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What is the Role of Inventory Management?

May 9, 2019

The role of inventory management is to maintain appropriate stock levels for the business’ needs, minimising wasted inventory, funds tied up in stock, and lost income through stocks dropping too low.

Manufacturers, wholesalers, and retailers all use inventory management to achieve slightly different goals.

The role of inventory management is to make sure your business has the stock it needs without overspending on stock costs.

Manufacturers & Types of Inventory

Manufacturing businesses need to do more than track stock levels. They must also understand the different types of inventory.

A simple model of inventory uses three types. These are raw materials, work in progress, and finished goods.

Some businesses add a fourth type that must be tracked differently, making the list of four types:

  • Raw Material
  • Work in Progress
  • Finished Goods
  • Maintenance, Repair, & Operating Supplies (MRO)

Raw Material

Raw material is a catchall term for materials used to manufacture finished goods. As well as steel sheeting, lengths of wood, rubberised sheeting, etc., it also includes ball bearings, nuts, and bolts. It can even include more complex components which had to be manufactured earlier in the supply chain.

Raw material will become work in progress.

Work in Progress (WIP)

How you track Work in Progress inventory will vary according to the value of raw material, time taken in manufacture, etc. For example, if some raw material may be ‘lost’ or damaged during production, it’s more important to keep track of how much is used and how much is lost. If this isn’t an issue, the system may simply update automatically.

Fully manufactured items which have not gone through quality control are usually still considered work in progress.

Finished Goods

Finished goods are ready for sale. This might be retail or wholesale, depending on your business. They’ve passed quality control and any other inspection. At this point they’re either shipped immediately or stored to be shipped following a purchase order.


Maintenance, Repair and Operating supplies are used internally. Businesses need to maintain their premises. Manufacturers also need plenty of MRO to keep their equipment operational. So, storage space must be allocated and quantity and quality records must be kept. In other words, MRO needs inventory management.

Warehousing also needs high levels of MRO, especially if mechanical equipment (cranes, fork lifts, conveyor belts, etc.) is used. Inventory management will also class personal protective equipment (PPE) and office supplies for any paperwork to be part of MRO inventory.

After all, it all takes up space, and all of it can run out or need to be replaced.

How Do You Control Inventory?

At the heart of inventory control is projection. Projected sales (sometimes called projected run rate) tells you how quickly you should anticipate needing more stock.

There are plenty of factors to consider when working out run rate. They include:

  • Sales records year on year
  • Current sales
  • Market share growth (current and predicted)
  • Market trends
  • Promotional budget
  • Market economy

All of these play a role in how quickly products sell. Of them all, market trends can be most unpredictable. A popular TV show, YouTube host or podcaster featuring your product can lead to a huge increase in sales. If you didn’t arrange to be featured, you might not realise it’s coming.

Even if your stock isn’t perishable, you want to sell older stock first. Time can make it unsellable. This makes accurate inventory tracking vital. Without that, how would you tell older from newer in your warehouse?

Stock levels should be tracked and updated in real time. This is especially important when the unpredictable happens and demand spikes. You’ll need to raise your purchase order as quickly as possible.

Tools for Inventory Management

To make effective inventory management practical, you need modern inventory management software. This is the most essential piece of the puzzle.

You can support it with barcode and scanner technology which will make handling inventory more efficient and more accurate. Records will update automatically when products are scanned. That means no manual entry errors.

Your inventory management software should integrate with other parts of your business. Inventory management is just part of your business flow. By integrating with the systems you use for connected steps, you can increase efficiency, reduce errors, and make your employees happier. After all, it saves them some tedious data entry.

Some inventory management software has alerts when stocks drop below a certain level. Some even raises or amends purchase orders automatically. This speeds up the ordering process. It also helps you avoid being distracted mid-order.

Inventory Management & Accounting

The role of inventory management is to ensure the business has the stock needed to run smoothly while minimising stock costs. It can make the difference between your business turning a profit and making a loss.

And that’s why it’s so important for your business to have accurate financial data on your inventory. Most warehouse management software integrates with accounting packages for just this reason.

This has an interesting side effect. Small businesses usually reach the point where accounting software becomes essential faster. Therefore, their inventory management software needs to suit a choice they’ve already made. Programs like Sage50, Xero and QuickBooks are good for inventory management systems to integrate to for this reason.

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