What Is Inventory Management?

Inventory management refers to the supervision of an organization's production, ordering, storing, and retail sales processes. This involves monitoring how raw materials and finished items are processed and stored.

A corporation maintains organization through efficient inventory management. It also offers vital information that companies need to be profitable, react to market changes, and prevent supply chain management failures. 

Synonyms

• Stock Control
• Inventory Control
• Stock Management
• Warehouse Management
• Inventory Oversight

The Importance of Inventory Management

Inventory management affects order fulfillment, production, and warehousing costs. For businesses, maintaining an appropriate stock level and cutting costs are two advantages of effective inventory management. Additionally, less excess inventory is created.

Types of Inventory

The following are the four primary categories of inventory:

1. Raw Goods

Materials that are used to make things are known as raw goods. They often show up early in the production process. Metal, plastic, cloth, and wood are examples of raw materials that are used to make completed items. They may come from one or more vendors. 

2. Work-in-progress (WIP)

A work-in-progress (WIP) is a product that is nearly done but still needs work. WIPs are used to track production expenses such as labor, equipment, and other costs that are later applied to the cost of goods.

3. Finished Goods

Finished goods are items that are ready for customers to purchase and are kept in stock. Once a work in progress is done, it is added to the inventory of finished items.

4. Maintenance, Repair, and Operations Goods (MRO)

Materials and equipment utilized in production but not included in the finished product are referred to as MRO. Personal safety equipment, cleaning and office supplies, and other items may be included in this.

Inventory Management Methods

The sizes and structures of the firms determine the different inventory management strategies. In the end, they always increase operations by reducing waste and managing costs. Typical methods include the following:

1. Just in Time (JIT)

The goal of just-in-time (JIT) inventory management is to minimize expenses and increase efficiency by timing the arrival of goods with the start of production. This approach aims to fulfill the demand for the product at a high production volume while maintaining the lowest possible amount of inventory on hand. 

You'll need reliable demand forecasting and strong ties with trustworthy suppliers if you want your JIT inventory firm to succeed.

Advantages:

• Cuts down on wasteful stock purchases
• Reduce expenses by not purchasing items that are unneeded
• preventing the need for more inventory storage space than is required 

2. Material Requirements Planning (MRP)

Material requirements planning, or MRP, is one supply planning method that manufacturers may use to determine how much inventory is required to meet demand for a product. MRPs function in line with demand and the bill of materials (BOM). By examining the types of materials required, the quantity of each material needed, and the production completion date. 

Advantages:

• Provides companies with a well-balanced inventory
• Enables companies to have the appropriate stock of materials for manufacturing
• Removes manual tasks like examining historical sales data and current inventories

3. Economic Order Quantity (EOQ)

The formula known as the economic order quantity (EOQ) is used to determine the ideal order size to satisfy demand while remaining within budget. Any company that controls inventory, no matter how big or little, may benefit from EOQ.

The objective is to minimize waste and overordering, minimize storage expenses, and take full advantage of vendor quantity discounts.

Advantages

• It reduced holding and storage expenses.
• Helps keep inventory levels in line with client demand
• It gives precise guidelines for the appropriate amount of goods to have on hand.

4. Day of Sales Inventory (DSI)

A measuring instrument for inventory tracking and sales monitoring is the day sales in inventory (DSI). Because it determines how long it takes a company to sell its inventory and takes into account how long the present inventory will survive, the DSI is also known as the average age of inventory.

Advantages:

• Cut costs associated with excessive inventory purchases
• Managing financial flow effectively.
• Stop wasting money on out-of-date merchandise.
• Helps in the determination of statistical data for a business's sales, monitoring, and inventory management.

Inventory Management Challenges

The main challenges are: having too much inventory and not being able to sell it; not having enough inventory to fulfill orders; and not knowing what you have in inventory and where it is. Additional challenges include:

• Customer Demand is Always Changing

Consumer requirements and preferences are ever-changing. How would you know when and why their preferences change if your system is unable to detect trends?

• Getting Accurate Stock Information

You cannot determine which stock to replenish or when to restock without accurate stock information.

• Using Warehouse Space Effectively

Staff wastes time if, for example, products are difficult to find. Fortunately, inventory management is a skill that can help remove this obstacle.

• Poor Procedures

Outdated or manual procedures can make work error-prone and slow down procedures.