Inventory management is the balance of having the correct product inventory in stock at the right time, in a quantity that will result in neither overstocking nor understocking, all while being cost-effective for the company. It is a component of supply chain management and the inventory process.
An easy way to understand inventory management is to think about a store during a holiday. They will want to have that season’s desirable product in stock in quantities that won’t run out too quickly or sit on shelves for too long. At the same time, these items, from acquisition to order to shipping, should be marked up at a price that will maximize profits for the store while still appealing to customers. As consumers, we see this frequently in brick-and-mortar stores with seasonal items like Christmas lights or Halloween candy.
In short, the goal of inventory management is to properly and efficiently order and store products. When done correctly, these methods can positively affect the bottom line of a company. For example, proper inventory management methods can save a business money, ensuring that the warehouse doesn’t order too much of a product, while benefiting the customer by always having just enough of the product in stock.
Inventory Management Methods
The two most common methods of managing inventory are the “Just in Time” method and the “Materials Requirement Planning” method. While wholly different, each method comes with its own advantages and disadvantages.
Just in Time (JIT)
The Just in Time (JIT) method is based on timing shipments so that products are received as they are needed, rather than ordered consistently in an effort to maintain a large inventory. As the name implies, the company receives each shipment of product “just in time” — right as they are running out of inventory. However, proper JIT practices ensure the warehouse is never quite running out of product on the shelf.
Using this method means a company does not have to keep money invested in large quantities of product, and, in effect, requires less storage space. However, JIT also means closely monitoring supply and demand, and anticipating surges in demand ahead of time.
Materials Requirement Planning (MRP)
While JIT closely monitors a small amount of inventory, the Materials Requirement Planning (MRP) method predicts future needs and schedules deliveries based on sales forecasts. Typically, MRP is software-based. The three major steps are taking inventory of what products are on hand, identifying which additional products will be needed, and scheduling their purchase in specific planning periods.
Like JIT, MRP aims to keep inventory stock to a minimum, carefully planning storage needs, and factoring in product manufacturing times. The disadvantages are that the systems can be expensive and implementing them can be time-consuming. For the system to truly work, accurate asset tracking is a must.
Inventory Management System
In general, an inventory management system hinges on taking stock and ordering when necessary, and in a timely manner. To achieve this goal, reorder points must be known and safety stock must be calculated.
The reorder point is the point in your inventory quantity where a company needs to order more product so as not to suffer empty shelves. An item’s reorder point takes into account its current inventory quantity and delivery lead time, as well as safety stock.
Safety stock, as the name suggests, is the number of items kept in case something unexpected happens. It is the buffer against a sudden customer demand for a particular product, a manufacturing hiccup, or a shipping problem. Safety stock is calculated by a formula, and it can be changed based on how much time a company wants as a buffer.
Inventory Management Software
Using the right inventory management app or software is essential to tracking assets, keeping an accurate inventory count, forming JIT or MRP predictions and forecasts, and, in turn, calculating reorder points. Answering common questions about what features are needed for a specific company can help determine the appropriate software to suit them.
At the most basic, inventory software should integrate with Excel. While small businesses might try to manage inventory with just Excel, it is better to have specialized, automated software that will do most of the work for you. Other important integrations include QuickBooks and Shopify, which is especially useful if the company is solely ecommerce based.
Next, it’s important to know if you will need a mobile, cloud-based program, which can be accessed via wireless barcode scanners and computers, or if a desktop-based program will suffice. Smaller businesses might find a desktop-based program sufficient, while growing or larger businesses will want the convenience of mobile-ready, cloud-based software.
Another consideration is budget. A free option, like Boxstorm Forever Free, can offer a variety of features that will make inventory management much easier by automating the inventory process and organizing warehouses. This will eliminate many problems introduced by the possibility of human error, improving a business’s efficiency and bottom line.
With the right inventory management system in place, a business can gain a better grasp on product quantity, know when to order more, and customize inventory storage requirements. Proper management can help reduce over- and understocking, increase profitability, and provide stability in emergencies.