Inventory management is a critical component of supply chain management that involves tracking and controlling the flow of goods, products, and materials from raw materials to finished goods. It is a systematic approach to managing inventory levels, ensuring that the right products are available at the right time and in the right quantities to meet customer demand.
Inventory management software plays a crucial role in automating tasks, tracking stock levels, and improving the efficiency of retail operations. Executing effectively helps minimize costs, avoid stock shortages, and improve overall customer experience.
Whether you are a small retailer or a global manufacturer, inventory management works fundamentally similarly. It handles variations in supply and demand and lead times. Inventory management involves multiple processes, such as recording, planning, and overseeing inventory to suit consumer requirements.
Proper inventory control can keep the supply chain running efficiently, prevent over- or under-stocking, and safeguard profits over the long run.
Here, we will discuss and highlight the importance of inventory management, as well as the benefits, challenges, steps, and suggestions on this crucial element of the supply chain.
Why is Inventory Management Important?
Inventory management balances saving costs for the company and ensuring customer service. Let's look at a couple of examples at both ends of the spectrum.
Imagine going into a shop to purchase something you need only to have it out-of-stock. Annoying, huh?
So now think about a warehouse filled with non-moving products choking the business cash flow and blocking costly warehouse space.
Both instances show exactly why inventory management is crucial for virtually any business. In fact, all the companies that have scaled globally have excelled in their inventory management practices.
Here are the top 4 reasons why inventory management is important:
1. Prevents Overstocking
Overstocking occurs when businesses hold much more inventory than is required. This leads to capital being tied up, increases storage costs, and increases the risks of obsolescence or expiry. Excess inventory, often called dead stock, eats into company profits as companies try to sell it off at heavy discounts.
2. Avoids Stockouts
The other end of the spectrum of improper inventory management is running out of stock. It is just as damaging as overstocking, but the only difference is that it directly impacts the top line. Stockouts bring sales declines, delayed orders, and furious buyers. If customers can't find what they want, they will probably go to competitors, adversely impacting your brand image and earnings.
3. Improves Operational Efficiency
When an inventory system is well-managed, businesses can simplify operations, reduce waste, and optimize storage space costs. This leads to smoother workflows and better utilization of resources.
4. Boosts Profitability
Striking the right inventory balance reduces costs, improves cash flow, and ensures customer satisfaction — all of which contribute to a healthier bottom line. Implementing a perpetual inventory system can help maintain accurate stock levels and reduce costs by automatically recording every transaction and providing real-time updates on inventory changes.
Now that we understand the importance of inventory management, let us also discuss the benefits of implementing the right practices in an organization.
5 Benefits of Inventory Management
Essential Inventory Management Techniques for Business EfficiencyTo run efficient inventories, companies will have to invest in a good inventory management system. These are software-based tools that help businesses manage their inventory levels, track inventory movements, and optimize inventory processes. It is critical for businesses that aim to improve their inventory management processes, reduce costs, and enhance customer satisfaction. Inventory management systems can be manual, periodic, or perpetual and can be customized to meet a business's specific needs.
Inventory management systems can be integrated with other business systems, such as enterprise resource planning (ERP) systems, to provide a comprehensive view of inventory management processes. They can also be customized to meet a business's specific needs, including managing raw materials, work-in-progress, and finished goods.
Inventory management systems do more than prevent headaches for the supply planners; they deliver significant benefits across multiple facets of a business. And while the benefits can vary slightly based on the industry, here is a list of the top 6 benefits:
1. Improved Costs
Although installing inventory management software initially costs considerable money, the time savings outweigh the original price tag. By maintaining optimum stock levels, businesses reduce carrying costs, minimize waste, and lower costs.
2. Better Visibility & Forecasting
Inventory management systems, particularly a sophisticated inventory system, allow businesses to analyze sales data, determine the variability in demand, and identify trends. Therefore, companies can better predict future demand and avoid stock imbalances with such insights.
3. Higher Customer Confidence
With real-time visibility into inventory levels and delivery timelines, businesses can fulfill orders quickly, provide accurate updates, and improve the customer's confidence in the company. Happy customers are more likely to become repeat buyers.
4. Optimized Utilization
Efficient inventory management ensures that storage space or truckloads are done more effectively. Businesses can identify slow-moving items, minimize waste, and prioritize high-demand products in the warehouse. Meanwhile, the FTL can bring savings when sending goods across to the warehouses.
5. Better Supplier Relationships
Transparent inventory practices promote better communication and trust with suppliers. Building inventory replenishment practices like Just-in-Time (JIT) or Vendor Managed Inventory (VMI) requires the highest level of collaboration with the suppliers but also helps them save costs with highly predictable and constant demand. This leads to both parties working closely together for faster inventory replenishments and smoother operations.
These benefits highlight why inventory management is so beneficial and important to running a successful business. However, implementing these systems comes with its own set of challenges. Let's look at them next.
5 Common Challenges in Inventory Management
Even the most advanced inventory management systems can be challenging to implement and maintain. What are those challenges you ask? Here is the list of top 5:
1. High Setup Costs
Implementing inventory management solutions and processes requires an upfront investment. This can burden smaller businesses, though the long-term benefits often justify the cost.
2. Poor Data Foundation
Traditional systems frequently depend on manual data entry, resulting in greater inconsistencies. A weak data foundation can cause problems with system accuracy, which in turn can hinder adoption. Errors in inventory data may create stock discrepancies and operational challenges.
3. Integration Complexities
Connecting inventory systems with other business tools like ERP or CRM platforms can be technically complicated and require specialized expertise.
4. Managing Large Inventories
Managing inventory can be daunting for businesses dealing with thousands of SKUs across multiple locations without robust systems. A perpetual inventory system can help in managing large inventories by providing real-time updates and maintaining accuracy. For example, in Orthopedics Medical Devices or Auto, the number of SKUs can be in the thousands. If the system isn’t competent, it can lead to consistency and adoption issues.
5. Resistance to Change
Employees may resist adopting new technologies or workflows, making it difficult to realize the benefits of advanced inventory management systems fully.
While these challenges may seem significant, they can be easily avoided with careful planning, the right implementation partners, technology, and a focus on training and change management. Implementation partners are important here as they can help with the best inventory management techniques. Below, we will discuss the top five techniques.
5 Effective Inventory Management Techniques
Essential Inventory Management Techniques for Business EfficiencyInventory is a necessary evil for any business. However, the right inventory management is the process of turning this 'necessary evil' into a competitive advantage. Companies can use different approaches to effective inventory management to make their inventory process more robust. Here are the top 5 inventory management techniques:
1. Run Periodic Stock Review
This is a straightforward method of inventory reconciliation. It usually involves regularly reviewing stock levels, including physical stock counts. While simple, it can be labor-intensive and is best suited for smaller businesses or where the value of the inventory is high, such as jewelry.
2. Adopt Just-In-Time (JIT)
This technique helps in faster inventory replenishments of stocks, hence lowering the need for inventory in the network. Inventory arrives on short notice, as needed. However, JIT requires much shorter lead times to support the business. This technique is very popular in the Auto industry, where hundreds of OEMs replenish the components at the manufacturer's location just in time for production.
3. Run ABC Analysis
ABC or Pareto Analysis categorizes inventory into three groups:
- A: High-value, low-quantity items
- B: Moderate-value and quantity items
- C: Low-value, high-quantity items
The idea here is to focus on what is important and optimize that inventory. Usually, the A class, the high-value items, are kept under the highest governance as only about 20% of the total SKUs can drive up to 80% of the inventory value. Such a focused approach helps drive sharp actionability and the best ROI on the efforts toward inventory management.
4. Follow Economic Order Quantity (EOQ)
Inventory management helps procurement answer questions like what to buy, when to buy, and how much to buy. The answers to such questions are statistically arrived at using the economic order quantity, or EOQ. Any order has fixed and variable costs. EOQ is the optimal order quantity to minimize costs associated with ordering and holding inventory.
5. Derive Statistical Safety Stock
Safety stock is a buffer of extra stock to handle unexpected demand or supply chain disruptions. It acts as a cushion whenever demand or supply goes off plan and helps prevent customer service issues. However, for safety stock to be effective, it has to be calculated statistically based on demand variations, lead times, and other factors, depending on the supply chain.
Elevating Your Inventory Management Game with Holocene
Inventory management is a crucial part of supply chain management. The right inventory management practices optimize efficiency, lower expenses, and delight consumers. The best inventory management practices can give businesses an edge over their competition.
We at Holocene optimize inventory processes for companies across industries. We offer innovative solutions for getting the best out of inventory management.
Connect with us for a free demo to determine exactly how we can upgrade your inventory management and unleash new productivity levels.
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