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  • Home / Blog / Glossary

Inventory Management - [Complete Guide]

31 Jan, 2023 | 6 Min Read
Inventory Management - [Complete Guide]

Table of Contents

1) Introduction

In the eCommerce ecosystem, inventory can include anything from large boxes filled with school supplies to stacks of bicycles to thousands of footballs (basically anything that a business owns and needs to sell). And among the key operations any eCommerce business needs to take care of are the storage, update, and tracking of this inventory.

All of these operations are collectively known by the umbrella term “inventory management,” and it typically involves maintaining proper records of inventories, from the time they arrive in storage houses to the time they are dispatched post-sale. Needless to say, the entire process involves a lot of stages and must be done accurately if a business aims to maintain its profit margins.

If you’re an online seller or wish to enter the field of eCommerce selling, inventory management is a concept that should be crystal clear to you. In this article, you will get to know about this business operation and the various aspects associated with it. Stick around and keep reading.

2) What is inventory management?

Inventory management is a technique that permits companies to acknowledge what proportion of stock must be ordered and at what time. It tracks inventories from the acquisition to the sale of goods. This practice identifies and responds to the stock trends to ensure that there is always enough stock available to meet consumers’ orders and keep a check on the warning of a shortage.

Inventory management is important for any company’s health because it helps in remodeling of the state of stocks at hand. There should not be an excessive amount of or too less stock available because it can create a risk of stockouts and imbalanced records.

When it involves public companies, it's extremely essential for them to trace inventories as it is a basic requirement for compliance with (SEC) Securities and Exchange Commissions and under the (SOX) Sarbanes-Oxley Act. Companies should document their entire inventory management process so as to prove compliance.

Now that you have understood the term inventory management thoroughly. Let's move to its features.

3) What are the features of Inventory Management?

  • Picking and packing- The picking and packing employees are directed to prescribed warehouse locations.
  • Shipping- Receipts of lading, packing sheets, invoices, and other relevant documents are collected. 
  • Managing locations- Particular raw materials are directed towards designated warehouses to ensure the space and resources are utilized correctly. 
  • Receiving orders- Take control of incoming orders in order to establish fulfillment of operations.
  • Tracking inventories- Keeps track of running total on all inventories or SKUs.
  • Cycle counting- This technique of counting inventories helps in maintaining up-to-date totals of raw materials.
  • Barcode tracking- Manages barcode scanning and further integrates it with shipping, accounting, and various other systems. 
  • Reporting tools- Generates valuable information for actionable intelligence to ensure tactical and strategic decision-making. 

4) What is the process of inventory management?

Before building a strong inventory management plan, you must understand each and every step in the inventory management process. This is crucial in order to minimize errors and allows you to choose the most effective management system for your organization. 

4.1) Delivery of goods to your facility

In this process, the raw materials and subcomponents of the final products are provided to the manufacturers at the respective warehouses.

4.2) Inspection, sorting, and storing

Irrespective of which warehouse management system you use, the inventories need to be inspected and reviewed, sorted, and then stored in their allotted stock areas. 

4.3) Monitoring inventory levels

This can be done through physical inventory counts, cycle counts, or via perpetual inventory software that helps in minimizing the chances of any errors. 

4.4) Approval of stock orders

In this method, you pass the order to your supplier or it can also be automated via your POS system, depending upon the management software your organization uses.

4.5) Take goods from stocks

The required goods are found by SKU number, derived from the stock, and later shipped to the customer or manufacturers. 

4.6) Update the inventory levels

If you use a perpetual inventory system, you can automatically upgrade the inventory levels and share the required information with necessary stakeholders. But if you don't have inventory management software, you can also update the inventory levels manually or through other traditional methods. 

4.7) Reordering

Once you get the records of inventory levels, restock inventory as per the requirements. 

To visualize these steps in a better manner and make use of it efficiently, try creating an inventory process map for smooth working and understanding of the staff. This will help you stay on track and minimize under or overstocking of inventories. 

Now that we have understood the basics of inventory management, let's move to the technical part of it.

5) Techniques of inventory management

Some inventory management techniques use analysis and formulas to plan and keep a check on stocks, whereas others depend on procedures. But in the end, all of them aim to boost accuracy. The techniques selected by a corporation depend upon its working pattern and requirements. 

Here's a guide to basic inventory management techniques-

5.1) ABC Analysis

This method helps in categorizing the foremost and least popular styles of stock.

5.2) Bulk shipments

This method consists of unpacked goods that suppliers load directly onto trucks and ships. It consists of shopping for, storing, and shipping the inventory in large batches.

5.3) Batch tracking

In this method, groups of comparable items are put together to trace expiration dates and find damaged or defective items.

5.4) Cross-Docking

In this process, the products are directly unloaded from a supplier’s truck to the delivery van. Warehousing or storage is actually eliminated during this process.

5.5) Economic Order Quantity (EOQ)

This formula states exactly what percentage of inventories a corporation has to place an order for to cut back holding and further added costs.

5.6) Demand forecasting

It is a sort of predictive analytics that enables you to predict customer demand.

5.7) Dropshipping

In this practice, the things are shipped directly from their warehouse to the clients.

6) How to choose an inventory management system?

Choosing the right inventory management system is just a matter of identifying what features your business requires. Do you really need to track stock moments or track trends and plan inventories, or maybe both? 

Choose a system that is easy to use and lowers the barriers to understanding from the very beginning. An inventory management system that is highly intuitive, ensures security, is accessible from every location, and provides active management processes. By keeping in mind the right business requirements, selecting good inventory management isn't as overwhelming as it may seem. 

Here are 8 features you must look for when choosing an inventory management system.

  • Inventory tracking
  • Inventory barcoding
  • Perpetual upgradation
  • Integrations
  • Usability
  • Accessible to operate
  • Designed to grow

7) What are the benefits of inventory management?

7.1) Saves monetary funds

Understanding the stock trends allows you to know how much stock you have and where it is stored so that you'll be able to make better use of that. This practice allows you to keep track of all your inventories and minimize the practice of stockpiling. By following this number of inventories that are left unsold or obsolete will also decrease.

7.2) Better Cash Flow

With the help of a proper inventory management system, you only spend money on the inventories that are being sold i.e., the cash keeps moving through the organization which leads to a smooth cash flow system. 

7.3) Consumer satisfaction

The most important element that helps in developing loyal customers is by providing them with good and effective service. It's essential to make sure that the customer is receiving the right products without any extra waiting.

8) How is inventory management different from other processes?

People usually end up confusing inventory management with some of its sister practices. It's essential to understand this basic difference that inventory management manages and controls all the stocks within a firm. 

8.1) Inventory management vs. Inventory optimization

Inventory optimization is a significant process of using inventories in the most efficient and best way possible. Resulting in minimizing the funds that are spent on storing and stocking those items.

8.2) Inventory management vs. Order management

The concept of inventory management is responsible for managing and tracking raw materials as it arrives at the warehouse. Whereas, order management is related to receiving and tracking client orders. Both inventory management and order management are codependent on each other, as orders are received and inventories are allocated to specific orders that need to be fulfilled on time. 

8.3) Inventory management vs. Warehouse management

Warehouse management is very closely related to inventory management. The process of warehouse management helps in organizing and managing raw materials in a warehouse. Whereas, inventory management focuses on managing the stocks and trends of an entire company. 

9) Limitations of inventory management

9.1) High installation and maintenance costs

Although the automated inventory software provides a lot of great and effective features and ensures smooth working for the organization. But it comes with its own drawbacks, one of them being the cost of installation. Big organizations can still cover this expense and invest a huge chunk of money in the system. Still, for small and medium-sized businesses, it won't be feasible to maintain such software. 

9.2) Complex in use

The use of inventory management makes operations quite easy but learning how to operate it is a big task. The entire process can be very cumbersome with a bunch of complexities that employees may find hard to inherit. Special supervisors and training sessions need to be provided that will add to the cost of the organization. 

10) Conclusion

Whether you own an eCommerce business, a brick-and-mortar, or even a multichain retail business, inventory management is one such crucial technique you need to take into consideration in this competing market and provide your consumers with the experience they really deserve. And without implementing proper inventory management techniques, you'll never get ahead of your set goals. 

11) FAQs

11.1) How can you reduce inventory costs?

A growing business has to undergo increasing demand and higher overhead costs. Therefore, inventories can take away a lot of your funds especially when you account for damaged items, warehousing, spoilage, replacements, and quality controls. Here are some methods through which you can minimize your inventory management costs and free up some extra capital.

  • Let go of your deadstock
  • Opt for better inventory management software
  • Cut short the supplier lead time
  • Avoid the practice of overstocking

11.2) What are the benefits of inventory management for a business organization?

  • In order to avoid inventory misplacement and theft.
  • Finding the required inventories quickly in a huge warehouse.
  • Increase in business productivity
  • Helps an organization in avoiding stock issues.

11.3) What inventory techniques help in tracking the product?

There are various inventory tracking techniques like BLE (Bluetooth low energy), Barcode, GPS (Global positioning system), QR code(Quick Response code), IoT (internet of things), NFC (Near field communication), etc. 

11.4) What are the objectives of inventory management?

The two main objectives of inventory management are to maintain enough stock to satisfy your customer’s needs and invest as little as possible in stock and inventory management while earning the most profit.

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