form, ready to be used by the end-user. Examples of finished goods include cars, clothes, food, and electronics.

Maintenance, repair, and operations (MRO) goods

MRO goods are items that are used in the production process but are not directly incorporated into the final product. MRO goods are used to support the production process, keep machinery and equipment in good working order, and ensure that the production process runs smoothly. Examples of MRO goods include lubricants, spare parts, cleaning supplies, and maintenance tools.

Type of inventory management terms and techniques

Just-in-time (JIT) inventory management

Just-In-Time (JIT) inventory management is a popular inventory management technique that aims to reduce waste by only ordering inventory when it’s needed. In a JIT system, the company orders inventory only when a customer places an order, so there is no excess inventory. This technique helps reduce inventory holding costs and frees up capital that would otherwise be tied up in excess inventory.

ABC analysis

ABC analysis is a technique that categorizes inventory items based on their importance to the company’s operations. In an ABC analysis, inventory items are classified into three categories: A, B, and C. A items are the most important items, and the company should closely monitor their inventory levels to ensure that they don’t run out. B items are moderately important, and the company should monitor their inventory levels but not as closely as A items. C items are the least important, and the company should have minimal inventory levels for these items.

Economic order quantity (EOQ)

Economic Order Quantity (EOQ) is a formula-based inventory management technique that helps companies determine the optimal order quantity for each item. The formula takes into account factors such as ordering costs, holding costs, and the item’s demand rate. The EOQ technique helps companies minimize inventory holding costs while ensuring that they always have enough inventory to meet customer demand.

Minimum order quantity (MOQ)

Minimum order quantity (MOQ) is the minimum number of products or items a supplier requires a customer to purchase in a single order, typically to ensure it is economically viable for the supplier to produce and supply the product. The MOQ is often negotiable and can vary depending on factors such as the product, the supplier, and the customer’s relationship with the supplier.

First-In, first-out (FIFO)

First-In, First-Out (FIFO) is a popular inventory management technique that prioritizes selling the oldest inventory first. In a FIFO system, the first items purchased are the first items sold. This technique helps prevent inventory from becoming obsolete and minimizes the risk of spoilage for perishable items.

Last-in, first-out (LIFO)

Last-In, First-Out (LIFO) is an inventory management technique that prioritizes selling the newest inventory first. In a LIFO system, the last items purchased are the first items sold. This technique is commonly used in industries where inventory costs are rising, as it allows companies to reduce their tax liability by reporting lower income.

Benefits of inventory management

Improved cash flow

Inventory management can help a business to improve its cash flow by ensuring that inventory levels are optimized. By monitoring inventory levels closely, businesses can avoid overstocking and understocking, which can tie up valuable capital and reduce cash flow. By maintaining an optimal level of inventory, businesses can ensure that they have the right amount of stock on hand to meet customer demand without tying up too much capital in inventory.

Increased profitability

Effective inventory management can also lead to increased profitability. By optimizing inventory levels and avoiding stockouts, businesses can ensure that they can fulfill customer orders quickly and efficiently, which can lead to increased sales and revenue. Additionally, by avoiding overstocking, businesses can avoid unnecessary storage and handling costs, which can improve their bottom line.

Enhanced customer satisfaction

Inventory management can also improve customer satisfaction by ensuring that businesses have the right products in stock when customers need them. By avoiding stockouts, businesses can avoid disappointing customers and losing sales. Additionally, by maintaining an optimal level of inventory, businesses can ensure that they have the right products in stock to meet customer demand, which can lead to repeat business and increased customer loyalty.

Improved supply chain efficiency

Inventory management can also improve supply chain efficiency by providing businesses with greater visibility into their inventory levels and supply chain operations. By monitoring inventory levels closely, businesses can identify potential bottlenecks or issues in their supply chain and take corrective action before they become major problems.

Reduced waste and spoilage

Effective inventory management can also help to reduce waste and spoilage by ensuring that products are sold before they expire or become obsolete. By monitoring inventory levels closely and managing inventory turnover, businesses can avoid holding onto products that are no longer in demand or that have reached their expiration date.

Inventory management challenges

Forecasting demand

Accurately forecasting demand is one of the biggest challenges of inventory management. If a business overestimates demand, they may end up with excess inventory that ties up capital and leads to storage costs. On the other hand, if they underestimate demand, they may face stockouts, which can lead to lost sales and dissatisfied customers.

Managing lead times

Lead times refer to the amount of time it takes for goods to be produced and delivered to the warehouse. Managing lead times is a critical aspect of inventory management, as delays in production or shipping can impact inventory levels and availability.

Handling seasonality

Seasonality refers to the fluctuations in demand that occur at different times of the year. Managing inventory during peak seasons can be challenging, as businesses need to ensure that they have enough stock on hand to meet demand without overstocking and tying up capital during slower periods.

Balancing costs

Managing inventory costs is a delicate balancing act for businesses. On the one hand, holding onto excess inventory can lead to storage and handling costs. On the other hand, stockouts can lead to lost sales and dissatisfied customers.

Maintaining accuracy

Maintaining accurate inventory levels is critical for effective inventory management. Manual tracking and recording of inventory levels can be time-consuming and prone to errors, leading to inaccuracies in inventory levels and stockouts.

Inventory management best practices

Keep accurate records

Accurate inventory records are essential for effective inventory management. Keeping track of what is in stock, what has been sold, and what needs to be replenished will help you make informed decisions about ordering and restocking.

Use an inventory management system

Investing in an inventory management system can help streamline your operations and reduce the likelihood of errors. An inventory management system can help automate inventory tracking, reduce stockouts and overstocking, and provide real-time visibility into inventory levels.

Conduct regular audits

Conducting regular audits can help identify discrepancies between actual inventory levels and what is recorded in your system. This can help you identify and resolve issues before they become bigger problems.

Optimize your warehouse layout

Optimizing your warehouse layout can help improve efficiency and reduce the time it takes to move inventory. This can involve using vertical space, organizing products by popularity or size, and using automation where possible.

Use forecasting to anticipate demand

Using forecasting to anticipate demand can help businesses plan for future inventory needs. This can involve using historical sales data, market trends, and other factors to predict future demand.

Implement a system for monitoring expiration dates

If you sell products with expiration dates, it’s important to have a system in place for monitoring and removing expired inventory. This can help prevent waste and reduce the risk of selling expired products.

Monitor supplier performance

Monitoring supplier performance can help ensure that you receive inventory in a timely manner and at the expected quality level. This can help reduce the risk of stockouts and other inventory issues.

Manage inventory effectively with WarehouseQuote

Managing inventory and ensuring data accuracy across multiple warehouse locations can be difficult. With WarehouseQuote’s Operations team and integrated technology platform, we can help your firm manage inventory effectively with complete visibility across your warehouse and fulfillment network in one platform. 
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About WarehouseQuote

WarehouseQuote is a managed warehousing solution helping middle market and enterprise businesses scale their warehouse operations with precision. Through our 3PL warehousing and fulfillment network of 250+ facilities, integrated technology platform, and in-house supply chain expertise, we enable businesses to design efficient fulfillment networks connected by a single technology platform. Hundreds of B2B and B2C businesses like Chatime, Joyride, Benitago Group, Big Ass Fans, and Mighty Good Solutions use WarehouseQuote to scale, streamline, and optimize their warehouse operations.

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