Whether you own a small business or a chain store, inventory management is just as crucial. The term inventory represents products available for sale or raw materials and items that are used to manufacture these products. The turnover of inventory generates profits and hence inventory is considered to be one of the most important assets of a business.
In simple terms, inventory is considered to be the products that a company either manufactures or obtains from a vendor and plans to sell. For example, a pharmacy’s inventory may include drugs, a pharmaceutical industry’s inventory may include raw materials, in-process goods, packing materials, and finished products in the form of drugs. These products stop being a part of the inventory when they are sold to the customers.
Inventory Management and Its Importance
Inventory management is a procedure designed to track stock a company owns, whether it is in a warehouse or a store. It can be used to locate any item and determine its quantity at any given time. It encompasses 5 key phases:
- Purchasing phase- Procuring and purchasing raw materials or finished products.
- Production Phase- Manufacturing the finished product from raw materials (does not apply to businesses that purchase finished products only)
- Stock Holding Phase– Storage of raw materials, packing materials, in-process goods, and finished goods.
- Sales Phase- Converting stock to revenue by selling it to customers.
- Reporting Phase- Investigating the amount of stock sold, highest and lowest selling items, and profit made on each sale.
Practicing inventory management techniques can help your business forecast product sales, create a balance between supply and demand, reduce costs, and generate more profit. Opting for an inventory management software streamlines this process and makes it more efficient.
Inventory Management Strategies
Employing a sound inventory management technique will optimize your company’s operations. However, the chosen strategy may vary depending on the type of company you have.
- Minimum Order Quantity (MOQ):
MOQ is a minimum set amount of stock that a buyer must purchase from a vendor at a time. Inventory products with high production costs usually have a lower MOQ than products that are cheaper to manufacture.
- Economic Order Quantity (EOQ):
EOQ is the optimal order quantity a business needs to purchase to minimize holding costs, order costs, and storage costs. It is calculated through the EOQ formula.
- Just in Time (JIT):
JIT inventory management follows the concept of reordering products as needed rather than stockpiling them. This is practiced to avoid dead stock build-up from ordering too much inventory.
- ACB Analysis:
Inventory items are categorized on the basis of their turnover rates. Category A consists of the 20% products that generate 80% of the revenue, category B and C consist of products with lower turnover rates.
- Reorder Point (ROP):
The ROP formula calculates the minimum amount of stock that triggers an action to repurchase the said item.
- FIFO and LIFO:
First In, First Out (FIFO) method comprises of selling the older items of the inventory first, before they spoil. Last In, Last Out (LIFO) on the other hand follows the concept of selling newer inventory items first.
- Safety Stock:
Safety stock is an inventory management method in which a business stores an extra quantity of a product to mitigate the risk of stockouts or shortages due to incorrect forecasting or unforeseen supply and demand problems.
A cosigner (wholesaler) supplies their goods to a consignee (retailer) without an upfront payment for the inventory. The consignee pays for the goods only when they are sold.
- Batch Tracking:
A set of stocks that share similar properties are grouped to facilitate their monitoring and tracking. It simplifies tracking the expiration dates of products and tracing defective products back to the batch they belong to.
In this technique, the store doesn’t physically hold the items it sells, instead, sales are completed through a third party. Whenever a customer buys an item, the store purchases that item from a third party, which then sends the package directly to the customer.