What is Inventory Management? – Importance, Types And Techniques

Have you ever heard the phrase, “have all your ducks in a row”? Inventory management is about having all your ducks in a row if you want to run an efficient and profitable business. In this article let us deep dive into inventory management, its advantages and how it can help your business out.

Inventory management is an integral part of every business, be it a physical store or an online store or both.

We assume that an order cycle starts when a customer places an order, but the fact is; the cycle starts with you as a business owner analysing the stocks of your products and putting them up on the catalogue.

The customer places an order from the catalogue. You accept the order once the payment gets through, pick the product from the storage, pack it and ship it out to the customer.

Once the customer receives the product and is happy with it, the order cycle is complete from the customer’s POV. you would have to update the stock of the product before you can consider the order cycle as complete.

So, you get a basic view of how your business starts and ends with analysing and updating the stocks of your products/ goods. That is inventory management for you in the simplest sense.

Take an eCommerce giant like Amazon for example. Amazon receives approximately 66,000 orders per hour.

Even so, there is very little to no friction when it comes to the packaging and shipping out of the orders. If a product is ‘out of stock’, it gets updated immediately on the catalogue and people cannot place orders for such products until it is back on stock.

This results from an impeccable inventory management system that helps them handle the products and their stock, and bulk manage them as required.

Now, if you think that you do not need an inventory management system because you are a small business, you cannot be more wrong.

As a small business, you have a lot more to lose if there is some mismanagement in the order cycle. Even one unhappy customer can cause a huge loss in terms of sales and reputation.

There are so many more advantages to inventory management, which we will discuss further in this article. Before that, let’s look at what inventory management is.

What is inventory management?

Inventory management is an important part of the supply chain that is all about having a complete controlled data and tracking of the inventory, moving in and out of the storage.

Inventory refers to all the physical assets held by the business with an intention of turning it into a profit. These assets can be raw materials to finished goods and everything in between.

Your stocks or your inventory are one of the most fluid assets of your business. Their numbers are ever changing with every purchase and every sale made.

Inventory management works on three levels:

Closely managing the inventory at every level will help reduce a lot of costs involved with overstocking or under-stocking the inventory.

What is the Importance of Inventory Management?

Inventory management is the first step towards running your business smoothly and with fewest hurdles. If your inventory management is on point, your order management will be like clockwork.

Here is a list of advantages of inventory management:

Now let us discuss all the different types of inventory you will have to deal with in a business.

Some of these inventory types may or may not apply to your business. However, it is good to know about it for future reference.

Various types of inventories involved in a business

Most people assume that a stock or an inventory is specific to only finished goods that are ready to sell. However, every business has a different set of inventories to manage.

If you are a small business owner that sources finished goods from a supplier and sells them through their store, then your inventory is majorly dominated by finished goods that are ready to be shipped. But what about the packaging and shipping material?

You do not want to delay shipping out an order just because you do not have the necessary packing material in stock!

So these are the types of inventory that you may have to deal with as a business owner.

1. Raw materials

You have to organize and manage raw materials for your products, too. Especially if you own a business of handmade products.

2. Work-in-progress inventory

This kind of inventory refers to the semi-finished goods that are waiting to be turned into finished goods.

3. Finished goods

It is a straightforward concept. Managing a stock of finished goods that are ready to be sold.

Once an order is placed for a product, you pick the product from your inventory, pack it and ship it out to the customer.

4. Packing materials

Like I mentioned before, mismatch in the stock of packaging material can also cause a delay in order cycle.

Packaging materials include cardboard box, bubble wrap, courier bags, fillers, adhesive tapes, brand labels and more.

5. Buffer or safety stock

Usually, we stock up on things only when we are about to run out. However, buffer stock is a stock of products that are bought and stored in advance based on forecasting a demand trend.

6. Repair, maintenance & operations

This kind of inventory is very useful during the process of manufacturing, but is not a part of the finished product in any way.

Some of these products are cleaning supplies, safety tools, repair tools, extra batteries, machinery and computer systems, etc.

Did you know that there were these many kinds of inventory that businesses have to deal with?

Well, neither did I, until today!

What are some of the inventory management techniques?

Whether you are managing your inventory on your own or you have hired someone to do it for you or you have invested in an inventory management system, it will only work out if you use the relevant technique.

That said, there are a few inventory management techniques that you can choose from. You can choose the technique that works best for your business type.

The ABC analysis

In this technique, the inventory is basically categorised into 3 groups based on the impact they have on the overall cost of the inventory.

Group A would comprise your most valuable stocks. Group B is the one that is between the most valuable and least valuable, and group C is your least valuable inventory.

But this is the most common way of categorizing your inventory in the ABC analysis. They can be categorized based on many other factors, like demand, risk, etc.

Just in time inventory

This is the low-cost inventory management technique where the raw materials are ordered to be delivered on schedule with the production timings.

When there is a demand for a product and the production of the said product is in a way, only then the raw materials are ordered. Hence, these raw materials are not stored in the warehouse for long!

This technique also ensures that there are no dead stocks in the warehouse that are never used or sold to customers.

Safety stock

Safety stock technique is a way to make up for unforeseen changes in the demands of a product. This way, you will never run out of stock for the said product.

During the start of the lockdown, masks and sanitizers went out of stock in almost every store within days.

However, some businesses that had predicted this demand ensured to have a buffer stock of masks and sanitizers, which paid off for the business and its customers.

FIFO/LIFO

First In, First Out, or FIFO is a technique where the inventory that is procured first is sold first. This works best for perishable items that come with an expiration date.

Last In, First Out, or LIFO, is a technique where the inventory that is procured at the end is the first to get disposed of. This works best for non-perishable items like clothing, decor, jewellery, etc.

Perpetual inventory management

This is the kind of inventory management that is perpetual, as the name suggests.

In this technique, the stocks are counted and categorised as soon as they arrive.

The stocks are also checked and updated at the end of every order cycle. So this inventory technique is all about staying on top of the numbers of your inventory.

Six sigma and lean six sigma

Six sigma is a kind of an educational tool that teaches businesses about supply chain management and everything involved in it, including inventory management.

Their teaching focuses on improving the performance and increasing profits for business and also reducing costs of stocking excess inventory.

Lean six sigma is used to enhance the teachings of six sigma that focuses on optimizing the production workflow in particular.

Material requirements planning

Material requirements planning or MRP is one of the oldest computer based inventory management techniques.

This technique works with a single goal and that is to have the right products ready in the right place at the right time.

MRP improves the productivity of business by ensuring that the right components are available when needed, which reduces the inventory levels and optimizes inventory management.

Implementing an inventory management technique ensures that you have a better visibility of your inventory and complete order cycles with ease. It should reduce all the frictions involved in pick, pack and ship of a product.

If you have achieved this, then your inventory management is at top-notch!

What are the good practices to follow in inventory management?

Depending on the size and scale of your business, inventory management can be really simple or very complicated. But whatever may be the case, these are some of the good practices that make inventory management easier.

At the end of the day, inventory management is a part of your business, and not your entire business. Its purpose is to make running your business easy and efficient.

But if you find it confusing or time-consuming, you can always invest in a good inventory management system or software.

Summary

Inventory is the biggest asset for any business, waiting to be converted into profit.

However, if you cannot make the most of your inventory or in-turn incurring losses because of mis-management of your inventory, it is high time that you made some changes.

In this article, we have discussed what is an inventory, what is inventory management and why it is important to businesses.

We have also dived into the different types of inventory that businesses have to deal with on a regular basis.

Following which, we looked at some of the inventory management techniques that have been used in the business world for years.

These techniques vary from business to business, but once you find the technique that works best for your business, inventory management becomes like clockwork.

Last but not least, I have listed some of the best practices to follow in inventory management. These practices are common for every kind of business.