What is inventory management?

The supply chain is crucial to a firm's operations as it manages the inflow and outflow of products that are manufactured from the initial stage to the end product. It also considers the raw materials needed at different stages of production and when the work is in progress. Inventory management functions consist of ordering, storing, and procuring the organization's inventory like raw materials, factors, and finished products. It's also used for controlling the number of products for trade and helps manage the organization's inventory and stock. Inventory Management has been defined as having the right inventory, of the right volume, at the right cost.

Requirement of inventory management

It is essential to track inventory, streamline it, and track gains, demands, and deals for effective functioning in an organization. Inventory software can help structure or break the business for small organizations, depending on their ability to keep up with the demands.

Inventory management helps the business to operate at reduced cost and ensures that the operations do not get interrupted due to delays or unavailability of inventory. It also helps with the timely delivery of goods or services to the customers.

The inventory operations affect several aspects of the business, and therefore, choosing the right inventory operation system and technique can help businesses save time, meet client demands, and stay effective in the competitive e-commerce geography.

Conduct a regular inventory inspection

Auditing physical inventory can be time-consuming, but it's an important aspect of inventory operation. It involves counting accurate storehouse inventory on hand (also called cycle counting) and ensuring it matches what the organization has listed in the inventory operation software. However, the management of organizations should perform inventory counts regularly (using a barcode scanner to track SKUs) and compare it to the information against their inventory operation system if working with a 3PL provider. This can help to cut down on human error. In addition, there should be clear rules in the organization's 3PL mate agreement ( also known as a Service Position Agreement – SLA) that state the frequency the inventory is checked and the permissible distinction.

Inventory management tools

Finding the right software system to help handle inventory operations is essential. The right software will provide the real-time criteria, reporting, and updates that match the organization's requirements — whether demanding to move unsold products, meeting an unforeseen demand in deals, or calculating the inventory after making errors. Accurate reporting of inventory situations is pivotal, and the inventory software should assist on top of this when needed.

Tracking trends over time will be imperative to successful inventory operation. The right software can help optimize where to store inventory which can cut shipping costs. A great illustration of inventory operation software is the Enterprise Resource Planning (ERP). ERP refers to an intertwined business planning and operations approach. With ERP systems, organizations can manage all their finances, logistics, operations, and inventory in one place.

Methods used to manage inventory

• The "first-in, first-out" (FIFO) method holds that the oldest inventory, being the first in, should be sold out first before the newer stock is offered to the customers. This e-commerce stock control strategy is especially important to retailers who sell perishable goods.
• The "last-in, first-out" (LIFO) method holds that the latest inventory being the last in, should be sold out first before selling the older inventory. This strategy has its biggest advantage in saving taxes during inflations, as LIFO reduces taxes and assists in equalizing revenue with expenses.
• The "highest in, first-out" (HIFO) method holds that the inventory with the highest purchase cost has to be used first and sold before the inventory with lower purchase costs. However, this strategy has been rarely used by organizations that would take advantage by decreasing their taxable income by a substantial period.
• Economic order volume (EOQ) is an ideal volume the organization should buy to minimize its inventory costs, like deficit or carrying costs. The gist of it is to recognize profitable order volume that will result in a drop in spending, its formula identifies the topmost number of units demanded (per order) to reduce buying. One of the primary earnings of the EOQ model is customized recommendations for a particular organization. At times, EOQ may suggest investing in a larger order to take advantage of the reduction in bulk buying and to cut down on total costs associated with multiple shipments.
• Safety stock: Safety stock in inventory operation is redundant inventory being ordered beyond anticipated demand. It is used to help shortages generally caused by incorrect soothsaying or unlooked-for changes in client demand.
• ABC analysis: ABC analysis classifies inventory into three orders representing the goods' inventory values and cost significance. Order A represents high-value and low-volume goods. Order B represents moderate-value and moderate-volume goods. Order C represents low-value and high-volume goods. Each order can be managed independently, exercising an inventory operation system.
• Drop-shipping: In drop-shipping, one can sell products without actually holding the inventory themselves. Rather, a wholesaler or manufacturer is responsible for carrying the inventory and dispatching the products when consumers buy from one's store. One doesn't have to worry about inventory holding, storehouse, or fulfillment. Numerous possessors who start an online store borrow drop shipping styles, but numerous types of businesses can espouse this inventory chain fulfillment strategy across all diligence.
• Use of robotics and Artificial Intelligence: Automated systems offer real-time, accurate information about stock situations and composition. The technology employed in managing inventory in a storehouse is critical to success because the value of the automated system is just as good as the quality of the system itself. A low-quality system retains some of the pitfalls associated with inaccurate inventory. A careful and informed selection process reduces the threat of earning a robotization system that doesn't meet the requirements of the storehouse.

Context And Applications

Inventory management is widely practiced in all industries, primarily in FMCG, Consumer durables, Electronics, and so on. The subject is important at the graduate and postgraduate level, and all the exams relating to management such as Bachelor in Leadership and Team management, Bachelor of Commerce, and Master in Business Administration.

Practice Problems

1. Which of the following is not an inventory?

1. Machines
2. Raw material
3. Finished products
4. Consumable tools

Answer: Option a
Explanation: Machines are not inventory.

2. In which of the following is the cost of insurance and taxes included?

1. Cost of ordering
2. Set up cost
3. Inventory carrying cost
4. Cost of shortages

Answer: Option c
Explanation: Inventory carrying cost includes the cost of insurance and taxes.

3. Which type of inventory technique does not require handling inventory?

1. Economic order volume
2. Drop-shipping
3. Safety stock
4. None of these

Answer: Option b
Explanation: In drop-shipping, one can sell products without actually holding the inventory.

4. Which inventory technique offers real-time, accurate information about stock situations and composition?

1. Regular inventory inspection
2. Inventory management software
3. Economic order volume
4. Robotization

Answer: Option d
Explanation: Automated systems offer real-time, accurate information about stock situations and composition.

5. Economic order quantity is the quantity at which the cost of holding and carrying inventory is:

1. Maximum and equal
2. Minimum and equal
3. It can be maximum or minimum depending upon case to case.
4. Minimum and unequal

Answer: Option d
Explanation: Economic order quantity is that quantity at which the cost of holding and carrying inventory is minimum and unequal.

Common Mistakes

Students generally get confused in distinguishing between the different inventory management techniques and face difficulties finding the right technique in the proper operations. Inventory management is not to be confused with warehouse management which is different in terms of scope and complexity.

Related Concepts

• Supply chain management
• Batch tracking
• Consignment inventory
• Demand forecasting