What is Inventory Management?
Inventory management can be defined as an essential management and operation process that involves listing, purchasing, and stocking the ingredients or resources needed to produce a product in adequate quantities. It often turns out to be a tricky task because companies may sometimes end up with insufficient inventory, which then hampers their production process. On the other hand, some organisations may incorrectly compute their inventory requirements and thus build up an excessive stock of ingredients with the ‘just in case’ notion that the extra resources may somehow be required to cater to sudden surges in demand or if some of the existing inventory gets spoiled. However, this is not always beneficial because the company ties up cash by holding on to extra inventory. The extra inventory also needs additional storage space, and if they get damaged, then the company would incur a wasteful expense. Therefore, firms mostly in the manufacturing and retail sector need to be very conscious of their inventory management strategies.
Tips for Effective Inventory Management
- Evaluating your inventory requirements and future forecasts: Before ordering a set of inventory, it is vital to prioritise the materials that will be imperative to run the production process or the retail stores. For example, when ordering for a new stock of ketchup, supermarkets should study each ketchup brands’ sales figures and then prioritise ordering the brand that generated the most revenue. In the case of a manufacturer, ordering the raw materials that forms the foundation of the final product must be prioritised. Once the minimum required quantities for each raw material or inventory has been determined, companies can then consider possible concerns such as expiry dates, spoilage, storage space, and potential accidents that can influence the quantity of inventory held by the business.
- Use inventory management software and use IT systems: Using inventory management software can enable managers and supervisors to track the inflow and outflow of inventory, current stock levels, and also record the material or products that have been sold more than the others. This way firms can get rid of unnecessary stocks of goods and purchase the ones that are highly demanded. For instance, supermarkets such as Walmart have their inventory levels connected to the till counter. Every time a product is purchased, the till records it and information is transmitted to computers that display the existing stock level of each product. Following a purchase, the quantity of a particular good/brand purchased is deducted from the computer’s records. Once the stock level reaches a particular point, an alarm is set to indicate that new stocks now need to be ordered. This saves costs, time, and prevents firms from ordering inaccurate quantities of inventory.
- Apply the 80/20 rule to inventory management: According to this rule, 80% of the revenue generated by a firm is facilitated by 20% of the products maintained in its inventory. This is largely applicable for retailers such as Zara, Walmart, and even Amazon. Therefore, it would be sensible for these retailers to prioritise stocking up the products that make up 20% of the inventory. Nonetheless, for this decision to be successful, firms need to carefully study their sales figures and determine the most popular and lucrative products.
- Develop healthy relationships with your suppliers and have more than one supplier: Small businesses, and in fact businesses of every size tend to procure their inventory from suppliers. Poor relationship with these suppliers can lead to unprecedented delays, or the delivery of poor quality products. This can hinder production processes, and curb companies from sating the customers’ demands in a timely fashion. Consequently, cash inflows can be disturbed, affecting overall efficiency, and consumers can move to competitors. Therefore, developing warm relationships, and having contracts with more than one supplier can help reduce reliance upon one supplier.
Conclusion
Inventory management is indeed one of the most essential operations management activities because if the right amount and quality of inventory is unavailable, then the business will not be able to make any form of sales. Effective inventory management can save costs, time, and allow for informed decision making. While the inventory management strategies employed are likely to differ on the basis of a company’s customers, products/services, and industry, prioritising the idea of proper inventory management is extremely vital.
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