What Is Inventory Management
Inventory management is the process of ordering, storing, tracking, and controlling a company’s stock to ensure adequate supply without excessive surplus.
It involves managing the balance between supply and demand, optimizing stock levels, and reducing costs. Effective inventory management ensures products are available when needed, enhancing customer satisfaction and operational efficiency.
Inventory Management vs. Supply Chain Management
Inventory management focuses on controlling and optimizing a company’s stock, ensuring there is enough product on hand to meet demand without excess. It deals with the storage, ordering, and distribution of goods within a company.
In contrast, supply chain management (SCM) has a broader scope, including inventory management, but also involves the coordination of all activities related to the flow of goods from raw materials sourcing to final product delivery to the customer.
SCM aims to maximize efficiency and profitability across the entire production and distribution network.
How To Manage Inventory in 8 Steps
Managing inventory efficiently is important for you to maintain the balance between supply and demand, ensuring product availability, and minimizing storage costs.
Here’s how you can manage your inventory effectively in eight steps:
1. Define Product Sourcing and Storage Methods
Begin by establishing reliable sourcing strategies for your products. Choose suppliers based on their delivery times, quality of goods, and pricing.
Determine the best storage methods for your products, considering factors like size, perishability, and handling requirements.
Efficient storage methods reduce damage and wastage, keeping your inventory in optimal condition.
2. Decide How To Track Inventory Data
Choose an inventory tracking system that suits your business needs. Options range from simple spreadsheet-based tracking to advanced inventory management software that integrates with other business systems.
The right system should allow you to monitor stock levels, track orders, and analyze inventory data effectively. With Finli, you can now use a state of the art inventory management system.
3. Create an Internal SKU System
Develop a unique Stock Keeping Unit (SKU) system to simplify tracking and managing your inventory. SKUs are alphanumeric codes that uniquely identify each item in your inventory. This system enables quick data entry, reduces errors, and facilitates easy tracking of sales and stock levels.
4. Organize Inventory Storage Areas
Efficiently organize your inventory by grouping similar items together and using labeling systems to ease the process of locating specific items. Consider implementing techniques such as FIFO (First In, First Out) or LIFO (Last In, First Out), depending on the nature of the products. Well-organized storage facilitates quicker retrieval and restocking, which enhances overall operational efficiency.
5. Use Forecasting To Order Inventory
Implement inventory forecasting to predict the quantity of stock needed to meet future customer demand without overstocking. Use historical sales data, market trends, and seasonal fluctuations to make informed predictions.
Accurate forecasting helps in maintaining optimal inventory levels, reducing holding costs, and minimizing stockouts.
6. Set Up Inventory Receiving Procedures
Establish standardized procedures for receiving inventory to ensure accuracy and efficiency. This should include steps for inspecting shipments, verifying quantities and quality, and updating inventory records.
Effective receiving procedures prevent discrepancies between physical stock and inventory records, which are crucial for maintaining inventory accuracy.
7. Get Rid of Unneeded Stock
Identify and eliminate obsolete, damaged, or slow-moving items that tie up capital and storage space. Options include discounting these items, selling them in bulk to liquidators, or donating them for a tax write-off.
Regularly clearing out unneeded stock helps optimize storage space and reduces maintenance costs.
8. Keep Track of Inventory Levels
Regularly review and adjust your inventory levels based on current sales trends and forecasts. Set up reorder points for each item in your inventory to automate the ordering process. Maintaining proper inventory levels ensures that you meet customer demands efficiently without overstocking.
By implementing these eight steps, you can achieve a streamlined inventory management system that not only saves time and costs but also enhances customer satisfaction through better product availability and service.
FAQ
What’s the difference between managing inventory and asset tracking?
Managing inventory involves overseeing the stock of goods for sale, focusing on optimizing quantities, order timing, and storage to meet demand efficiently.
Asset tracking, on the other hand, involves monitoring and maintaining a company’s fixed assets, such as equipment and machinery, to ensure their effective use and upkeep over time.
While inventory management is about controlling consumable products, asset tracking focuses on long-term assets critical for operational capacity and productivity.
What is the 80/20 rule for inventory?
The 80/20 rule for inventory, also known as the Pareto Principle, states that about 80% of a company’s sales typically come from 20% of its stock items.
This rule is used in inventory management to prioritize the storage, handling, and replenishment of the most profitable or fastest-moving items, ensuring that resources are focused on the products that generate the most revenue.
By identifying and focusing on these key items, your business can optimize its inventory efficiency and overall profitability.
What are the 3 most important inventory control techniques?
The three most important inventory control techniques are:
- Just-in-Time (JIT) Inventory: This technique minimizes inventory levels by ordering and receiving goods only as they are needed in the production process, reducing holding costs and the risk of excess stock.
- Economic Order Quantity (EOQ): EOQ is a formula used to determine the optimal order quantity that minimizes the total costs of inventory management, including ordering and holding costs. This method helps in maintaining an efficient balance between these costs.
- ABC Analysis: This method divides inventory into three categories (A, B, and C) based on the items’ value and turnover rate. Category A contains the most valuable items with the highest turnover, requiring the most attention and rigorous management, while Category C has the least valuable items. This prioritization helps businesses allocate resources and focus on managing the most critical stock items efficiently.
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