Inventory Management Explained: Techniques, Processes and Software
Whatever a business’ aspirations and objectives, their success hinges on one defining characteristic: how they manage their physical inventory. Effective inventory management is central to all stock-carrying businesses, and can make all the difference in a brand’s long-term profitability, continuity and growth.
It’s for this reason that inventory management is the subject of today’s guide, in which we’ll be covering the what, why and how of managing an inventory successfully. Use the links below to navigate or read on for our top tips advice on inventory management, and how it relates to ERP.
Quick Links
- What is Inventory Management and Why Does it Matter?
- Inventory Management Techniques and Their Benefits
- How ERP Can Simplify Inventory Management
What is Inventory Management and Why Does it Matter?
Inventory management relates to how companies track inventory coming in and out of their warehouse. It’s a vital step in the supply chain, wherein businesses monitor stock levels to ensure cost, space and resource efficiencies.
The objective of inventory management is to ensure that a business has optimum stock levels at all times. Not only does it prevent a company from over-buying stock, but it also ensures they have adequate inventory to meet consumer demand at the right time.
For many businesses, sound inventory management is the overarching key to success. It’s hugely important in terms of cost, efficiency, management, and operational reputation, and also assists in effective decision-making at all levels of the business.
Without inventory management, businesses would face a catalogue of recurring errors, from over and under-buying stock, to miss-picks, out-of-stocks, and ineffective warehouse organisation. All of these issues translate into major problems, affecting a business’ profitability, efficiency and reputation.
Inventory Management Techniques and Their Benefits
Effective inventory management doesn’t happen on its own. Instead, businesses rely on a range of techniques and processes to maintain optimum inventory levels, eight of which we’ll take a closer look at below.
ABC Analysis
ABC analysis places emphasis on the cost and value of your inventory. It involves splitting stock into three value categories, A, B and C, with A representing stock of most value and C items that affect profitability the least.
Used effectively, ABC analysis reduces obsolete inventory and ensures you only reorder stock which brings the biggest bottom-line benefits. It’s a means of prioritising your inventory for the best ROI and turnover.
Batch Tracking
Batch tracking is one of the most widely-used inventory management techniques. It involves grouping similar items in an inventory, assigning each with a unique batch number which makes them easier to manage and track.
One of the main advantages of batch tracking is that it allows you to trace a specific item back to its original batch. Useful for product returns and recalls, it can also be beneficial when identifying defective stock, ensuring it’s swiftly removed from circulation before it reaches point of sale.
Economic Order Quantity
Economic order quantity (EOQ) is an advanced inventory management solution that bases stock control on a set of predefined variables. An EOQ formula is used to manage stock levels, based on things like demand rate, production cost, and seasonal consumer demand.
The purpose of EOQ is to optimise stock levels for a specific demand period. This ultimately helps keep inventory management costs down, ensuring businesses only order the amount of stock needed to meet the anticipated demand.
Minimum Order Quantity
Minimum order quantity (MOQ) is used to safeguard suppliers and manufacturers against high production costs. It’s a means of inventory management whereby retailers must buy the minimum amount of a certain product.
MOQ is used most frequently in relation to high-end products, like technology and appliances, which have innately high production and shipping costs. In order to maintain cashflow and turnover, businesses set a MOQ which retailers must meet to procure the products for sale.
Often, new businesses use MOQ as a means of ensuring strong cashflow in their first few months of trading. Given that retailers must commit to a minimum order amount, it guarantees a reliable rate of return for products in their inventory.
FIFO and LIFO
First in, first out (FIFO) and last in, first out (LIFO) are inventory management techniques used frequently in lots of business sectors, particularly those which deal with perishable, time-sensitive stock. FIFO is used when a business wants to sell old stock first, while LIFO is used when new stock should be prioritised.
While FIFO and LIFO are techniques that lend themselves well to the food and drinks sector, they’re increasingly used in other market areas, like the fast fashion industry. Here, brands rely on hitting rapidly-changing trends, therefore they often prioritise new stock over old (LIFO), before launching promotional sales periods to prioritise the sale of old inventory items over new (LIFO).
Safety Stock Inventory
Safety stock inventory is a technique whereby businesses buy more stock than they typically need, giving themselves a safety buffer should demand increase unexpectedly. There are lots of reasons why a company may choose to buy more stock than they need – from market uncertainty to the prospect of busy trading periods, such as Christmas.
While effective inventory management tells us that surplus stock is bad for efficiency and cost, there are times when it’s necessary to over-purchase to prevent out of stocks. Unforeseen demand or errors in forecasting can easily lead to shortages, while uncertainty in the market (brought on by events like COVID-19) can make it difficult to predict accurate inventory levels.
Consignment Inventory
Consignment is a unique inventory management solution wherein a supplier or manufacturer gives retailers a consignment of stock for free, on the basis that they’ll be reimbursed when the items sell. This technique carries some risk for the supplier, as there are no guarantees that the products will sell as forecast.
That said, for many businesses, consignment inventory can be a huge boon. For example, small businesses with new products may find it easier to get their items in front of customers using the consignment technique, with retailers more willing to take a risk on taking new products to market.
Just-in-Time Inventory
Just-in-time inventory (JIT) is used within the manufacturing sector to manage the quantity of raw materials required to manufacture and produce certain products. It ensures that a manufacturer isn’t left with surplus materials should demand for a certain product drop, with inventory controlled on a flexible, ad-hoc, right-on-time basis.
For manufacturers and suppliers, JIT offers a two-fold benefit. Firstly, it helps keep production and material costs low, with expenditure only happening when demand reaches a certain point. And secondly, it reduces wastage and improves efficiency, minimising the risk of ‘dead stock’ and surplus materials.
How ERP Can Simplify Inventory Management
A multi-channel, multi-technique approach to inventory management requires the appropriate systems, processes and software. That’s where enterprise resource planning (ERP) comes in, giving businesses the power to manage their inventory (and more besides) from a single, unified location.
Integrating ERP software into an existing inventory management strategy can bring significant benefit. Advantages include cost savings, increased efficiency, accurate data collection, supply chain transparency, and the opportunity to expand and refine current inventory management processes.
An integrated ERP inventory management system typically offers the following features to make light work of managing inventory assets:
- Batch tracking and management
- Multi-channel order management and fulfilment
- Data intelligence, analytics and reporting
- Warehouse management and administration
- Payment gateway functionality
- Ecommerce integration, including shipping and accounting
By no means an exhaustive list of features, ERP can assist with inventory management in any number of ways, with full customisation options to suit a business’ requirements and targets.
We hope this guide helps you get to grips with inventory management and how an ERP system could bring greater efficiency to your operation. At JS3 Global, our experts have decades of combined experience in helping businesses leverage ERP solutions for their inventory management needs. For more information or to find out more about our services call us on 0161 503 0866 or email us at enquiries@js3global.com.