What is Inventory Management and How Does It Work?

1. What is inventory management?

Inventory, often interchanged with stock, is defined as the goods or materials a business plans to sell to customers for profit. As such, inventory needs to be tracked for optimal business performance. Inventory management is defined as the process in which businesses track their current inventory, identify what stock to order and how much, and ensure there is enough inventory to match customer demand. This includes managing raw materials, components and finished products as well as storage and processing.

In this article, we’ll explore what inventory management is, why it’s important, and how it works. We’ll also discuss common inventory management methods that you can use to optimise your inventory management processes and the benefits you can gain from it.

2. Why is inventory management important?

Inventory is among one of the most important assets for a business. Effective inventory management enables businesses to manage and balance their incoming and outgoing stock for optimal efficiency.

Without proper inventory management, you can be overstocked or understocked. An understocked inventory means you don’t have the right products to match customer demand, leading to lost sales and unhappy customers.

However, overstocking results in money being tied up in inventory, limiting cash flow and eating into profit margins. This type of inventory is called “dead stock.” Businesses also have to invest in storage and insurance, risking spoilage, damage and theft.

Hence, inventory management is crucial to avoid stockouts and overstocking, and being cost efficient. Keeping the right balance can be further aided with accurate reporting and data analytics.

3. What is an inventory management system?

An inventory management system is a centralised software tool that is used to track and manage your inventory of goods. Typically using a combination of barcodes, RFID tags, or other tracking technologies, the system can monitor inventory levels, manage inventory data, automate manual inventory management tasks, and provide real-time updates on inventory levels and demand patterns.

Inventory management systems can be used by businesses of all sizes and in all industries, from small retailers to large manufacturers. To ensure that the system matches your business needs, it can be tailored with specific features like customisable reporting, forecasting, and demand planning.

4. What are the types of inventory management?

There are three types of inventory management systems that can help you track stock. Which one you choose is up to the technology you prefer to use and your business operations.

• Periodic inventory management

The periodic inventory system is a technique for valuing inventory for financial reporting needs that involves physically counting the inventory at predetermined times. With this accounting technique, the cost of goods sold (COGS) is calculated by taking inventory at the beginning of a period, adding new inventory purchases throughout the period, and subtracting ending inventory.

• Barcode inventory management

Barcode inventory management works by assigning a number to every product and associating data to the number. This data includes supplier, product dimensions, weight, stock amount and other relevant information.

• RFID inventory management

RFID (radio frequency identification) wirelessly transmits the product’s identity in the form of a distinct serial number. This offers comprehensive product information and allows easier tracking of the products.

5. Common inventory management methods

Various inventory management methods have been developed to streamline the process and improve efficiency. Depending on your type of business and the products you deal with, your method may differ. There are four common methods: just-in-time (JIT) management, materials requirement planning (MRP), economic order quantity (EOQ), and days sales of inventory (DSI).

• Just-in-Time Management (JIT)

By only producing goods as needed, just-in-time (JIT) management, a popular inventory management technique, aims to reduce inventory holding costs. Since this method depends on the prompt delivery of raw materials and components to the production line, suppliers and manufacturers must work closely together. JIT management helps you minimise storage costs, boost production effectiveness, and enhance customer satisfaction by lowering inventory levels and production lead times.

• Materials Requirement Planning (MRP)

Materials requirement planning (MRP) is a thorough inventory management method that enables you to plan and control their production schedules. This method uses computerised systems to analyse sales forecasts, production plans, and inventory levels to optimise the amount of raw materials and components needed for production. MRP helps streamline production schedules, reduce inventory levels, and ensure timely delivery of finished goods to customers.

• Economic Order Quantity (EOQ)

Economic order quantity (EOQ) is a basic inventory management method that helps you determine the optimal quantity of inventory to order at a given time. EOQ takes into account the cost of ordering, the cost of holding inventory, and the demand for the product. By calculating the minimum cost of ordering and holding inventory, you can determine the most cost-effective order quantity that meets their production needs.

• Days Sales of Inventory (DSI)

Days sales of inventory (DSI) is a measure of the average number of days it takes for a business to sell its inventory. DSI is calculated by dividing the inventory on hand by the average daily cost of goods sold. This method helps you identify slow-moving inventory and optimise their production schedules accordingly. By reducing DSI, you can minimise inventory holding costs, improve cash flow, and increase profitability.

6. The benefits of inventory management

Effective inventory management is critical for businesses of all sizes, as it helps optimise costs, improve efficiency, and increase profitability. But how can it really benefit you and help you succeed?

• Optimise inventory levels

With effective inventory management, you can optimise your inventory levels by ensuring that you have the right amount of inventory on hand at all times. Overstocking can lead to increased storage costs and risk of obsolescence, while understocking can result in stockouts, missed sales, and dissatisfied customers. By monitoring inventory levels and demand patterns, you can optimise your inventory to meet customer demands while minimising costs.

• Improve cash flow

When you reduce inventory levels and increase inventory turnover, you can improve your cash flow. This occurs because you are eliminating unnecessary inventory holding costs such as storage, handling, insurance, and other related costs.

• Increase efficiency

Being efficient with your time and resources is essential. To achieve this, you can use inventory management to optimise production schedules, reduce lead times, and improve customer service. By ensuring that the right inventory is available at the right time, you can reduce production delays, minimise stockouts, and improve order fulfilment rates.

• Improve customer satisfaction

Making sure your customers are happy is one of the most important things to focus on as a business. And that includes having the right products stocked up when customers need them. With proper inventory management and monitoring demand patterns, you can reduce stockouts and backorders, improve customer satisfaction and satisfy demand.

• Identify slow-moving inventory

Inventory turnover is key in not having outdated and superfluous stock. In this case, inventory management can help you identify slow-moving inventory that is not selling as quickly as expected. Slow-moving inventory ties up valuable resources and can lead to increased inventory holding costs. By identifying slow-moving inventory, you can take steps to reduce inventory levels and avoid future overstocking.

• Increase profitability

With effective inventory management, you can reduce costs, improve cash flow, increase inventory turnover and thus, improve your bottom line. These benefits can lead to better decision making and the implementation of best practices, allowing increased profitability.

As such, inventory management can help you achieve all of these benefits such as optimised inventory levels, increased efficiency, improved customer satisfaction, and increased profitability. Thereafter, businesses can achieve long-term success and thrive in a competitive business environment.

Conclusion

So there you have it! Inventory management may not be the most glamorous topic, but it’s a critical process that can make or break a business. So, whether you’re a small business owner or the CEO of a multinational corporation, inventory management is something you can’t afford to ignore. 

Effective inventory management involves keeping track of inventory levels, monitoring demand patterns, and optimising production schedules to ensure that you’ve got the right products in stock when your customers need them. Reap your benefits, save time, reduce errors, and streamline your inventory levels like a pro with an inventory management system.

EPOS

If you’re in need of a robust inventory management system in Singapore, you’re in the right place. For businesses seeking an ultra-seamless POS that provides precise control over your inventory, EPOS is one of Singapore’s leading POS system vendors. Use powerful features designed to help your business thrive by improving efficiency, reducing costs and increasing profitability. Get to know our system by signing up for a free, non-obligatory demo!

• Written by Adrija Chakravarti