At its core, inventory management is about ensuring businesses have just enough stock to meet demand. It’s a careful balancing act of avoiding overstocking, which ties up capital and prevents stockouts, which leads to lost sales.
But there’s quite a bit more to it than this. Companies have to grapple with many challenges, like space constraints and lack of inventory visibility, while deciding how best to manage their inventory in the first place.
And so, in this guide, we cover inventory management in detail, exploring almost everything you need to know:
- What is inventory management?
- Why is inventory management important?
- What are some of the challenges around inventory management?
- How do you effectively manage inventory?
What is inventory management?
Inventory management refers to the process of ordering, counting, storing, and tracking inventory to ensure businesses can meet demand while minimizing costs associated with carrying excess stock.
Types of inventory
There are many different types of inventory you can manage, including:
- Raw goods: materials used in early production, like wood, metals, and plastics
- Work in progress (WIP) inventory: partially finished items awaiting completion
- Finished goods: completed products available for purchase
- Maintenance, repair, and operations goods (MRO): goods and equipment used in production that are not part of the final product, like office supplies
Key components of inventory management include:
- Real-time inventory tracking to identify the quantity, location, and status of stock. This helps you quickly fulfill orders and avoid stockouts or overstocking.
- Ordering and reordering stock at the right time and in the correct quantities to help maintain optimal stock levels. You’ll need to set suitable reorder points and economic order quantities.
- Forecasting demand to predict how much stock to hold. This can prove especially challenging during the holiday season but can be done with the correct forecasting techniques and inventory management system.
- Categorizing inventory based on criteria, like turnover rate and value, so you can prioritize inventory. For example, popular or fast-moving stock will require more monitoring and attention than slower-moving items. You’ll need to replenish stock more frequently to meet demand.
So, why is inventory management important?
Inventory management plays a vital role in the success of businesses across a multitude of industries. Here are five key reasons why you should prioritize inventory management:
- Reduces holding costs. It helps maintain optimal stock levels to prevent over- or understocking. This helps minimize holding costs that arise from overstocking, like warehousing, labor, storage, security, and insurance.
- Prevents obsolescence. Monitoring inventory levels and demand helps you avoid overstocking products, which can cause them to expire if they’re held for too long.
2. Improved cash flow:
- Optimizes working capital. It helps prevent overstocking, which ensures you’re not tying up capital that could be used elsewhere in your business.
- Improves turnover. You’re able to sell products more quickly, increasing your inventory turnover. This means you can convert capital tied up in stock into cash much sooner.
3. Enhanced customer satisfaction:
- Minimizes stockouts. With inventory management helping you maintain optimal stock levels, you always have enough stock to meet demand, leading to happier customers.
- Ensures accurate order fulfillment. Proper inventory control reduces order fulfillment errors, which can lead to customers not receiving products on time.
4. Greater efficiency and productivity:
- Streamlines production planning. You can better plan your production schedules because you can access accurate, real-time inventory data.
- Optimizes operations. Order, receiving, storing, and shipping processes are improved, which enhances overall operational efficiency. For instance, accurate demand forecasts and real-time visibility into inventory levels help you optimize the stock-ordering process. Automated systems can generate purchase orders to order stock when stock levels reach certain levels.
5. Strategic decision making:
- Make data-driven decisions. Inventory management systems give you valuable data on product performance, demand trends, and supplier performance. You can use this data to make better business decisions around pricing, product introductions, etc. For instance, by using the software to review sales data, you can identify fast- and slow-moving stock. From there, you can change your strategies around how much of each item to carry.
- Improve demand forecasting. Accurate historical inventory data can help you better predict future demand and plan for seasonal demand so you can adjust production and stock levels to meet that demand.
While inventory management is undeniably beneficial for any business, there are still plenty of challenges to overcome.
What are some of the challenges around managing inventory?
From struggling to forecast demand and dealing with a lack of visibility to grappling with outdated technology and coping with warehouse space constraints, managing inventory isn’t always easy.
Here are nine common challenges you may need to overcome.
Maintaining inventory levels is a constant balancing act. You’re trying to avoid stockouts (running out of inventory) and overstocking (having too much inventory).
Forecasting demand. Demand forecasts can be especially hard during the holiday season. Inaccurate predictions can lead to inefficient inventory levels, lost sales, and high carrying costs.
Supplier issues like late deliveries or quality problems can have ripple effects on the entire supply chain. For example, imagine you’re a car manufacturer relying on a crucial component from a supplier. If the supplier faces delays in delivering that component, you’ll experience production delays, affecting your ability to meet demand.
Determining the right reorder points and order quantities. Knowing how much to order and when can be tricky when constant demand fluctuations occur, with errors leading to over or underordering.
Lack of inventory visibility. Insufficient access to real-time and accurate information about the location, quantity, and status of inventory can lead to poor decision-making and a higher risk of stockouts and overstocking.
Managing inventory with outdated methods. Manual inventory management via methods like spreadsheets leads to inaccuracies, delays, and errors that can cost your business a lot of money. For instance, if your manual records incorrectly indicate that you have more stock than you actually do, you won’t order new stock when it’s actually time to do so. You’ll then be understocked and run out of stock before the next inventory arrives, losing out on sales.
Warehouse and space constraints. Limited warehouse space restricts how much stock you can carry, posing a challenge to maintaining optimal stock levels and, in turn, demand.
Shrinkage. Maintaining accurate inventory records can be hampered by shrinkage due to damage or theft.
Compliance. You need to comply with specific regulations to avoid damage to your reputation, financial loss, or legal issues. For example, the food industry has strict regulations regarding food expiration dates. Selling these expired products can lead to fines and erode customer trust.
But despite all these challenges, managing inventory doesn’t have to be tricky. You just need to manage it effectively.
But how do you effectively manage inventory?
The two main approaches businesses typically use to track, control, and manage their inventory are manual or software-based inventory management. Which is right for you?
Manual inventory management
Some businesses lack a process for managing inventory, because they rely on manual methods, using spreadsheets and the old-school pen-and-paper approach. Instead of using software, people perform tasks using physical methods, like counting and recording inventory in spreadsheets.
Manual methods generally have a low upfront cost and benefit from simplicity: they’re easy to understand and set up. However, while they technically work for companies with straightforward needs, there are significant shortcomings.
Not only are these methods prone to errors, like data entry mistakes or miscounts, that cost companies precious time and money, but they’re also far more time-consuming: the time wasted on managing and tracking inventory could be better spent on other high-value activities.
On top of that, they’re characterized by limited scalability, because they struggle to handle the complexities as a business grows and, inevitably, has more inventory to manage.
There’s also a genuine lack of any real-time data needed for strategic decision-making as inventory level updates are not instantaneous. Discrepancies between actual and recorded inventory can easily exist, resulting in stock not being ordered on time, incorrect quantities being ordered, or companies sitting on stock they didn’t even realize they had.
Boxes R Us, for instance, had $100,000 worth of stock that wasn’t even moving. They now use a solution like Fishbowl to avoid costly mistakes.
As a result of these shortcomings, many businesses like Boxes R Us prefer to use technology.
Software-based inventory management
As the name implies, software-based inventory management involves using inventory management software (IMS). An IMS is a digital solution that helps businesses manage and optimize their inventory. Using computer software, they can track purchase orders, sales shipping details, and stock levels. This information is then available from a centralized database.
Unlike manual methods, software reduces the need for manual intervention by using automation. Automation improves the accuracy and reliability of inventory data, because it minimizes human error and improves efficiency, thanks to faster and more efficient inventory tracking—say goodbye to hours and hours of manual counts.
Software also provides real-time data and insights for faster and more informed decisions, based on the current state of inventory. There are no discrepancies between actual and recorded inventory. Finally, the software can more easily scale to adapt to a growing business.
Sure, the initial cost may be higher for a software setup when considering software licensing, training to get everyone up to speed, and hardware. But, over the long run, the software quickly pays for itself with improved operational efficiency and fewer costly errors.
Take it from Boxes R Us. Software helped them overcome the pitfalls of manual inventory tracking to save $60,000 in inventory alone.
With the right solution, you too can easily overcome these shortcomings.
Manage SMB inventory with ease
Fishbowl is the industry’s most flexible and popular IMS. With the ability to connect to and integrate with core business solutions, like QuickBooks for accounting, FedEx for shipping, and Shopify for eCommerce, SMBs can operate virtually their entire tech stack through Fishbowl’s powerful platform.
For warehouse and manufacturing professionals, not only does Fishbowl offer real-time visibility into current stock levels to help you run a smooth operation, but automation features for routine processes, like reordering, reduce the manual workload to minimize errors.
You also get actionable data to improve decision-making, thanks to robust reporting features that provide insights into sales trends and other essential metrics. Book a demo to learn how Fishbowl can help you manage inventory with ease.