4 Things to Know About Inventory Management and Its Importance

Did you know that only 22% of companies have a proactive supply chain network? That means that only a small percentage of companies are actively responding to change instead of simply reacting to it.

One of the key areas of a supply chain network that requires a lot of proactive thought is inventory. Despite this fact, many people are still unfamiliar with inventory management and how it applies to their system.

So, what is inventory management? And how does it work? If you want to learn the answer to these questions, and more, then you’re in the right place. In this article, we’ll give you a crash course in everything you need to know about inventory management. Let’s get started!

What Is Inventory Management?

As its name suggests, inventory management is the process of managing a company’s inventory. This inventory includes both finished products and the raw material that’s needed to make them.

Before they can be shipped off to stores and customers these products and materials need to be ordered, stored, used, and then sold. As such, the inventory management process essentially tracks a product’s life from cradle to grave.

So, why is this important? Simple: because it helps companies know the amount of product that’s in stock at what time. This allows you to properly identify when certain trends might require more or less inventory.

However, more importantly, it helps improve the turnover rate of products. Remember that any inventory that’s just sitting in a warehouse is cash that’s tied up. It’s a liability.

When a product is sitting in a warehouse any number of things can happen to it, from theft and fire to spoilage or flooding. As such, an efficient inventory management system is vital for minimizing the amount of liability that comes before and after the production process. Now, let’s take a closer look at how inventory management works.

How Does It Work?

As we will see, there are a variety of different inventory management methods that might work out for your business. However, at the end of the day, they all break down into three simple steps.

The first is the purchasing of the inventory. This is when goods or materials are purchased and shipped, either to a warehouse or the physical store. Next, the goods or materials are stored until they’re needed.

Once they are needed, then they’re transferred across the fulfillment network. Finally, the finished goods are then pulled from storage to fulfill customer orders.

At its core, all inventory management follows some variation of this system. However, as we mentioned, there are many different ways you can put it into effect. Here are some of the popular methods:

  • Just-in-time management (or JIT) – This method helps companies save money by letting them only keep the things they need to produce and sell products. However, it’s not ideal for dealing with an unexpected increase in demands.
  • Materials requirement planning (or MRP) – This method uses sales history to determine how much inventory to keep. However, the sales forecast must be accurate or it can lead to problems.
  • Days sales of inventory (or DSI) – This method looks at the financial ratio of the average amount of days that a product spends in inventory. From there, the company can deduce how many days the inventory will last before it needs to be refilled.

What Are the Benefits That Come With Inventory Management?

The biggest benefit that comes with inventory management is the fact that it raises profits and helps you fulfill orders. However, these aren’t the only benefits that come with it. It also helps your business save money. How?

When you understand your inventory management better it allows you to keep less stock in each location since you can pull it from any of your locations. This means that you spend less money on storage and sell more stock before it goes bad waiting in your warehouse.

Good inventory management also helps speed up cash flow for a business. As we mentioned, there’s nothing worse than cash gets tied up in inventory purgatory. Finally, it helps keep your customers satisfied.

No one likes ordering something only to find that it’s sold out. As such, good inventory management helps prevent this and keep your customers happy with their decision to purchase from you.

What Are the Challenges That Come With Implementing It?

As you can guess, many challenges arise when organizing inventory management. The first is getting accurate stock details.

If your business isn’t keeping up-to-date details on its stock inventory, then you will have no way of determining when something needs refilling, or when a particular piece of inventory is selling better than others.

Many companies also use manual processes for tracking inventory. This outdated method often leads to errors that can significantly slow down the rate of production. You can combat it by using things like this inventory management Excel template.

By using modern sources of tracking you help ensure that you don’t make as many user errors. Another challenge changes in customer demands. And customers are buying more or less than usual, then you need to know.

Otherwise, you’ll have inventory that’s just waiting around in a warehouse. Or, worse, you’ll be sold out.

Want More Content? Keep Reading

We hope this article helped you answer the question, What is inventory management? As you can see, inventory management isn’t just about tracking your inventory.

It’s about ensuring that your customers are happy by ensuring there are enough products in stock. And, if there is a shortage, then a good inventory management system can inform the public instead of canceling orders.

So, if you have been avoiding investment in your inventory management system, then now is the time to upgrade it. Did you enjoy this article? If the answer is yes, then you’re in the right place. Keep exploring to find more topics that you’re sure to love.

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