Skip to content
SuperMoney logo
SuperMoney logo

Inventory Management Defined Plus Methods and Techniques

Last updated 03/20/2024 by

SuperMoney Team

Edited by

Fact checked by

Summary:
Inventory management ensures that a company’s inventory is ordered, stored, and utilized to satisfy consumer demand without overstocking stockouts, or waste. Optimizing inventory levels can minimize holding costs, boost profitability, improve supply chain efficiency, estimate demand, and detect slow-moving or obsolete goods. Inventory management red flags include excess inventory, stockouts, slow-moving or obsolete inventory, erroneous inventory data, unreliable suppliers, and inefficient warehouse operations. Technology, managing inventory levels, supplier connections, inventory control, monitoring inventory performance, training staff, optimizing warehouse layout, and cross-functional teams are best practices for inventory management. JIT, EOQ, MRP, and days sales of inventory are inventory management methodologies (DSI). Inventory management includes FIFO/LIFO, demand prediction, and minimal vs. economic order quantity.
Inventory management is the means of ordering, storing, and using a company’s inventory. It involves managing the stock of finished goods, raw materials, and work-in-progress items essential for business operations. Effective inventory management ensures that a company has the right amount of inventory to meet customer demand while avoiding overstocking, stockouts, and waste.
It helps businesses to optimize their inventory levels, reduce holding costs, and increase profitability. Inventory management also involves tracking inventory movements, monitoring inventory levels, forecasting demand, and identifying slow-moving or obsolete inventory. By using various inventory management techniques and methods, businesses can improve their supply chain efficiency and maintain a competitive edge in the marketplace.

Benefits of Inventory Management

Inventory management is crucial for business optimization; hence here are some benefits of inventory management:
  • Optimizes inventory levels to meet customer demand while reducing holding costs
  • Reduces stockouts and excess inventory, leading to better cash flow and profitability
  • Improves supply chain efficiency and reduces lead times
  • It helps to identify slow-moving or obsolete inventory and prevent waste.
  • Enables businesses to forecast demand and plan production more accurately
  • Enhances customer satisfaction by ensuring product availability and on-time delivery
  • Enables businesses to make informed decisions about pricing, promotions, and product development based on inventory data
  • Reduces the risk of overproduction or underproduction, resulting in better resource utilization and cost control
  • Facilitates compliance with regulatory requirements and improves safety by ensuring proper storage and handling of inventory.

What are Red Flags in Inventory Management?

Red flags in inventory management refer to warning signs that indicate potential issues or inefficiencies. Some common red flags in inventory management include:
  • Excess inventory can tie up working capital and lead to higher holding costs, which can impact the overall profitability of a business.
  • Stockouts can result in lost sales, decreased customer satisfaction, and reduced revenue. They may indicate a lack of accurate forecasting, poor inventory control, or inadequate safety stock levels.
  • Slow-moving or obsolete inventory can lead to waste, higher holding costs, and reduced profitability. They may indicate poor demand forecasting, inadequate inventory tracking, or ineffective product management.
  • Inaccurate inventory data can lead to stockouts, overstocking, and inefficient use of resources. They may indicate poor record-keeping, inadequate inventory tracking systems, or lack of employee training.
  • Inconsistent or unreliable suppliers can lead to supply chain disruptions, delays, and increased costs. They may indicate poor supplier management or inadequate supply chain planning.
  • Inefficient warehouse operations can lead to poor inventory management, higher labor costs, and reduced productivity. They may indicate poor warehouse layout, inadequate staffing, or inadequate inventory tracking systems.

What are the Best Practices for Effective Inventory Management?

  1. Use technology: Utilize inventory management software and other technological tools to track inventory levels, sales, and trends, and forecast demand accurately.
  2. Optimize inventory levels: Set up minimum and maximum inventory levels and reorder points based on accurate demand forecasting, supplier lead times, and safety stock requirements.
  3. Improve supplier relationships: Build strong supplier relationships, negotiate favorable terms, and establish clear communication channels to ensure timely delivery and quality of goods.
  4. Implement inventory control: Use inventory control techniques such as FIFO, LIFO, ABC analysis, and cycle counting to improve inventory accuracy, reduce waste, and prevent stockouts.
  5. Monitor inventory performance: Analyze inventory performance regularly and use key performance indicators (KPIs) such as inventory turnover, days sales outstanding (DSO), and holding costs to measure effectiveness.
  6. Train employees: Train employees in proper inventory management techniques and procedures, and ensure they understand the importance of accurate inventory tracking.
  7. Optimize warehouse layout: Optimize warehouse layout and processes to improve workflow and efficiency, reduce errors, and minimize handling and transportation costs.
  8. Utilize cross-functional teams: Form cross-functional teams involving representatives from sales, marketing, finance, and operations to improve coordination and alignment in inventory management.

Methods of Inventory Management

Businesses can optimize inventory levels and reduce holding costs using different inventory management approaches. Common inventory management methods include:

1. Just-in-time (JIT):

JIT is an inventory management method that involves ordering inventory only when it is needed, usually just in time for production or sale. This method helps to minimize inventory holding costs and reduce waste.

2. Economic order quantity (EOQ):

EOQ is a method that helps businesses determine the optimal order quantity for their inventory. It calculates the optimal order quantity based on the cost of ordering and holding inventory.

3. Material requirements planning (MRP):

MRP is a method that helps businesses plan and manage their inventory by using production schedules and forecasting demand. It involves calculating the required quantity and timing of materials needed for production.

4. Days Sales of Inventory (DSI):

This financial ratio illustrates a company’s average days to sell inventory, including work-in-progress. DSI can be read as the average inventory age, days inventory outstanding (DIO), days in inventory (DII), days sales in inventory, or days inventory. How many days a company’s inventory will last indicates its liquidity.

Inventory Management Techniques

1. FIFO/LIFO

FIFO and LIFO are warehouse accounting procedures that track product movement. FIFO helps businesses sell their oldest goods first. When someone orders the goods, they should be the first out of the warehouse. Perishable commodities must be kept fresh.

2. Demand prediction

Demand forecasting (or sales predictions) lets you determine how much of each product to keep in stock to meet consumer demand. Demand forecasting for established businesses should use sales data. Newer enterprises may need to use assumptions and industry data until they establish a sales history.

3. Minimal vs. economic order quantity

Businesses can utilize MOQ and EOQ to determine product reorders. MOQ sets a seller’s minimum product quantity. Low-cost items have a larger MOQ than high-ticket items. When reordering from suppliers, compare the MOQ for a product to your sales expectations.

4. Safety stock

Safety stock affects reorder amounts and sales predictions. It’s crucial for your top sellers. Safety stock is inventory ordered above demand. Over-ordering is never a good idea, but if you think an item will sell well, it’s good to have a few extra pieces.

5. Dropshipping

Customer orders are dropped shipped by your supplier. This eliminates storage and inventory. It’s excellent for rare orders or products you can’t fit in your warehouse because your supplier handles customer satisfaction.

6. Cross-docking

Cross-docking optimizes efficiency. Your facility will unload delivery trucks into trucks that deliver your sales. This avoids inventory management and bringing fresh products into your storage facility. Instead, they’re shipped immediately. This works well for not just in time shipping.

Conclusion

Effective inventory management is a crucial aspect of any business operation. By optimizing inventory levels, reducing stockouts, and improving supply chain efficiency, businesses can achieve higher profitability, a stronger market position, and more consumer satisfaction.
Implementing best practices such as utilizing technology, optimizing inventory levels, improving supplier relationships, implementing inventory control, monitoring inventory performance, training employees, optimizing warehouse layout, and using cross-functional teams can help businesses achieve effective inventory management. However, it is essential to note that inventory management is not a one-time activity but requires constant monitoring.

Key takeaways

  • The complete process of managing inventories, from raw materials to completed goods, is known as inventory management.
  • To prevent shortages and gluts, inventory management works to streamline stockpiles efficiently.
  • The four primary inventory management strategies are just-in-time management (JIT), materials requirement planning (MRP), economic order quantity (EOQ), and days sales of inventory (DSI).
  • All these approaches, which are examined below, has benefits and drawbacks.

You might also like