What Is Inventory?

Saves Money:

Inventory is the raw materials, components and finished Understanding stock trends means you see how much of
goods a company sells or uses in production. Accounting and where you have something in stock so you’re better
considers inventory an asset. Accountants use the able to use the stock you have. This also allows you to keep
information about stock levels to record the correct less stock at each location (store, warehouse), as you’re
valuations on the balance sheet. able to pull from anywhere to fulfill orders — all of this
decreases costs tied up in inventory and decreases the
Inventory vs. Stock
amount of stock that goes unsold before it’s obsolete.
Inventory is often called stock in retail businesses:
Improves Cash Flow:
Managers frequently use the term “stock on hand” to refer
to products like apparel and housewares. Across industries, With proper inventory management, you spend money on
“inventory” more broadly refers to stored sales goods and inventory that sells, so cash is always moving through the
raw materials and parts used in production. business.

What Is Inventory Management? Satisfies Customers:

Inventory management refers to the process of ordering, One element of developing loyal customers is ensuring they
storing, using, and selling a company's inventory. This receive the items they want without waiting.
includes the management of raw materials, components,
Inventory Management Challenges
and finished products, as well as warehousing and
processing of such items. The primary challenges of inventory management are
having too much inventory and not being able to sell it, not
What Is Inventory Management?
having enough inventory to fulfill orders, and not
Inventory management helps companies identify which and understanding what items you have in inventory and where
how much stock to order at what time. It tracks inventory they’re located. Other obstacles include:
from purchase to the sale of goods. The practice identifies
Getting Accurate Stock Details:
and responds to trends to ensure there’s always enough
stock to fulfill customer orders and proper warning of a If you don’t have accurate stock details,there’s no way to
shortage. know when to refill stock or which stock moves well.
Once sold, inventory becomes revenue. Before it sells, Poor Processes:
inventory (although reported as an asset on the balance
sheet) ties up cash. Therefore, too much stock costs money Outdated or manual processes can make work error-prone
and reduces cash flow. and slow down operations.

One measurement of good inventory management is Changing Customer Demand:

inventory turnover. An accounting measurement, inventory
Customer tastes and needs change constantly. If your
turnover reflects how often stock is sold in a period. A
system can’t track trends, how will you know when their
business does not want more stock than sales. Poor
preferences change and why?
inventory turnover can lead to deadstock, or unsold stock.
Using Warehouse Space Well:
Why Is Inventory Management Important?
Staff wastes time if like products are hard to locate.
Inventory management is vital to a company’s health
Mastering inventory management can help eliminate this
because it helps make sure there is rarely too much or too
challenge.
little stock on hand, limiting the risk of stockouts and
inaccurate records. Inventory Management Techniques and Terms

Public companies must track inventory as a requirement for Some inventory management techniques use formulas and
compliance with Securities and Exchange Commission (SEC) analysis to plan stock. Others rely on procedures. All
rules and the Sarbanes-Oxley (SOX) Act. Companies must methods aim to improve accuracy. The techniques a
document their management processes to prove company uses depend on its needs and stock.
compliance.
Find out which technique works best for your business by
Benefits of Inventory Management reading the guide to inventory management techniques.
Here’s a summary of them:
The two main benefits of inventory management are that it
ensures you’re able to fulfill incoming or open orders and ABC Analysis:
raises profits. Inventory management also:
This method works by identifying the most and least
popular types of stock.
Batch Tracking: Reorder Point Formula:

This method groups similar items to track expiration dates Businesses use this formula to find the minimum amount of
and trace defective items. stock they should have before reordering, then manage
their inventory accordingly.
Bulk Shipments:
Perpetual Inventory Management:
This method considers unpacked materials that suppliers
load directly into ships or trucks. It involves buying, storing This technique entails recording stock sales and usage in
and shipping inventory in bulk. real-time. Read “The Definitive Guide to Perpetual
Inventory” to learn more about this practice.
Consignment:
Safety Stock:
When practicing consignment inventory management, your
business won’t pay its supplier until a given product is sold. An inventory management ethos that prioritizes safety
That supplier also retains ownership of the inventory until stock will ensure there’s always extra stock set aside in case
your company sells it. the company can’t replenish those items.

Cross-Docking: Six Sigma:

Using this method, you’ll unload items directly from a This is a data-based method for removing waste from
supplier truck to the delivery truck. Warehousing is businesses as it relates to inventory.
essentially eliminated.
Lean Six Sigma:
Demand Forecasting:
This method combines lean management and Six Sigma
This form of predictive analytics helps predict customer practices to remove waste and raise efficiency.
demand.

Dropshipping:
Inventory Management vs. Inventory Control
In the practice of dropshipping, the supplier ships items
inventory control is a part of the overall inventory
directly from its warehouse to the customer.
management process. Inventory control manages the
Economic Order Quantity (EOQ): movement of items within the warehouse.

This formula shows exactly how much inventory a company Inventory Management vs. Inventory Optimization
should order to reduce holding and other costs.
Inventory optimization is the process of using inventory in
FIFO and LIFO: the most efficient way, and as a result minimizing the
dollars spent on stock and storing those items.
First in, first out (FIFO) means you move the oldest stock
first. Last in, first out (LIFO) considers that prices always Inventory Management vs. Order Management
rise, so the most recently-purchased inventory is the most
Inventory management is responsible for ordering and
expensive and thus sold first.
tracking stock as it arrives at the warehouse. Order
Just-In-Time Inventory (JIT): management is the process of receiving and tracking
customer orders. Software often combines both tasks.
Companies use this method in an effort to maintain the
lowest stock levels possible before a refill. Inventory management plays an important role in order
management. As orders are received, inventory can be
Lean Manufacturing:
allocated to specific orders, and then the status can be
This methodology focuses on removing waste or any item changed in the inventory record to essentially put it “on
that does not provide value to the customer from the hold” for that order. Furthermore, when the order
manufacturing system. management system and inventory system are integrated,
the inventory system can recommend which location
Materials Requirements Planning (MRP): should fulfill the order, based on where all the items in the
order are available—this eliminates multiple shipments for
This system handles planning, scheduling and inventory
a single order.
control for manufacturing.
Inventory Management vs. Supply Chain Management
Minimum Order Quantity:
Supply chain management is a process of managing supply
A company that relies on minimum order quantity will
relationships outside a company and the flow of stock into
order minimum amounts of inventory from wholesalers in
and through a company. Inventory management may focus
each order to keep costs low.
on trends and orders for the company or a part of the Manufacturing Inventory Management
company.
Manufacturing inventory management is the practice of
Inventory management is essential for a properly running keeping enough stock on hand so production lines can fulfill
supply chain. Inventory management follows the flow of orders. The process helps managers see stock levels at a
goods to, through and out of the warehouse. The supply glance and tracks raw materials, parts, work-in-progress
chain includes demand planning, procurement, production, and finished goods.
quality, fulfillment, warehousing and customer service—all
What Is Multi-Location Inventory Management?
of which require inventory visibility.
Multi-location inventory management is the process of
Inventory Management vs. Warehouse Management
managing stock across multiple locations, warehouses, and
Warehouse management complements inventory retail stores or across multiple selling channels. With multi-
management. Warehouse management organizes stock in a location management, you can watch stock levels in all
warehouse. Inventory management manages stock and locations and optimize your inventory to fulfill orders.
trends for many warehouses or an entire company.
What Is an Inventory Management System?
The key to streamlining your warehouse operations is a
An inventory management system combines varying
thoughtfully laid out and meticulously organized facility.
software packages to track stock levels and stock
When each product has a specific place in the warehouse, it
movements. The solution can integrate with multichannel
prevents staff from moving about inefficiently and
sales systems or shipping systems.
maximizes labor efficiency. But these processes are only as
good as the inventory records that drive them. An inventory management system optimizes inventory
levels and ensures product availability across multiple
Inventory Management vs. Logistics
channels. It provides a single, real-time view of items,
Logistics is the practice of controlling processes in a inventory and orders across all locations and selling
warehouse and in the replenishment and delivery systems. channels. This enables businesses to carry less inventory on
Inventory management maintains stock levels and manages hand and frees up cash to be used in other parts of the
stock location. business. An inventory management system helps keep
inventory costs low while delivering on customer
Inventory management is a crucial part of how companies
expectations.
manipulate their logistics. The relationship between
inventory management and logistics is interdependent.
Logistics need inventory management to perform their
Inventory Management FAQs
activities. Good logistics systems improve warehouse and
operational activities. There are many questions in a broad and complicated topic
like inventory management. Here are answers to a few:
Inventory Management vs. ERP
What Are the Objectives of Inventory Management?
An enterprise resource planning (ERP) system is software
that manages business activities such as accounting, One objective of inventory management is to keep enough
purchasing, compliance and supply chain operations. By stock to satisfy customers. Another is to invest as little as
contrast, inventory management is a part of a modern ERP possible in stock while still earning the most profit.
system, providing insight into stock levels, inventory en
route and the status of current inventory—this makes it Why Inventory Management Is Important in the Supply
visible across the organization in real time. Chain?

Inventory management helps to properly plan a company’s Inventory management is vital in the supply chain because
replenishment orders. ERP systems give companies a company must balance customer demand with storage
accurate inventory data, so they have the most current space and cash limitations. Inventory management provides
information for their inventory management plan. ERP visibility into the supply chain (procurement, production,
systems optimize the data so inventory management is fulfillment, etc.) so managers can coordinate lead times for
successful. deliveries with production timetables.

How Can Inventory Management Be Improved?

Retail Inventory Management Keeping accurate accounting records and taking regular
physical stock counts can improve your inventory
Retail inventory is the stocking of products that you sell to management efforts. A system that provides your
consumers. Use the system to set profitable prices and organization with real-time visibility into inventory can help
ensure you have the right amount of stock to meet stakeholders make critical business decisions. You should
demand.
also be aware of a stock’s condition, especially if you’re change when trends or seasons change. Poor stock
dealing with perishables. management increases costs and thereby reduces profits.

How Inventory Management Affects the Working Capital?

Real goods in warehouses tie up working capital until they

sell. Making the supply chain more efficient keeps you from
holding too much stock. Improving inventory management
processes helps you prevent storing, picking and shipping
errors that reduce sales.

What Are Inventory Management Policies?

Inventory management policies are plans for how to use

inventory to make customers happy and reduce costs.
Policies outline such things as the stock management
method the company uses.

What Are the Types of Inventory Management Systems?

There are several types of inventory management systems

that businesses use depending on how they operate. Three
examples are manual inventory, periodic inventory and
perpetual inventory. Manual methods are the least
sophisticated and least accurate, and perpetual systems are
the most sophisticated and most accurate.

Manual Inventory System: This involves physically counting

items and recording them on paper or in a spreadsheet.
Small businesses may use manual systems.

Periodic Inventory System: Periodic inventory systems

include manual and periodic counts. Periodic counts record
item details as items move in and out of stock. Barcodes
simplify stocktaking. A database contains the records of
stock levels and locations.

Perpetual Inventory System: Perpetual inventory systems

provide real-time stock data, as they rely on active radio
frequency identification (RFID) tags that are always on and
sending updates on item movements. Passive RFID tags,
meanwhile, use a scanner to send stock information to the
database.

What Is Service Level in Inventory Management?

A service level for inventory management is how much a

company believes it can successfully store a particular
stock.In other words, it’s the probability a company will
avoid stockouts and support sales.

How Does ERP Help in Inventory Management?

Enterprise resource planning (ERP) is helpful for inventory

management because it tracks and provides insights into
supply chain operation, accounting and purchasing,
consolidating the information and making it visible in one
place.

What Is Poor Inventory Management?

Poor inventory management is an imbalance between

keeping too much and too little stock. The definition of a
perfect balance can change as demand changes: Sales