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What is Inventory Management Exactly?

Why is Inventory Management Important?

Inventory management oversees several processes from raw material to finished goods at the point of sale. Depending on their role in the supply chain, specific businesses may only carry out inventory management for parts of this process.

Good inventory management allows companies to tie up less money in stock while avoiding stockouts – which can limit sales. Inventory management allows your business to lower costs, speed up fulfilment on orders, and to prevent or reduce fraud.

This makes inventory management a key part of supply chain management. Inventory management, in turn, has two key components of its own. The biggest of these is warehouse management, but stock purchasing is also important.

Supply chains, like many others, may see different people (or departments, in larger businesses) have responsibility for the same item at different times. Knowing who is responsible at a given moment will help you to correctly track the process.

What’s the Inventory Management Process?

  • Goods are delivered to your stores (usually a warehouse), either as raw materials, components, or finished products.
  • A team responsible for stock ‘books in’ these goods, storing them in the appropriate areas, and updates inventory records.
  • After assembly or other manufacturing processes, raw materials and components are stored elsewhere in your stores, ready to be shipped. Inventory records are updated.
  • Goods are shipped out to customers or to retail locations once ordered. Inventory records are updated.

What is inventory management?

This sequence is a cycle, with some stock in each of these steps at the same time. Accurate inventory management relies on data to track physical goods throughout the process. Lot numbers, serial numbers, quantities of each good, and the dates when a given item moves forward in the cycle are all important.

Modern inventory management will often confirm this data using barcodes and barcode scanners. Goods are scanned at every step along the process, and a central database keeps inventory records up to date. These records file goods by their SKU, a unique identifying number for each product. More details on SKUs are found below.

It’s important to remember that this cycle may look very different if you map the goods’ passage through departments. Stock may pass between your warehouse team and your production team several times, with stops in other departments along the way.

Creating a flowchart that shows the process for your business will help you to better manage it going forward.

Inventory Management Software

Before computers were available, inventory management was recorded on paper in thick ledgers. These were soon transferred to spreadsheets, making it easier to update and reorganise information. But neither of these solutions did everything needed. Modern inventory management software is highly advanced, and often integrates with accounting packages and order management systems.

A modern inventory management system can track goods in your inventory across several locations. The cost of your current stock can also be calculated, which makes accounting programs’ reports more accurate.

The most up to date inventory management software is cloud based, and is often supplied as SaaS (Software as a Service).

What is a SKU?

A Stock Keeping Unit, or SKU, is a unique number assigned to a specific product within an inventory management system. A business selling water bottles would track blue 500ML bottles made by one company under one SKU, yellow 500ML bottles from the same company under another, and blue 500ML bottles from a different company under a third.

Why Do SKUs Matter?

Using SKUs allows stock to be tracked highly accurately, product by product.

Many wholesale and retail businesses will deal with thousands or even hundreds of thousands of SKUs. At that level, anything less than total accuracy means your inventory management is almost pointless.

SKUs and Multi-Channel Sales

It’s not uncommon for a company to sell products which have different SKUs (and related ID numbers) on different channels. Many smaller businesses, as they start expanding onto new channels, don’t see this as a problem – but it makes accurate stock-keeping much harder.

Modern multi-channel systems require a ‘core SKU’ for each of these products. A product map tells the system which SKU to use on which system:

SKUs in Inventory Management

This makes tracking inventory a simple, automatable process. It also allows inventory management systems integrated with sales channels to update stock in real time.

Inventory Management Techniques

Just in Time (JIT)

Goods are ordered to arrive ‘just in time’ for customer demand. JIT inventory management minimises the need for storage (and storage costs), but instead, the risks include supplier problems or a surprise increase in market demand leading to products being out of stock.

Successful JIT management requires you to understand factors affecting buying patterns. Seasonal changes in demand are one obvious factor, but a given product might have many more.

ABC Analysis

This technique divides your inventory into three categories based on value and sale volume.

  • Category A goods are high value but sell slowly
  • Category B goods are of moderate value and sell at a moderate rate
  • Category C goods are low-value but sell quickly

These categories are managed separately. ABC analysis provides a simple way to divide your stock which keeps the cost of stock low.

Stock Review

Also known as a stock audit, stock review is closest to what most people picture when they think about inventory management. It involves regular reviews of stock, matches against how quickly the business expect to sell a given product. (This is sometimes called its run rate).

Stock review processes benefit the most from using software. With a modern system, run rate calculations can be constantly updated, and a full stock audit can be ‘replaced’ by real-time updates. (Stock audits may still be useful from time to time. A computer system prevents you from accidental issues. It doesn’t prevent someone deliberately circumventing the system.)

Without software and technology support, stock review is the most time-intensive. However, it allows the same benefits as ABC analysis, except on a product by product level instead of a category level.

What’s the Difference Between Inventory Management and Inventory Control?

Inventory control is sometimes used to mean the same thing as inventory management. However, it’s also used for a specific part of the process. Inventory control works to have the least amount tied up in inventory while being able to supply customers with their orders in an acceptable time.

In today’s world, where next-day Prime delivery has become the standard to beat, inventory control is more challenging than ever before.

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