define inventory management essay

Inventory Management: Definitions and Concepts Research Paper

Introduction.

Inventory management is an important aspect employed by manufacturing companies to control the flow of raw materials and goods. Inventory management increases organizational efficiency by reducing costs associated with obsolescence, pilferage, spoilage and storage. It is important to note that poor inventory management often results in business closure. For example, production process may close down if critical raw materials run out of stock. What is more, poor inventory management may result in the loss of customers. 1 This happens when the retailer fails to provide adequate stock of goods on time thereby leaving potential shoppers frustrated.

There is no doubt that e-commerce plays an integral role with respect to the inventory management of a variety of goods. The internet has turned out to be a critical channel in the supply chain for many manufacturers who use online channels to distribute products directly to consumers. However, e-commerce is characterized by a number of problems which are different from those encountered in the traditional retail outlet (i.e. Bricks-and mortar). It is important to mention that the online channel and the traditional channel are different in terms of access to information relating to demand and supply, the level of market segmentation, the expected quality of the products, logistical needs, cost structure, and the types of consumers. 2

Definitions & Concepts

As noted earlier, inventory management is important in any business organization. There are various definitions of inventory management. For example, Kotler notes:

Inventory management refers to all activities involved in developing the inventory levels of raw materials, semi-finished materials (work-in-progress) and finished goods so that adequate supplies are available and the costs of over or under stock are low… 3

In other words, inventory management not only deal with the efficient management of production inputs but also it also ensures that a proper supply chain mechanism is put in place to ensure that order requests are fulfilled on time and in an efficient manner. Other authors have suggested that inventory management entails preserving a sustainable amount of a particular asset (human resources and material inputs) in order to improve the competitiveness and profitability of a firm.

According to Drury, inventory management refers to the quantity of goods/products that an organization preserves to meet the unexpected rise in demand. 4 A similar sentiment is echoed by Schroeder who describes the influential role of inventory management in supporting a number of business activities such as finance, accounting and marketing. The author suggests that manufacturing firms undertake inventory management for three main purposes. These are: speculative purpose, precautionary purpose and transaction purpose. 5 In many cases, a manufacturing firm may preserve stock in order to achieve sales and production targets (transaction purposes). What is more, an organization may maintain a certain amount of inventory (precautionary purpose) to meet unanticipated requirements relating to sales and production. Finally, a firm may opt to procure additional manufacturing inputs if it expects to reap substantial returns (speculative purpose). 6

As a matter of fact, inventory management entails two important aspects. These are: scheduling and control. Under the scheduling aspect, the manufacturing firm must determine the amount of raw materials it requires from the suppliers and the frequency of the orders to ensure that production processes run smoothly. Under the control aspect (also known as stock control), the firm undertakes continuous/periodic evaluation of inventory levels and uses this information to make appropriate decisions. 7

Many organizations are currently using several economic models to compute their optimum stock levels. For example, economic order quantity (EOQ) is one of the models that manufacturing firms use to mitigate flaws stemming from the conventional methods of stock assessment and control. As mentioned previously, poor inventory management can result in detrimental outcomes. For instance, a manufacturing firm which disregards inventory management is susceptible to production holdups and consequently cannot sustain the minimum stock levels it needs to maximize returns. What is more, poor inventory management may result in irreversible loss for manufacturing firms that carry out their operations in industries characterized by high competitions. 8

Inventory Management and E-Commerce

The advent of the internet has dramatically altered the manner in which the social and economic activities are carried out at both individual and organizational levels. According to conservative estimates, 32 percent of internet users procure goods via online outlets. What is more, approximately 43 percents of internet users in the United States pay their bills via internet. The emergence of the internet has also changed the manner in which business organizations carry out their operations via e-commerce. 9 Supply chain management entails collaboration among retailers, distributors, manufacturers and dealers. What is more, an efficient inventory management system ensures that consumers receive goods and services in a timely manner. Thus many manufacturing firms have adopted lower inventory processes in order to reduce total costs. It is against this backdrop that some manufacturing firms have embraced e-commerce to improve their supply chains and reduce inventory costs. 10

Sameh Elnikety and Elrich Nahum assert that e-commerce is an important technological advancement that allows both businesses and shoppers to sell and procure goods on the internet in a comfortable manner. The main objective of many online businesses is to achieve a permanent presence on the internet in order to meet customer requirement and increase profitability. However, there are two major challenges that businesses encounter when they introduce e-commerce online sites in their supply chain management. The first problem is known as site overload. This happens when the number of requests for a particular product provisionally surpasses the processing capacity of the web site. As a result, the website may stop working. The second problem is known as responsiveness. Some websites take a long time to respond to customer requests. This is a major problem because it discourages potential shoppers from using the website thereby leading to revenue loss. 11

There are three components in an e-commerce website. These are: Front-end component, application component, and back-end component. The first component (front-end web server) typically deals with the inert section of the workload (i.e. HTML pages and images). The second component (application server) employs a number of methods (i.e. Java Servlets and PHP scripts) to issue several queries and modify the returned results of the query in an HTM format. These results are relayed back to the first component (front-end server) and the cumulative content is finally dispatched to the client via the web server. The third component (admission server) prevents the website from crashing as a result of transitory overload. To be precise, the admission server decreases the volume of work when the site experiences an overload. In addition, the admission server classifies potential shopper in the order of priority so that customers can be served immediately in the event of an overload. 12

Leonard and Cronan assert that business organizations that have embraced e-commerce incur lower inventory costs than their non-internet counterparts given that electronic supply chains amalgamate stakeholders in a well-organized manner. 13 For instance, it is easier to sell some goods (i.e. Electronic products, TVs, CDs, and magazines) via the internet than using the traditional channel. Conversely, it is difficult to sell other goods (i.e. Shoes and clothes) via the internet since some shoppers have a habit of physically touching these types of goods before procuring them. Thus, e-commerce is an important tool in inventory management because it can help an organization to realize flawless and synchronized supply chain integration. What is more, business organizations can achieve synchronized efficiency if they adopt a multi-layered e-commerce system with swift decision-making capabilities. In addition, e-commerce platforms with capabilities to provide first-rate services can enable businesses to realize the limitless connectivity to the worldwide supply chain system. 14

Emerging online merchants have struggled in the current internet era since they rely on other organizations to handle their inventory processes. As a result, some brick and mortar retailers have come to appreciate the importance of setting up an online presence to manage their inventories and supply chains. Supply chain management is an important aspect in any business organization. For example, it accounts for over 70 percent of operating outlays. What is more, inventory management is an important aspect in any business because it improves the inventory turnover of a business. It is important to mention that business organizations can reap benefits that emanate from e-commerce if they adopt flexible systems that are responsive to consumer requirements as well as inventory uncertainties. 15

A number of studies have been carried out to explore the relevance of e-commerce in inventory management and supply chain management. For example, one of the studies carried out in the early 1990s, revealed that prices for goods such as CDs and books were approximately 12.5 percent cheaper in electronic channels than in the traditional outlets. 16 This means that e-commerce is increasingly growing popular as many businesses employ electronic outlets to manage their inventories as well as fulfil order requests. However, other studies have highlighted the challenges that businesses encounter as they adopt e-commerce in inventory management. 17

Challenges of Inventory Management in E-commerce

Inventory management is a complex phenomenon that entails a number of challenges. To be specific, online shoppers may get impatient if goods and services are not delivered on time. What is more, businesses must deal with problems that emanate from variations in demand. For instance, reverse logistics is a major issue that must be addressed by online retailers. Reserve logistics is defined as a procedure whereby the retailer, supplier, or manufacture systematically handles returned goods for possible disposal, recycling, or reuse. Snyder Rell and Hamdan Basel state that ‘retailers and e-retailers with brick and mortar or click and mortar operations have a tremendous advantage over e-retailers that use third party distribution methods… (Drop shipping)… in reverse logistics…’ 18 In other words, product returns are more prevalent among internet retailers compared to brick and mortar retailers. It is against this backdrop that manufacturing firms must manage reverse logistics in an efficient manner to reduce product returns and maintain a competitive edge in the market.

Consumer Satisfaction

Internet shoppers expect goods and services to be delivered on time and in a consistent manner. Therefore, business organizations must adopt efficient inventory management systems, automatic material flow systems, order management systems, enterprise resource planning systems and web management system in order to meet consumer requirements on time. What is more, an efficient transportation management mechanism must be adopted to handle the shipping process efficiently. There are a number of distribution channels that business organizations can employ to sell their goods. In terms of e-commerce, the type of distribution channels a firm employs to sell products is determined by the inventory management system used. For instance, online businesses can adopt inventory ownership and drop shipping strategies to plan their inventory. Businesses can also use a hybrid strategy (which combines the first two strategies mentioned above) to manage their inventories. 19

Drop-shipping & Inventory Ownership Strategies

Drop-shipping is an outsourcing strategy in which online retailers outsource their inventory management processes to third parties in order to pursue other business activities. On the other hand, inventory ownership is a traditional inventory strategy in which business enterprises use their own warehouses to store goods and sell them to consumers at the appropriate time. Drop-shipping is an important inventory strategy in supply chain management because it allows businesses to keep inventories at a single centralized place to be distributed to retailers at the same time. There are various benefits a firm can get by adopting drop-shipping strategy. For instance, a firm can expand its market reach by supplying goods to multiple retailers. What is more, the strategy can assist manufacturing firms to increase their profit margins by making appropriate inventory decisions. 20

As noted earlier, drop-shipping is an important inventory strategy that helps wholesalers to supply their goods to different retailers at the same time. However, retailers pursue their own objectives in a selfish manner. For example, statistics suggest that approximately 28 percent of online businesses are currently using drop-shipping as their principal method of the order fulfilment. However, it deserves merit to mention that both strategies have their own advantages and disadvantages. Although businesses typically pursue their own objectives, they collaborate on a number of issues. The collaboration among different businesses lends credence to transshipment, a mutual relationship in which wholesalers and vendors help each other to ensure there are adequate inventories to meet rising demand of products in any locality. What is more, some retailers and wholesalers have adopted a hybrid system to meet customer requirements. Businesses that have adopted hybrid system usually serve consumers from their own depots. On the contrary, they employ drop-shipping strategy when the demand for a particular product surpasses supply. 21

It is important to note that older firms that sell high-margin goods tend to use drop-shipping in their supply chain management. In addition, these businesses have a limited range of product variety. Alternatively, the click and mortar strategy is commonly employed by younger firms which sell a wide range of goods characterized by high levels of demand uncertainty. As noted earlier, inventory ownership and drop-shipping strategies are useful in a number of ways. For example, drop-shipping allows online businesses to provide a wide range of goods to potential shoppers. However, businesses that adopt this strategy are more susceptible to demand uncertainty compared to brick-and-mortar retailers. 22

What is more, large and established enterprises have stable financial resources which enable them to keep their own inventories. On the contrary, small firms have limited financial resources which limit their ability to keep their own inventories. For example, small enterprises cannot afford costly e-commerce systems which must be amalgamated with front-end systems to facilitate efficient management of online inventories. What is more, product size determines the inventory strategy that a firm adopts. This is because high inventory costs are directly associated with bulky products. In addition, bulky products require large storage space and substantial financial resources to store and distribute. Thus, drop-shipping strategy is more suitable than the traditional approach for those businesses that deal with bulky goods. 23

Dual-Echelon Dual-Channel Inventory System

Under the dual-echelon dual inventory system, a producer employs both an online-enabled platform and a conventional retail depot to supply goods. The retailer normally uses inventories from the lower echelon to fulfil order requests made by shoppers at the retail depots. On the other hand, inventories from the upper level are used to meet order requests of the customers via the online-enabled platform. This system is commonly described as a multi-level multi-channelled supply system. Many enterprises have embraced the internet as an online channel for selling products. It is worth mentioning that the emergence of the internet has enabled many businesses to distribute a wide range of products using different outlets. For instance, one recent study revealed that approximately 41 percent of top merchants from different sectors (i.e. Apparel, sporting products, and electronics) use the internet to sell products directly to shoppers. 24 In other words, many businesses are now using both the conventional retail outlets and online-enabled sales platforms to realize a flexible supply chain system.

There are several managerial challenges that a firm may encounter if it opts to implement a dual-channel supply system. For instance, the demand structure of a particular product may be altered when a firm combines the conventional retail supply chain with the online-based supply chain. Therefore, business organizations may be compelled to restructure their optimal inventory distributions within the dual-echelon supply settings. The elementary mission, with regard to the challenges posed by the dual-echelon supply system, is to balance the volume of inventories between the upper level and the lower level. 25

Kevin Chiang and George Monahan note, ‘while multi-echelon inventory control policies have been extensively studied, the theoretical basis for multi-echelon multi-channel inventory problem has not yet been well developed…’ 26 For example, the multi-level inventory models presuppose that the distribution chain system is made up of different locations whereby the relationship between supply and demand produces a pecking order. In other words, each location collects order requests from numerous direct descendants who share the same level. Nonetheless, a limited number of studies have been carried out to explore this phenomenon.

Recent trends in the business environment suggest that the efficient management of inventories is hampered by challenges emanating from product complexities, product range and customization. The demand for products such as clothing merchandise, spare parts, electronics, appliances, and furniture is typically low. What is more, these products attract huge inventory costs, especially if they are kept in large quantities to meet consumer requirements. Consequently, the supply chain is likely to experience immense pressure that emanates from sales and inventory costs associated with these types of merchandise. Several studies have demonstrated the manner in which an enterprise can use order-for-order replenishment strategies to manage goods that are characterized by low levels of demand. In addition, Kevin Chiang and George Monahan suggest that a firm can dramatically decrease the overall inventory costs if it implements order-for-order strategies in the multi-level two-channel inventory system. In other words, a firm must use both the traditional retail store and the online-enabled direct platform to reduce costs associated with the various types of products identified above. 27

Hybrid Strategy

As noted in the previous section, a hybrid strategy entails a combination of the inventory ownership and drop shipping strategy. A number of enterprises prefer the hybrid technique it decreases the risk that emanates from keeping inventory at a different location. With regard to inventory management, the hybrid system compels the enterprise to maintain lower inventory levels because the enterprise uses other distribution means other than drop-shipping. In addition, the hybrid technique allows the wholesaler and merchant to keep lower inventory levels compared to when they employ either the conventional channel or drop-shipping strategy. 28 E-commerce allows the wholesaler to augment the number of retailers with the supply chain because the channel allows the wholesaler to carry out multiple transactions relating to supply management at the same time.

However, there are a number of factors that influence the choice of strategy for inventory management. Transportation cost is one of the factors. For example, when the cost of transportation increases, the retailer will opt to use both the hybrid strategy and drop-shipping strategy. As a result, the wholesaler stands to gain from reduced costs of transportation in view of the fact that retailers are likely to use the conventional channel to procure large quantities of inventories. What is more, all parties within the supply chain can reap additional benefits when more retailers are included within the drop-shipping outlet. 29

However, the hybrid channel presents a different scenario because the profit margin reduces as more retailers are included in the supply chain. Therefore, online businesses prefer to use hybrid and drop-shipping techniques when the number of retailers increases within the supply chain. Nonetheless, the hybrid system has a number of limitations. For example, some business may discard the hybrid system on the basis of the following scenarios: when the traditional approach is favoured by the structure of the transportation cost, and when the profit margin of the wholesaler is less than that of the retailer. 30 To put it another way, the manufacturers will increase the stock levels if they anticipate an increase in profitability. Equally, the retailer will increase inventory levels if the profit margin increases.

Many scholars have demonstrated the various advantages that emanate from having lower inventories. Nonetheless, there are several risks associated with stockouts. For example, Stockouts increases back-end outlays and consumer discontent. In addition, it reduces sales volume and consequently the competitiveness of an enterprise. It is against this backdrop that businesses must make swift macro-economic decisions to deal with this problem. For instance, they can stabilize the prices of products, resort to stick-out compensation (i.e. Decreasing prices of products that are out of supply). It is worth mentioning that some businesses have augmented their competitiveness via stockout compensation since this strategy increases the demand for goods that run out of supply. What is more, some enterprises deliberately initiated stock-out strategies in order to augment profits, reduce outlays and improve product demand. However, stock-out compensation strategies have come under intense criticism because they destabilize the supply chain system. In addition, stock-outs result in higher backorders and reduce sales volume. 31

Inventory management is an important strategy used by manufacturing companies to control the flow of raw materials and goods. Several scholars have attempted to define inventory management. According to Drury, inventory management refers to the quantity of goods/products that an organization preserves to meet the unexpected rise in demand. A similar sentiment is echoed by Schroeder who describes the influential role of inventory management in supporting a number of business activities such as finance, accounting and marketing. The author suggests that manufacturing firms undertake inventory management for three main purposes. These are: speculative purpose, precautionary purpose and transaction purpose.

Inventory management increases organizational efficiency by reducing costs associated with obsolescence, pilferage, spoilage and storage. It is important to note that poor inventory management can result in business closure. This paper has also demonstrated the relevance of e-commerce in inventory management and compared it to other traditional approaches. For instance, e-commerce has enabled many internet businesses to fulfil consumer requirements in an efficient manner. The various challenges facing the adoption of e-commerce in inventory management have also been discussed. For instance, site overload is one of the major problems associated with e-commerce. This happens when the number of requests for a particular product provisionally surpasses the processing capacity of the website. This problem may render the website dysfunctional and result in revenue loss. Nonetheless, e-commerce remains an important channel with respect to inventory management.

Previous studies have shown that there is a positive correlation between consumer contentment and decreasing the price of products that are out of supply. Thus, businesses must adopt and re-evaluate their e-commerce processes and strategies given that many shoppers are currently using the internet to procure items. A majority of online businesses has previously undermined the significance of the efficient supply chain mechanism in inventory management. As noted in the preceding sections, large enterprises have strong financial bases which enable them to manage their inventories without relying on third-parties. What is more, large enterprises appear to enjoy the synergies that emanate from the ability to use different channels (such as e-commerce) to sell products. For example, enterprises that adopt click and mortar techniques are in good position to provide a wide range of products to meet consumer needs. It is important to note that the ultimate objective of many business organizations is to satisfy their customers and achieve a competitive edge in the market. It is against this background that many enterprises have adopted e-commerce to provide a wide range of products to their customers in a timely and efficient manner.

This paper has also discussed various strategies that businesses use to manage inventories. These include Drop-shipping & Inventory Ownership Strategy, Dual-Echelon Dual-Channel Inventory System, and stock-out strategy. For example, Drop-shipping is an outsourcing strategy in which online retailers outsource their inventory management processes to third parties in order to pursue other business activities. Under the dual-echelon dual inventory system, a producer employs both an online-enabled platform and a conventional retail depot to supply goods. The hybrid strategy entails a combination of the inventory ownership and drop shipping strategy to meet customer demands.

Bibliography

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Chiang, WK & GE Monahan, ‘Managing inventories in a two-echelon dual-channel supply chain’, European Journal of Operational Research, vol. 162, 2005, pp. 325-341.

Drury, C, Management and Cost Accounting, International Housan Business Press, London, 1996.

Elnikety, S & E Nahum, ‘A Method for Transparent Admission Control and Request Scheduling in E-commerce web sites’, WWW, 2004, 276-286.

Johnson, ME & S Whang, E-Business and Supply Chain Management: An Overview and Framework, Stanford, CA, Stanford University, 2002.

Kotler, P, Marketing Management, 2nd edn, Prentice Hill of India, New Delhi, 2002.

Leonard, KN & TP Cronan, ‘Website Retailing: Electronic Supply Chain Replenishment’, Journal of End-User Computing, vol. 15, 2003, pp. 45-55.

Rell, S & H Basel, ‘E-Commerce and Inventory Management’, Proceedings of ASBBS, vol. 16, no. 1, 2009, pp. 1-5.

Schroeder, RS, Operation Management: Contemporary Concepts and Cases, International Edition, USA, 2000.

1 SL Adeyemi & AO Salami, ‘Inventory Management: A Tool of Optimizing Resources in a Manufacturing Industry. A Case Study of Coca-Cola Bottling Company, Ilorin Plant’, J Soc Sci, vol. 2, no. 23, 2010, pp. 135-142.

2 ME Johnson & S Whang, E-Business and Supply Chain Management: An Overview and Framework, Stanford, CA, Stanford University, 2002.

3 P Kotler, Marketing Management, 2nd edn, Prentice Hill of India, New Delhi, 2002.

4 C Drury, Management and Cost Accounting, International Housan Business Press, London, 1996.

5 RC Schroeder, Operation Management: Contemporary Concepts and Cases, International Edition, USA, 2000.

6 Adeyemi & Salami, p. 137.

7 Adeyemi & Salami, p. 135.

8 Adeyemi & Salami, p. 136.

9 S Rell & H Basel, ‘E-Commerce and Inventory Management’, Proceedings of ASBBS, vol. 16, no. 1, 2009, pp.1-5.

11 S Elnikety & E Nahum, ‘A Method for Transparent Admission Control and Request Scheduling in E-commerce web sites’, WWW, 2004, 276-286.

12 Elnikety & Nahum, p. 277.

13 KN Leonard & TP Cronan, ‘Website Retailing: Electronic Supply Chain Replenishment’, Journal of End-User Computing, vol. 15, 2003, pp. 45-55.

14 Rell & Basel, p. 1.

15 Rell & Basel, p. 2.

16 WK Chiang & GE Monahan, ‘Managing inventories in a two-echelon dual-channel supply chain’, European Journal of Operational Research, vol. 162, 2005, pp. 325-341.

18Rell & Basel, p. 2.

19 Chiang & Monahan, p. 325.

20 Rell & Basel, p. 3.

24 Chiang & Monahan, p. 326.

26 Chiang & Monahan, p. 327.

27 Chiang & Monahan, p. 328.

28 Rell & Basel, p. 4.

29 Rell & Basel, p. 4.

31 Rell & Basel, p. 5.

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Inventory Management: Definition, Types, and Examples

Effective inventory management is the unsung hero of successful business operations, whether in the bustling retail world or in systematic manufacturing processes. 

It’s a critical component that can dictate a company’s ability to meet customer demand, manage cash flow, and maintain a competitive edge. 

According to a report by the National Retail Federation , the retail industry loses nearly $50 billion annually due to inventory shrinkage, a problem that effective inventory management can mitigate

By leveraging data and modern inventory management systems, businesses can ensure that inventory levels are optimized, excess inventory is minimized, and inventory costs are controlled. 

This foundational aspect of supply chain management affects the balance sheets and impacts customer satisfaction and business agility.

In this article, we will share inventory management definitions, explain inventory management meaning, give an inventory example, and discuss how inventory management relates to both inbound and outbound logistics.

Inventory Management Defined

Inventory management refers to ordering, storing, using, and selling a company’s inventory. This includes managing raw materials, components, finished goods, and warehousing and processing of such items. 

Automotive and healthcare industries rely on effective inventory management to streamline production processes and reduce hold-ups. Historically, inventory management was a manual process. 

Still, today it has evolved into a sophisticated inventory management system integrated with supply chain logistics, thanks to advancements in technology like Enterprise Resource Planning (ERP) systems and inventory management software. These tools provide real-time data that businesses use to efficiently forecast, plan, and execute their inventory management processes.

Advantages of Inventory Management and Supply Chain

The advantages of sound inventory management are manifold. Primarily, it allows businesses to have the right products available at the right time, which is crucial for meeting customer orders and maintaining solid sales channels. This is particularly crucial for the inbound logistics process.

Good inventory management can lead to better inventory turnover, ensuring fresh and relevant products, which is especially important in industries with rapid product lifecycles, such as fashion or technology. 

Also, effective inventory management reduces costs by decreasing the need for excess inventory and storing inventory, which can drain resources and capital if not appropriately managed.

Inventory vs. Stock Explained

While often used interchangeably, inventory and stock have subtle distinctions. 

Inventory encompasses more than just the products available for sale (stock); it includes raw materials, work-in-progress items, and all components involved in the production process. 

Understanding this nuance is vital, as it affects how businesses plan their inbound logistics, procurement and manage inventory levels across the supply chain.

Counting Inventory

Counting inventory , or taking a physical list, is a crucial task that validates the quantity and condition of items on hand. It’s a fundamental process that informs financial reporting, inventory forecasting, and supply chain planning. 

Accurate counts are essential for maintaining inventory data integrity, which impacts everything from order management to customer satisfaction. This process is critical at the end of accounting periods to ensure that reported inventory levels reflect the actual value of assets held by the company.

Types of Inventory Management Methods

Several methods help businesses optimize their handling of goods and materials.

Just-in-Time Management (JIT)

Just-in-Time Management (JIT) is a strategy where inventory is delivered only as it is needed in the production process, reducing the cost of storing inventory. Significant for industries like automotive manufacturing , JIT can lead to reduced inventory levels and associated costs, promoting an efficient supply chain.

Materials Requirement Planning (MRP)

Materials Requirement Planning (MRP) systems calculate the materials and components required to manufacture a product. This method is vital for manufacturing industries, ensuring that materials are available for production without the excess that can tie up capital.

Economic Order Quantity (EOQ)

Economic Order Quantity (EOQ) is a formula used to determine the optimal order quantity that minimizes inventory costs involving holding and ordering costs. This is significant across various industries for maintaining balance in inventory management.

Days Sales of Inventory (DSI)

Days Sales of Inventory (DSI) measures how quickly a company can turn its inventory into sales. A lower DSI indicates that a company is more efficient at selling off its stock. This metric is critical for retailers to gauge their inventory management efficiency.

Common Problems within Inventory Management

Though crucial, inventory management is fraught with challenges that can ripple through the supply chain and impact logistics operations. 

One common issue is overstocking, which ties up cash flow and can lead to excess inventory that may become obsolete or expire. Conversely, understocking risks stockouts, leading to delays in the production process and dissatisfied customers. 

Prominent Examples of Inventory Management

Inventory management plays a crucial role in industries where products have a limited shelf life, such as food and beverage or pharmaceuticals . Here, it’s pivotal to prevent spoilage and ensure compliance with safety regulations. 

In fashion retail, inventory management must be dynamic to keep up with changing trends and seasonal demand, making it essential for maintaining inventory freshness and reducing instances of dead stock.

Disadvantages of Inventory Management

Despite its many benefits, inventory management can have downsides. Holding inventory inherently involves storage costs, and stock that sits in a warehouse too long can lead to increased expenses without generating revenue. 

Moreover, complex inventory management systems can be costly to implement and maintain, requiring significant technological and training investments. These systems can sometimes lead to a dependency that may cripple operations if the system goes down or is attacked by cyber threats .

Inventory Management and Software

Inventory management software has revolutionized how companies approach their inventory processes. This technology allows for real-time tracking of goods, inventory forecasting, and more accurate demand planning. 

Inventory Management vs. Supply Chain Management

While inventory management focuses on overseeing and controlling goods within a company, supply chain management encompasses a broader scope, managing the entire flow of goods and materials from suppliers to the end customer. 

Tracking Inventory and Internal SKU Systems

Tracking inventory through internal Stock Keeping Units (SKUs) is an intricate part of inventory management. SKUs help businesses quickly categorize and locate inventory, facilitating faster inventory turnover and more precise inventory data. 

Forecasting and Controlling Inventory with Software

Modern inventory management software often includes sophisticated forecasting tools that utilize historical sales data, seasonal trends, and other variables to predict future demand. This predictive capability helps businesses maintain optimal inventory levels, reducing the risk of overstocking or stockouts. 

Types of Successful Inventory Management Techniques

A variety of inventory management techniques are employed by businesses to maintain efficiency and cost-effectiveness in managing stock levels.

These methods are tailored to match the needs of the company and the nature of the inventory it holds.

Economic and Minimum Order Quantity

Economic Order Quantity (EOQ) and Minimum Order Quantity (MOQ) are foundational concepts in inventory management. 

EOQ calculates the ideal order quantity to minimize total inventory costs, while MOQ determines the minuscule amount a supplier is willing to sell. Both are vital for optimizing inventory levels and reducing costs.

ABC Analysis

ABC Analysis categorizes inventory into three categories (A, B, and C) based on importance and volume. 

‘A’ items are high-priority with stringent control, ‘B’ are moderate, and ‘C’ have the most negligible financial impact. This prioritization is essential for efficient inventory control.

Just-In-Time Inventory

Just-In-Time (JIT) inventory management is a strategy that aligns raw-material orders with production schedules to minimize inventory costs. 

It’s crucial for businesses looking to reduce waste and increase efficiency in the production process.

Safety Stock

Safety Stock is additional inventory held to prevent stockouts caused by inaccuracies in demand forecasting or supply chain disruptions. 

It’s a critical buffer that ensures customer demand is met without delay.

First In-First Out (FIFO) vs. Last In-First Out (LIFO) Explained

FIFO and LIFO are methods to manage the flow of inventory costs. FIFO assumes the first items stocked are the first sold, reducing the chance of obsolete inventory. 

LIFO, less common, takes the last things in are the first sold, which can benefit in specific tax situations.

Reorder Triggers

Reorder triggers are pre-determined inventory levels that prompt a new purchase order. 

They are vital for maintaining stock levels and ensuring consistent supply without overstocking, playing a significant role in inventory management systems.

Batch Tracking

Batch tracking monitors the production and expiration dates of batches of inventory items. 

It’s crucial for traceability in case of recalls and managing stock with expiration dates, maintaining the integrity of the supply chain.

Consignment Inventory

Consignment inventory allows retailers to stock goods without purchasing them upfront; payment is made only after the sale. 

This method is vital for inventory management as it reduces the retailer’s capital in inventory and transfers the risk of unsold stock to the supplier.

Perpetual Inventory

A perpetual inventory system continuously tracks inventory levels, updating in real-time with every sale and restock. 

It’s essential for accurate inventory data, allowing for timely ordering and reduction of excess stock.

Dropshipping

Dropshipping is a retail fulfillment method where a store doesn’t keep products in stock but instead transfers customer orders and shipment details to the manufacturer or a wholesaler, who then ships the goods directly to the customer. 

This method is vital as it eliminates the need for managing physical inventory, significantly reducing handling and storage costs.

Lean Manufacturing

Lean manufacturing emphasizes waste reduction within the manufacturing system without sacrificing productivity. 

It’s vital for inventory management as it promotes a just-in-time approach, minimizing stock levels and reducing holding costs.

Six Sigma and Lean Six Sigma Techniques

Six Sigma and Lean Six Sigma focus on quality improvement and process efficiency. 

They are vital to inventory management by identifying and eliminating process defects, resulting in lower inventory costs and improved customer satisfaction.

Demand Inventory Forecasting

Demand inventory forecasting uses historical sales data to predict customer demand and manage inventory accordingly. 

It’s essential for preventing stockouts and overstock, making inventory management more responsive and cost-effective.

Cross-Docking

Cross-docking is a logistics procedure where products from a supplier or manufacturing plant are distributed directly to a customer or retail chain with marginal to no handling or storage time. 

It’s vital as it reduces the need for warehousing while increasing inventory turnover rates.

Bulk Shipments

Bulk shipments involve transporting large quantities of a single product, which can significantly reduce transportation costs. 

It’s vital for inventory management as it can lead to economies of scale, making larger shipments more cost-effective.

Cycle Counts

Cycle counting is an inventory auditing procedure where a small subset of inventory in a specific location is counted on a particular day. It contrasts with traditional physical inventory counting, where operations are halted to count all inventory. 

Cycle counts are less disruptive and more accurate, allowing for regular verification of inventory accuracy and providing ongoing insights into inventory levels without the operational shutdown.

The Significance of Inventory Management, Control and Optimization

Effective inventory management, control, and optimization methods are crucial for maintaining the delicate balance between too much and too little inventory. 

They ensure that capital is not unnecessarily tied up in stock, preventing stockouts that can lead to lost sales. These methods can result in improved cash flow, better customer service levels, and the ability to quickly respond to market changes.

How Inventory Affects Logistics

Inventory levels directly impact logistics operations; having the right stock in the right place at the right time is essential for effective logistics. 

High inventory levels can cause bottlenecks and increase storage costs, while lower inventory levels can result in inefficient transportation and higher shipping costs for urgent replenishment.

ERP Inventory Management Style

ERP inventory management incorporates all facets of a company’s inventory system into a unified system, including tracking, management, and forecasting. 

This method offers comprehensive insights into inventory, streamlines processes, and can improve overall efficiency.

Retail and Manufacturing Inventory Management

Inventory management in retail focuses on having the right products available to meet consumer demand while manufacturing inventory management ensures that production materials are at hand without overstocking. 

Both require strategies that optimize stock levels, though retail is more directly driven by consumer trends, and production schedules and supplier lead times influence manufacturing.

Unveil the essentials of inventory management with these succinctly answered frequently asked questions.

What does inventory management do?

Inventory management oversees stock levels, manages orders, and forecasts demand to optimize business operations.

What are the 4 types of inventory?

The four types are raw materials, work-in-progress, finished goods, and maintenance, repair, and operations (MRO) inventories.

What are the 3 major inventory management techniques?

The three main techniques are Just-In-Time, ABC Analysis, and Economic Order Quantity (EOQ).

Inventory Management Techniques Summary

Effective inventory management is a cornerstone of successful business operations, ensuring that inventory levels are balanced, customer demand is met, and inventory costs are minimized. 

Businesses can enhance their supply chain management and maintain a competitive edge in today’s market by employing strategic inventory management techniques, such as Just-In-Time and Economic Order Quantity. 

Additionally, advancements in inventory management software have made it easier for companies to track and manage their inventory more efficiently, further optimizing their inventory management processes.

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Inventory Management: Definition, Benefits, and Techniques

March 18, 2022 - 10 min read

Businesses that effectively use inventory management are destined to succeed. With the help of inventory management software, companies can automate the process of ordering, storing, and optimizing their goods in a single place.

In this article, we will expand on the importance of inventory management, as well as the different inventory management techniques, benefits, and examples managers need to know. Keep reading to learn the key to inventory management that will give you a competitive edge. 

What is inventory management?

Inventory management refers to the process of storing, ordering, and selling of goods and services. The discipline also involves the management of various supplies and processes.

One of the most critical aspects of inventory management is managing the flow of raw materials from their procurement to finished products. The goal is to minimize overstocks and improve efficiency so that projects can stay on time and within budget. 

The proper inventory management technique for a particular industry can vary depending on the size of the company and the number of products needed. For instance, an oil depot can store a huge inventory for a long time. Or for businesses that deal in perishable goods, such as fast-fashion items, keeping on top of your inventory can be very costly.

One way to account for inventory is by grouping it into four categories: first-in-first-out, last-in-first-out, weighted-average, and first-in-first-out. Raw materials are the components used by a company to make its finished products.

Depending on the type of company that it is dealing with, different inventory management methods are used. Some of these include JIT, material requirement planning, and days sales of inventory.

Other methods of analyzing inventory can also be used depending on national and local regulations. For instance, the SEC requires public companies to report the existence of a so-called LIFO reserve.

Having frequent inventory write-offs can be a red flag that a company is struggling to sell its finished products or is prone to inventory obsolescence.

Learn even more about inventory management from Walton College’s Supply Chain Management program’s introduction on the subject covering everything from forecasting to point models: 

Why is inventory management important?

One of the most valuable assets of a company is its inventory. In various industries, such as retail, food services, and manufacturing, a lack of inventory can have detrimental effects. Aside from being a liability, inventory can also be considered a risk. It can be prone to theft, damage, and spoilage. Having a large inventory can also lead to a reduction in sales.

Both for small businesses and big corporations, having a proper inventory management system is very important for any business. It can help you keep track of all your supplies and determine the exact prices. It can also help you manage sudden changes in demand without sacrificing customer experience or product quality. This is especially important for brands looking to become a more customer-centric organization . 

Balancing the risks of overstocks and shortages is an especially challenging process for companies with complex supply chains. A company's inventory is typically a current asset that it plans to sell within a year. It must be measured and counted regularly to be considered a current asset. 

What is the goal of inventory management?

The goal of any good inventory management system is to help warehouse managers keep track of the stock levels of their products. This means allowing them full transparency into their chain to monitor the flow of goods from their supplier. 

The benefits are both operational and financial. Not only will it serve to improve performance, but it’s also useful for preventing theft with the help of product tracking and security. 

Managers can also aim to use their inventory management plan to monitor sales procedures which leads to better service. Inventory management is especially useful for businesses that want to effectively manage seasonal items or new bestsellers throughout the year without disrupting the rest of their chain.

Benefits of inventory management

The main benefit of inventory management is resource efficiency. The goal of inventory control is to prevent the accumulation of dead stocks that are not being used. Doing so can help prevent the company from wasting its resources and space.

Inventory management is also known to help: 

• Order and time supply shipments correctly 
• Prevent theft or loss of product
• Manage seasonal items throughout the year
• Deal with sudden demand or market changes 
• Ensure maximum resource efficiency through cycle counting
• Improve sales strategies using real-life data 

Inventory management system examples

Although inventory management can change from industry to industry, there are some big-picture themes worth learning about. Here are three major retail categories with real inventory management system examples:

Grocery store chains 

Modern groceries have managed to manage inventory coming in from different suppliers all over the world. Giving consumers several different types of internationally-grown produce in both organic and non-organic varieties at an affordable price, even when the fruits and vegetables aren’t in season, is a modern marvel thanks in part to inventory management. 

Overseeing stock in real time and even setting up automated replenishment systems is mission-critical to many. 

Online retailers

On average, Amazon ships approximately 1.6 million packages from their brand to third-party sellers per day. Their Smart Warehouse uses robot and human help to get the job done, but it’s inventory management that keeps it all rolling. According to Tech Vision, “Amazon’s management technique, along with all that automation, have made the business astonishingly lean and mean by historic standards.”

Toilet paper companies

The inventory management of toilet paper companies was in the hot seat in early 2020 as panic-buying led to shortages nationwide. As demand outgrew supply beyond anything the brands had seen before (about 845%), it’s no surprise why there has been an increased focus on inventory management since. 

Their secrets to overcoming this unprecedented event? Temporarily narrowing down their portfolio of products, sending out “defective” yet functional rolls, and even transitioning to a direct-to-consumer model, all with the help of strong inventory management systems. 

Steps and types of inventory management

Most product inventory management systems follow the same basic steps for finished products: 

• Products arrive at your warehouse 
• Products are checked and stored 
• Managers or crew update inventory levels 
• Customers place an order 
• Customer orders are approved based on inventory 
• Products are pulled and packaged 
• Inventory levels are updated again 

This process is fairly straightforward and often involves help from software. There may be variations depending on what type of inventory management you are doing. Here are the main types you should know: 

• Raw materials This refers to pieces of your product that need to be shipped to you and assembled by your team. Inventory systems that track these must account for supplier timelines. 
• In progress Products made from raw materials and are currently being assembled or grouped fall under this category. This stage of inventory management may have one or several active projects at a time. 
• Repair Scheduled maintenance, updates, and refurbished goods all count toward this segment. Repairs may be handled in-house or in collaboration with a third party. 
• Finished goods Any good that is ready to ship to businesses or consumers is considered finished. These need to be updated regularly and constantly monitored to meet demand. 

Inventory management techniques

Without accurate inventory information, it can be very difficult to make decisions that affect your business. There are two main methods of keeping track of inventory: periodic and perpetual. The main difference between these is how often data is updated. Regardless of how often you track inventory, you may want to use one of the following inventory management techniques: 

• ABC Analysis ABC (Always Better Control) Analysis is inventory management that separates various items into three categories based on pricing and is separated into groups A, B, or C. The A category is usually the most expensive one. The items in the B category are relatively cheaper compared to the A category. And the C category has the cheapest products of all three. 
• EOQ Model Economic Order Quantity is a technique utilized for planning and ordering an order quantity. It involves making a decision regarding the amount of inventory that should be placed in stock at any given time. The order will be re-ordered once the minimum order has been reached.
• FSN Method This method of inventory control refers to the process of keeping track of all the items of inventory that are not used frequently or are not required all the time. They are then categorized into three different categories: fast-moving inventory, slow-moving inventory, and non-moving inventory.
• JIT Method Just In Time inventory control is a process utilized by manufacturers to control their inventory levels. This method saves them money by not storing and insuring their excess inventory. However, it is very risky since it can lead to stock out and increase costs.
• Minimum Safety Stocks The minimum safety stock refers to the level of inventory that an organization maintains to avoid a possible stock-out.
• MRP Method Material Requirements Planning is a process utilized by manufacturers to control the inventory by planning the order of the goods based on the sales forecast. The order is usually based on the data collected by the system.
• VED Analysis VED is a technique utilized by organizations to control their inventory. It mainly pertains to the management of vital and desirable spare parts. The high level of inventory that is required for production usually justifies the low inventory for those parts. 

How to improve inventory management with Wrike

One of the most critical factors that a company should consider is the accuracy of the information presented in its inventory databases. The data should be updated regularly to prevent it from getting distorted. Wrike is a project management solution that can help you do exactly that. 

With Wrike's product management tools, you can manage all of your product team's activities in one place and get the most out of every project. Wrike's product launch automation helps accelerate product launches with a streamlined approach. Managers can easily keep inventory and shipping processes in check by planning and allocating tasks to the right people all from one central dashboard. 

Wrike also makes it possible to create workflows that keep everyone up-to-date with the latest inventory progress. Tools like interactive charts and task dependencies help team members at every level identify and prevent delays. You can communicate with both vendors and clients through the advanced CRM built directly into the platform. 

Plus, Wrike's advanced insights tools allow you to track progress in real time, which is important for any successful inventory management strategy. 

Why choose Wrike as your inventory management software?

Wrike is a project management solution that makes it possible to achieve all your inventory management goals while also maximizing the benefits of the process. Regardless of which inventory management technique you use, Wrike can help you take the process step by step to ensure your inventory is always accurate regardless of what type you’re managing. Improve your inventory management plan today with Wrike’s two-week free trial . 

Maria Waida

Maria is a freelance content writer who specializes in blogging and other marketing materials for enterprise software businesses.

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The Ultimate Guide to Multi-Project Management

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A multi-project management dashboard is a project management tool that covers the various features of all your active projects in one easy-to-digest space. Through this dashboard, you can view all of your most important schedule, budget, and reporting metrics.  Each project schedule and project plan are displayed as a percentage complete and status indicator for reference. The project budget displays planned costs vs. the actual costs in real time, while visual charts display the various resources, risks, and issues affecting the projects in play. They can also be used to create reports and chart-based data sets.  You may already be familiar with using multi-project dashboards if you have experience with Agile project management.  Features to look for in a multi-management project tool Although some project apps offer these features, a true multi-management project tool will have each of the following: Dashboards that give users a bird’s-eye view of all active projects Detailed task descriptions that include individual effort indicators, deadlines, and in-task communication Integrated planning and scheduling tools that make it easy to pinpoint potential roadblocks Prioritization settings so that managers can indicate which areas should get the most resources and attention at the right time In-platform communication with controlled access to project plans, files, and assets Centralized document storage made accessible to all project team members Real-time budget and scheduling updates for accurate resource allocation How to implement multi-project management software Like any other project, implementing a multi-project management software requires planning and preparation. This should include a variety of key steps and roles for everyone involved, as well as a plan for communicating with the team. Before you dive into tool comparisons, the first step is to thoroughly assess your company’s needs. This will help you answer the most important questions, which will also inform the project’s overall budget. Once you have decided on the type of software that will work best for your company, you can start to narrow down the providers by interviewing them and gathering feedback from other users. This step will give you a better understanding of how to use them and what your options are.  During the execution phase, you will start converting data and preparing for the transition to the new platform. This is a critical step in the process, and it involves preparing for various scenarios. One of the most challenging parts of a successful software roll-out is dealing with resistance from your staff members, especially if they’re already overwhelmed with a number of ongoing projects. Having people with varying levels of expertise can help manage this issue and keep the system running smoothly.  Some software tools may even be ready within a day if you are able to dedicate time to quickly adding in project details and tasks. Get a jumpstart on this before you even purchase your next tool by taking stock of all current project workflows.  Mapping out your organization's processes is an important step in the transition from an old to a new project management software. This will help you visualize how those processes operate and identify opportunities for improvement which can help you prevent or overcome them in the future.  Implementing a multi-project management tool also works best if you can get the senior and middle managers to buy in first. They may be more likely to adopt the software if they see its effectiveness first-hand. List the activities that your team deals with and identify the key processes that have the most impact on achieving goals and targets. How to manage multiple projects with Wrike Wrike is an effective tool for project coordination no matter how many active projects you have on at the same time. With Wrike’s multi-project dashboards, you can quickly go over your work schedule, review progress, and approve changes where needed. It’s also a useful space for reflecting on projects and tasks throughout their entire lifecycle.  But above all else, Wrike is the best tool for keeping track of the tasks that require the most effort. It does so by allowing you to rate the amount of work that each task requires. At the same time, you can keep up with all the details, such as deadlines and stakeholder approvals through detailed task descriptions.  Creating a step-by-step breakdown structure for your tasks is the easiest way to make them more efficient. That’s why Wrike offers an automated workflow system to help you create a copy of all your past tasks and trigger the next steps in real time. With Wrike, you can easily evaluate your progress and assign tasks to specific projects. This eliminates the need to wait for the projects to finish before getting a more detailed view into what else is going on.  This level of transparency holds employees accountable and provides greater visibility into vital project aspects that will cut down on miscommunications and unnecessary questions. Plus, Wrike allows managers to plan each project's goals and assign people to oversee the work so that everyone knows what's expected of them. This will make it easier to get done and reduce stress. And with Wrike's Report Builder, users can customize the data so that it only reviews the most important metrics with updates made in real time so you never miss a beat.  In conclusion Multi-project management is a process that can be easily used to jump-start various projects while keeping everything organized in one place. Having a solid foundation like the kind Wrike can provide will allow you to focus on what matters most instead of starting from scratch each time you begin, work on, or finish another project. Start Wrike’s free trial today to begin mastering the art of multi-project management. 

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What Is Inventory?

• Understanding Inventory
• Special Considerations

Types of Inventory

Inventory management, inventory turnover.

• Inventory FAQs

The Bottom Line

• Corporate Finance
• Financial statements: Balance, income, cash flow, and equity

What Is Inventory? Definition, Types, and Examples

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

Investopedia / Mira Norian

The term inventory refers to the raw materials used in production as well as the goods produced that are available for sale. A company's inventory represents one of the most important assets it has because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders. There are three types of inventory, including raw materials, work-in-progress, and finished goods. It is categorized as a current asset on a company's balance sheet .

Key Takeaways

• Inventory is the raw materials used to produce goods as well as the goods that are available for sale.
• It is classified as a current asset on a company's balance sheet.
• The three types of inventory include raw materials, work-in-progress, and finished goods. 
• Inventory is valued in one of three ways, including the first-in, first-out method; the last-in, first-out method; and the weighted average method.
• Inventory management allows businesses to minimize inventory costs as they create or receive goods on an as-needed basis.

Understanding Inventory 

Inventory is a very important asset for any company . It is defined as the array of goods used in production or finished goods held by a company during its normal course of business. There are three general categories of inventory, including raw materials (any supplies that are used to produce finished goods), work-in-progress (WIP ), and finished goods or those that are ready for sale.

As noted above, inventory is classified as a current asset on a company's balance sheet, and it serves as a buffer between manufacturing and order fulfillment. When an inventory item is sold, its carrying cost transfers to the cost of goods sold (COGS) category on the income statement.

Inventory can be valued in three ways. These methods are the:

• First-in, first-out (FIFO) method, which says that the COGS is based on the cost of the earliest purchased materials. The carrying cost of the remaining inventory, on the other hand, is based on the cost of the latest purchased materials
• Last-in, first-out (LIFO) method. This method states that the COGS is valued using the cost of the latest purchased materials, while the value of the remaining inventory is based on the earliest purchased materials.
• Weighted average method, which requires valuing both inventory and the COGS based on the average cost of all materials bought during the period.

Company management, analysts, and investors can use a company's inventory turnover to determine how many times it sells its products over a certain period of time. Inventory turnover can indicate whether a company has too much or too little inventory on hand.

Special Considerations 

Many producers partner with retailers to consign their inventory.  Consignment  inventory is the inventory owned by the supplier/producer (generally a wholesaler) but held by a customer (generally a retailer). The customer then purchases the inventory once it has been sold to the end customer or once they consume it (e.g., to produce their own products).

The benefit to the supplier is that their product is promoted by the customer and readily accessible to end users . The benefit to the customer is that they do not expend  capital  until it becomes profitable to them. This means they only purchase it when the end user purchases it from them or until they consume the inventory for their operations.

Remember that inventory is generally categorized as raw materials, work-in-progress, and finished goods. The IRS also classifies merchandise and supplies as additional categories of inventory.

Raw materials are unprocessed materials used to produce a good. Examples of raw materials include:

• Aluminum and steel for the manufacture of cars
• Flour for bakeries that produce bread
• Crude oil held by refineries

Work-in-progress inventory is the partially finished goods waiting for completion and resale. WIP inventory is also known as inventory on the production floor. A half-assembled airliner or a partially completed yacht is often considered to be a work-in-process inventory.

Finished goods are products that go through the production process, and are completed and ready for sale. Retailers typically refer to this inventory as merchandise. Common examples of merchandise include electronics, clothes, and cars held by retailers.

Possessing a high amount of inventory for a long time is usually not a good idea for a business. That's because of the challenges it presents, including storage costs , spoilage costs, and the threat of obsolescence.

Possessing too little inventory also has its disadvantages. For instance, a company runs the risk of market share erosion and losing profit from potential sales.

Inventory management forecasts and strategies, such as a just-in-time (JIT) inventory system (with backflush costing ), can help companies minimize inventory costs because goods are created or received only when needed.

It's always a good idea for companies to invest in a good inventory management system. This is especially true for larger businesses with multiple sales channels and storage facilities. These systems are able to identify waste, low turnover, and fraud/robbery.

Inventory turnover is a key part of inventory management. Also called stock turnover, this is a metric that measures how much of a company's inventory is sold, replaced, or used and how often. This figure provides insight into how profitable a company is and whether there are inefficiencies that need to be addressed.

Consumer demand is a key indicator that can determine whether inventory levels will turn over at a quick pace or if they won't move at all. Higher demand typically means that a company's products and services will move from the shelves into consumers' hands quickly while weak demand often leads to a slow turnover rate.

A company's inventory turnover is often expressed as a ratio. The inventory turnover ratio is calculated using the following formula:

Inventory Ratio = COGS ÷ Average Value of Inventory

Company leaders can use this figure to make important decisions about whether they should continue to manufacture certain products and services or determine whether there are issues that need to be addressed.

How Do You Define Inventory?

Inventory refers to a company’s goods and products that are ready to sell, along with the raw materials that are used to produce them. Inventory can be categorized in three different ways, including raw materials, work-in-progress, and finished goods.

In accounting, inventory is considered a current asset because a company typically plans to sell the finished products within a year.

Methods to value the inventory include last-in, first-out, first-in, first-out, and the weighted average method.

What Is an Example of Inventory?

Consider a fashion retailer such as Zara, which operates on a seasonal schedule. Because of the fast fashion nature of turnover, Zara, like other fashion retailers is under pressure to sell inventory rapidly. Zara's merchandise is an example of inventory in the finished product stage. On the other hand, the fabric and other production materials are considered a raw material form of inventory.

What Can Inventory Tell You About a Business?

One way to track the performance of a business is the speed of its inventory turnover. When a business sells inventory at a faster rate than its competitors, it incurs lower holding costs and decreased opportunity costs. As a result, they often outperform, since this helps with the efficiency of its sale of goods.

Inventory provides businesses with materials to keep their operations going. This includes any raw materials needed in the production of goods and services, as well as any finished goods that companies sell to consumers on the market. Managing inventory and determining the turnover rate can help companies determine just how successful they are and where they can pick up the slack when the profits begin to dry up.

IRS. " Publication 538 (01/2019), Accounting Periods and Methods: Items Included in Inventory .”

Harvard Business School (HBS), Digital Initiative. " Zara: Disrupting the Traditional Cycle of Fashion ."

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What is the Main Purpose of Inventory Management?

November 9, 2023 •  3 min read

Inventory management is key to maintaining a profitable, organized, and productive business.  For some companies, practicing inventory management is simple: they take inventory every week or so by walking through a storage closet and checking to see if they’re low on anything. But other companies must take inventory management quite seriously, tracking every item the minute it arrives, moves, or is used up. 

In this article, we’ll cover the definition of inventory management, the purposes of inventory management, and a few ways the right inventory system can help you manage your business’s inventory.

What is the definition of inventory management?

What is the main purpose of inventory management.

Plus, practicing strong inventory management allows you to understand how you use your inventory–and how demand changes for it–over time. You can zero in on exactly what you need, what’s not so important, and what’s just a waste of money. That’s using inventory management to practice inventory control . By the way, inventory control is the balancing act of always having enough stock to meet demand, while spending as little as possible on ordering and carrying inventory.

Inventory management for physical and perpetual inventory

If you count your inventory manually every time you need to find out what’s in stock, you take physical inventory. If you’re constantly updating what you’ve got on hand and where it is, you take perpetual inventory. 

Perpetual inventory is practically impossible to track manually. There are just too many moving parts! You’ll almost certainly require technology, like an inventory app, to keep your records up to date. Key automation features, like QR code scanning, can make keeping your inventory app synced fast and simple. 

If you take physical inventory, you can decide between using pen and paper, an inventory spreadsheet, or inventory management software. Just know that manual tracking tends to take a lot of time, and can lend itself to human error. 

Related: What is the difference between perpetual inventory and physical inventory?

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The role of inventory management software

Sortly inventory management software helps you track, manage, and organize your inventory—from any device, in any location. We’re an easy-to-use inventory solution that’s perfect for small businesses. Sortly builds inventory tracking seamlessly into your workday so you can save time and money, satisfy your customers, and help your business succeed.

With Sortly, you can track inventory, supplies, parts, tools, assets like equipment and machinery, and anything else that matters to your business. It comes equipped with smart features like barcoding & QR coding, low stock alerts, customizable folders, data-rich reporting, and much more. Best of all, you can update inventory right from your smartphone, whether you’re on the job, in the warehouse, or on the go.

Whether you’re just getting started with inventory management or you’re an expert looking for a more efficient solution, we can transform how your company manages inventory—so you can focus on building your business. That’s why over 10,000 businesses globally trust us as their inventory management solution.

Start your two-week free trial of Sortly today.

What Is a Good Inventory Turnover Ratio?

• Inventory Management

April 14, 2024 • 3 min read

How to Keep Track of Consumables

April 14, 2024 • 6 min read

What Are the Most Common Inventory Control Models?

April 13, 2024 • 6 min read

6 Best Practices for Parts Inventory Management

April 9, 2024 • 5 min read

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CHAPTER 14 INVENTORY MANAGEMENT QUESTIONS FOR WRITING AND DISCUSSION

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Inventory can be regarded as a stock of goods. Here, we consider inventory as an idle but usable resource. It includes; labor, raw materials, finished goods and equipment stock is reserved to provide a flow of supply. In addition to design, planning, and inventory control, the applications of queueing theory can also be found in performance evaluation and improvement, logistics and transportation, and other areas of supply chain. The scope of logistics has been considerably extended, as it has been recognized as one of the important tools for developing competitiveness. In this work, efforts are being intensified on harmonizing the logistic technicalities with inventory control.

As a result to today's uncertain economy, companies are searching for alternative ways to stay competitive. This study goes through the process of analyzing the company's current forecasting model and recommending an inventory control model to help them solve their current issue. As a result, an Economic Order Quantity (EOQ) and a Reorder Point was recommended to help them reduce their product stock outs. The shortage of raw material for production always makes the process discontinuous and reduces the productivity. The ABC analysis technique for the inventory control system is first used to identify the most important multiple products and then the economic order quantity (EOQ) of each product is developed to find their inventory model equation individually.

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Inventory Management Overview

In the present day, Franklin Fan Company may be regarded as the north-central region’s largest manufacturer and distributor of electric fans. It was founded fifteen years ago by Ed Spriggs and Dan Block, mechanical and electrical engineers. The firm was originally located in the garage of Block, however, its gradual, though steady growth for approximately seven years allowed owners to relocate their small enterprise to an abandoned meat-packing warehouse on Chicago’s South Side.

In turn, when space for manufacturing and inventory storage had increased, Franklin Fan Company received an opportunity to extend its product line and introduce new models of fans. The combination of increased selection and the grown population of ceiling fans substantially contributed to the business’s explosive development. Lately, the company opened and relocated to a new office, manufacturing complex, and warehouse with a space of more than 100,000 square feet off Interstate 55 in Chicago. The capacity of warehouse utilization increased from 65% to 90%. However, despite all improvements and benefits, sales growth stagnated. The main purpose of the company is to raise its sales again. This objective is determined by the growth of the fan market and the formation of a highly competitive environment.

According to the analysis of the company’s customer service characteristics and compiling an inventory, it is possible to conclude that the main reasons that hinder its growth are product unavailability and late shipments. Regardless of the accessibility of an average of almost 60 days of inventory, the level of the company’s customer service is inadequate. Although Franklin Fan Company subsequently backorders all customer orders that were not immediately filled from its stock, approximately 10% of demand goes to competing companies.

In turn, the appropriate inventory management and the achievement of 95% of a cycle-service level will have a positive impact on the company’s development. It goes without saying that inventory management is a highly significant aspect of the whole supply chain as “the cost of inventory can represent anywhere between 20% and 40% of the total value of the product” (Pazhani, et al., 2015, p. 613).

For the inventory management of Franklin Fan, the CF151 ceiling fan and the PF032 personal fan was chosen as these products from the extensive line may be regarded as the most popular. Consequently, the inventory management reports for these units on the basis of data available are the following:

CF151 ceiling fan.

PF032 personal fan.

First of all, for an appropriate inventory system, the planning of production and inventory management, and both the continuous and periodic review systems are essential. The most appropriate time for production, preventive maintenance, and backordered quantities of common cycle length, and each item should be determined to minimize the total cost (Taleizadeh, 2018).

Due to the absence of the company’s compiled reports in all areas, for the manager, it is impossible to analyze the current situation in order to find solutions. That is why data concerning production due dates, capacity, and demand should be constantly updated to enhance the company’s forecasting. Through records, it is possible to understand the tendency of the demand’s growth and recession and use a statistical time-series analysis that relies on previous demand information to predict future demand taking into consideration particular trends and seasonal patterns.

Concerning the CF151 ceiling fan, it is advisable to enlarge its lot size, as its actual demand may exceed 2,000 units and customer orders will be backordered due to stockout. In turn, the lot size of the PF032 personal fan may be reduced in order to avoid overstock and related expenditures as the actual demand for the period of 3 weeks does not exceed 3,500 units. In addition, the ordering cost of PF032 personal fan may be reduced by 30% as the difference between the order price for production and the wholesale price is considerable, however, actual demand does not substantively differ from the actual demand for CF151 ceiling fan.

In addition, considering the forecasted periods of high and low demand and the standardized manufacture of fans, it will be reasonable to fill the stock with units when actual demand would be relatively low in order to provide customers with products without delays when units will be highly required. Moreover, customers’ loyalty may be preserved through the company’s delivery fee or discounts in the case of stockouts. In other words, if a product is not available, a consumer may be offered a reduced delivery fee or a 15% discount. In this case, there are considerable chances that the person will wait until his or her order will be backordered instead of choosing a competing company. In general, the firm’s current delivery fee may be reduced for all customers as it may be regarded as an incurred cost in comparison with the products’ order price for production.

Pazhani, S., Ventura, J. A., Mendoza, A. (2015). A serial inventory system with supplier selection and order quantity allocation considering transportation costs . Applied Mathematical Modelling, 40 , 612-634.

Taleizadeh, A. A. (2018). A constrained integrated imperfect manufacturing-inventory system with preventive maintenance and partial backordering. Annals of Operations Research, 261 , 303–337. Web.

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The Importance of Inventory Management

Updated 04 September 2023

Subject Corporations

Downloads 49

Category Business

Topic Company

Materials Management

According to De Giovanni, Karray and Martín-Herrán (2019), Materials management refers to the supply of goods at the appropriate quantity and time (p.470). It is important to note that through inventory management, organizations are in a position to minimize operational costs while at the same time meeting customer needs. However, most companies have faced challenges when it comes to materials management.

The primary reason is that there is a close relationship between the inventory maintained by an organization and the income generated by the goods. Moreover, some companies have a huge amount of their invested capital tied up in inventory. For this reason, maintaining a large amount of inventory may lead to obsolescence, price increases, and deterioration of materials. On the other hand, unlike large organizations that have the ability to hold large quantities of inventory, small companies find it costlier.

The Importance of Optimal Stock

According to Gu, Zhang, and Li (2015), there is a need to maintain optimal stock owing to the risks that come with uncertainty (p.107). In particular, uncertainty arises owing to the fact that organizations do not have future information regarding the goods they hold. It is important to note that inventory assists in ensuring the smooth running of the company operations. Therefore, freeing the assets tied up in stocks to come in handy in ensuring the company operations run efficiently. On the other hand, the inventory management models adopted by different companies vary depending on the amount of information available. Optimal materials management minimizes the costs and saves storage space. For this reason, inventory management has a significant impact on the supply chain management of a company.

Forms of Inventory Management

According to Feng, McVay, and Skaife (2014), inventory takes the form of raw materials, finished goods, and work-in-progress (WIP) (p.532). It is important to note that raw materials entail the items supplied to a warehouse without undergoing any conversion process. WIP refers to the form of inventory where it has passed the raw materials stage but is not ready for delivery or sale to the potential buyers. Therefore, there is the need to include the working capital when it comes to the buffer stock, overall production cycle, and the production process. For this reason, there should be minimal quantities of finished goods and raw materials present at the production area whereas the WIP needs to be evaluated closely to determine the duration they take before the goods are ready for sale. The responsibility of conducting this task is solely on the quality control department personnel. Lastly, finished goods are the inventories that are held in the warehouse and are yet to be sold to customers.

Supplier Selection

According to Steinker, Pesch and Hoberg (2016), inventory is one of the current assets and therefore involves the functional areas of the organization such as purchasing, finance, production, and marketing (p.5197). It is important to note that the levels of inventory as determined by the various functional areas of the organization vary. Besides, selecting the appropriate supplier significantly contributes to the success of the company. The primary reason is that there is stiff competition in the market and therefore creating the need for high quality and less costly goods. The factors considered during supplier selection include price, risk, service, and quality.

Concerning the price, the supplier needs to provide the lowest unit price and further provide relatively lower delivery costs and offer bulk discounts. Service depends on whether the goods are fast-moving and thereby the supplier should ensure there are no stock-outs. For this reason, the reliability of the supplier comes in handy during selection. Regarding risk, optimal efficiency in the company operations is subject to supply disruptions. For this reason, companies need to consider the likelihood of the supplier closing down to avoid any potential risks. Lastly, there is the need for quality during supplier selection as it determines the price adopted by the company and reliability of its operations. Hence, poor quality inventory will translate to a reduction in revenues owing to the negative impact on the reputation.

Frequency Needs

According to Tiwari, Daryanto and Wee (2018), the increase in the replenishment frequency paves the way for a significant reduction in the inventory held by an organization (p.287). Moreover, by increasing the replenishment frequency, the company will be in a position to price its goods at the prevailing market amount. However, there are drawbacks associated with increasing the replenishment frequency as there are additional costs associated with placing orders. For this reason, managers of a company need to evaluate the benefits and costs that stem from increasing the replenishment frequency. The costs that go up when the replenishment frequency increases include receipt costs, shipping costs, and ordering costs. On the other hand, capital costs and holding costs decline significantly when the replenishment frequency increases.

Application of Inventory Management to Retail, Leisure, and Manufacturing

According to Steinker, Pesch and Hoberg (2016), the optimal levels of inventory maintained by an organization varies from one firm to another (p.5200). In the case of a retail firm, the primary reason for having high quantities of inventory stem from the fact that the organization does not want interruptions in its operations. Besides, the time gap that exists between the period of ordering and delivery will not enable the completion of a sales opportunity. Similarly, the retail firm may receive bulk discounts from the supplier and thereby leading to large quantities in inventory in a move to optimize profits. On the other hand, the manufacturing companies face a different scenario whereby they not only hold finished good but also work-in-progress and raw materials. The levels of inventory for raw materials maintained by manufacturing firms assist in ensuring the production schedule remains uninterrupted.

Part 2: Field Research Findings

The field research conducted entailed examining the materials management practices exemplified in automobile companies.

Primary Materials Sourcing Method

The primary materials sourcing method used by the automobile companies was a just-in-time inventory system. It is important to note that the just-in-time inventory system assists in ensuring the raw materials from the suppliers get to the purchaser through a direct channel and thereby ensuring the production schedules run smoothly. Moreover, the use of the just-in-time inventory system in the automobile industry production assists in bringing about efficiency as there is a decline in wastes (Shin, Wood and Jun 2016, p.30). On the other hand, there is the need to forecast demand when using the just-in-time inventory management system. The case is different when it comes to the just-in-case inventory supply system as the purchasers have large amounts of goods in inventory that can sustain the market demand.

Consistency of Supply

In the just-in-time supply system, the forwarding of inventory to the various stock points facilitates the delivery to the work centers. Therefore, there are other procedures involved that include verification and validation in a bid to ensure that the supply is consistent with regarding the quality standards and the quantity. In particular, the quality production ensures that the finished goods meet the needs of the customers. However, for the consistency in the supply to be realizable, there is the need for a supply chain that is effective when it comes to the elimination of all non-value-added costs (Tiwari, Daryanto and Wee 2018, p.286). Moreover, the consistency of supply in the just-in-time inventory management system plays a significant role in ensuring the quality of the finished products has the required quality. On the other hand, there are other consistency factors that include manufacturing workmanship and design quality.

Presence or Absence of Stock-outs

The automobile companies use the just-in-time supply management in a bid to minimize the quantities of excess inventory. For this reason, there are instances when the inventory levels lead to stock-outs. In particular, the stock-outs occur during the seasons when the selling of automobiles is at peak (Duong and Wood 2018, p.5341). It is important to note that the just-in-time supply system aims at striking a balance between lowering the holding costs while at the same time meeting the customer demands. On the other hand, stock-outs arise whenever there are late deliveries in the just-in-time supply system. Therefore, late deliveries contribute to delays in the shipments to customers, which is equivalent to stock-outs. Apart from interrupting the operations of the automobile companies, late deliveries tarnish the reputation of the companies. In a move to ensure there are little to no stock-outs, there is the need for a close collaboration between the automobile retailers and suppliers. Hence, there is a possibility of experiencing stock-outs when using the just-in-time supply system, but adopting a high level of synchronization will help to eliminate them.

Stocks of Obsolete Items

Obsolete inventory contributes to increased operating costs. In particular, the obsolete items in inventories of automobile companies arise as a result of the poor design and product quality. Moreover, the poor quality makes the items in inventory fail the quality standard test. The just-in-time supply system may result in stocks of obsolete items if the deliveries made include incomplete goods (Shin, Wood and Jun 2016, p.30). It is important to note that inaccurate forecasting of demand significantly contributes to obsolete items in the inventory. However, the automobile companies have over the years played close attention to the trends and thereby base their decision-making when it comes to just-in-time supply on proven history records. Similarly, the automobile companies manage to avoid obsolete inventory by understanding the needs of the customers.

Part 3: Assessing the Focus Operations

The focus operations of automobile companies benefit from the efficiency, economy, and effectiveness of the just-in-time inventory management.

The just-in-time inventory management is successful if there is efficiency. In particular, the inventory of automobile companies is delivered to the warehouse the period it is needed. Besides, holding excess stock means that there are costs that arise when handling and moving the inventory. Therefore, the arrival of automobile parts when they are required improves the supply operations of companies that operate in this industry (Armenzoni et al. 2015, p.236). Despite the fact that there could be inadequacies in the inventory, the identification of the quantity gap can be filled within a short duration. On the other hand, efficiency in the operations of automobile companies is brought about by the automatic purchasing method which streamlines sourcing of orders and further planning the delivery of the automobile parts.

Effectiveness

The just-in-time inventory management method decreases the wastes that manufacturers incur and therefore showing that the effectiveness of the systems ensures there are no extra costs. It is important to note that the automobile manufactures deliver to warehouses only the needed items, in the appropriate quantity, and at the appropriate time. Moreover, there is a reduction in the overhead expenses which ensures that the overall operation costs remain minimal. Running a warehouse with excess stocks may be expensive for companies owing to the high carrying costs. However, the automobile companies that have adopted the just-in-time inventory management have managed to reduce the number of warehouses they operate, which shows that the just-in-time inventory management system is effective.

The operations of the automobile companies run smoothly owing to the economy brought about by the just-in-time inventory management system. In particular, the global economy is made up of virtual enterprises that are interconnected and thereby placing orders continues to be seamlessly easy. It is important to note that the automobile companies manage to increase their return on investment by lowering the inventories they have in the warehouses (Tiwari, Daryanto and Wee 2018, p.287). On the other hand, the economic benefit that stems from the use of the just-in-time system by the automobile companies also advantages the customers. They get quality products at a fair price since the manufacturers minimize the costs associated with wastes. Despite the expenses that come with implementing the just-in-time inventory system, the benefits outweigh the costs and thereby meeting the performance objectives of the company.

Armenzoni, M., Montanari, R., Vignali, G., Bottani, E., Ferretti, G., Solari, F. and Rinaldi, M., 2015. An integrated approach for demand forecasting and inventory management optimization of spare parts. International Journal of Simulation and Process Modelling, 10(3), pp.233-240.

De Giovanni, P., Karray, S. and Martín-Herrán, G., 2019. Vendor Management Inventory with consignment contracts and the benefits of cooperative advertising. European Journal of Operational Research, 272(2), pp.465-480.

Duong, L.N.K. and Wood, L.C., 2018. Discrete Event Simulation in Inventory Management. In Encyclopedia of Information Science and Technology, Fourth Edition (pp. 5335-5344). IGI Global.

Feng, M., Li, C., McVay, S.E. and Skaife, H., 2014. Does ineffective internal control over financial reporting affect a firm's operations? Evidence from firms' inventory management. The Accounting Review, 90(2), pp.529-557.

Gu, J., Zhang, G. and Li, K.W., 2015. Efficient aircraft spare parts inventory management under demand uncertainty. Journal of air transport management, 42, pp.101-109.

Shin, H., Wood, C.C. and Jun, M., 2016. Does Effective Inventory Management Improve Profitability?: Empirical Evidence from US Manufacturing Industries. International Journal of Information Systems and Supply Chain Management (IJISSCM), 9(3), pp.26-45.

Steinker, S., Pesch, M. and Hoberg, K., 2016. Inventory management under financial distress: an empirical analysis. International Journal of Production Research, 54(17), pp.5182-5207.

Tiwari, S., Daryanto, Y. and Wee, H.M., 2018. Sustainable inventory management with deteriorating and imperfect quality items considering carbon emission. Journal of Cleaner Production, 192, pp.281-292.

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