Inventory is the most critical asset for businesses operating in manufacturing, food, retail, and other inventory-intensive industries. Those companies have to deal with the challenge of ensuring that this asset does not turn into a liability. Also, the asset should not cause unnecessary expenses and cash outflow. That is why inventory management is an absolutely essential strategy for businesses of any size.
Inventory management definition
As Investopedia broadly states it, inventory management is the process of ordering, storing, and using a company’s inventory. It is a part of the supply chain that deals with aspects such as controlling and forecasting purchases from vendors and customers. It handles stock warehousing, sales amounts, order fulfillment, etc.
When the business effectively performs inventory management functions, extra costs of stock carrying decrease. In parallel, the level of sales increases.
Successful stock management leads to having the right products in adequate quantities. It excludes out-of-stock cases and extra costs associated with excess levels. Businesses can also ensure timely sales that avoid inventory obsolescence and damage or extra spendings on warehousing and storage.
Benefits of inventory management
Inventory management is essential on many levels of business operations and profits. Following are some of the ways that businesses benefit from effective stock management practices.
Order fulfillment accuracy
First and foremost, an effective inventory management strategy supports easy and accurate tracking of goods. It helps to avoid excess, and extra stock levels reduce the possibility of stock obsolescence. So, it allows businesses to meet market needs and become competitive players. It also improves shipment practices and controls and customer satisfaction. If companies consider investing in inventory management software, they would better avoid inaccuracies associated with orders and volumes.
Improved planning and ordering
Just imagine facing a scenario when a customer wants to make a large order, and it turns out you do not have enough quantity of that particular product. It doesn’t sound very good. Defining the right balance of product supply and demand is extremely important for businesses. For this reason, inventory management practices assist effective and more accurate inventory planning and ordering. Proper stock management helps warehouse and inventory managers refresh orders at the right time and in the right volume, making overall process cost and space effective.
One of the most important missions of any business is to make its customers satisfied. Inventory control supports the achievement of that mission as well. Firstly, well-developed inventory management gives a comprehensive view of inventory available and makes it possible to address issues on time and avoid out-of-stock notifications and wait times for customers. It also supports quick order fulfillment and fast shipment and delivery of orders. This is even more important for eCommerce and online retail businesses to keep their customers satisfied.
Another benefit of a proper stock management practice is a well-arranged warehouse. To complete this function, inventory control deals with stock barcoding and tracking within the warehouse. As a result, warehouse managers will know what products are available and where. Keeping a warehouse organized makes current and future order fulfillments more efficient and effective. Warehouse utilization also supports cost-saving.
Inventory management terms
There is a must-know vocabulary of inventory management, which you can learn below.
Barcode scanner: It is a device that reads barcodes on stocks used when checking in and out products from a warehouse or other fulfillment centers.
Bundle: It refers to a group of products that are sold as one unit. An example of a bundle is when a business sells a phone, charger, and earphones as on SKU.
Cost of goods sold (COGS): This is an accounting term, which refers to direct and indirect costs associated with the good’s production and sales.
Deadstock: It is a name given to a stock that did not manage to be sold, mainly because it expired.
Economic order quantity (EOQ): EOQ is used by managing accountants that estimate the ideal ordering quantities, which would allow them to meet the product demand and yet minimize ordering and holding costs.
Holding costs: Also known as carrying costs, these are the costs that the business meets when keeping the stock in its warehouse before selling it to customers.
Lead time: It is a timeframe between making an order and getting it delivered by the supplier.
Order fulfillment: This refers to the whole lifecycle of the order starting from the point of a customer’s purchase to its delivery.
Order management: It is a part of inventory management that deals with receiving orders, processing payments, making and tracking shipments, and ensuring delivery and feedback from a customer.
Purchase order (PO): It is a document used in procurement practices, the purpose of which is to give an outline of products, quantities, and agreed prices for orders between a vendor and buyer.
Pipeline inventory: It refers to the stock ordered by a business and not yet received from the supplier.
Reorder point: It is an inventory level that triggers a need for replenishment of a particular stock. Its purpose is to avoid stockouts.
Safety stock: It is a term used in logistics that refers to the amount of stock that should be held to avoid stockouts due to market demand uncertainties.
Sales order: It is a commercial document prepared by the seller to confirm that a particular sale was made. It includes sales details such as product names, quantities, prices, etc.
SKU: Opened as a stock keeping unit, SKU represents a unique alphanumeric code given to every product to indicate its characteristics such as size, color, etc.
Third-party logistics (3PL): It refers to the use of outsourced logistics services, which maintains inventory-related services such as warehousing, order fulfillment, and shipment.
Let’s sum up
From a business-thinking perspective, the purpose of inventory management is to assure that the proper inventory is available at the right level at the right time in the right place and, of course, for the right price. All these results in an optimized supply chain and increased cash inflow.