What Is Inventory Management?
Inventory Management Definition
Stock inventory management terms
|Barcode reader||An optical scanner that can read printed barcodes, decode barcode data, and send it to a computer. Almost all barcode scanners have a decoder circuitry that analyzes the barcode’s image data by the sensor and sends the barcode’s contents to the scanner’s output port.|
|Bundles or bundling||Involves two or more complementary goods or services sold together as a combined package|
|Cost of goods sold (COGS)||The carrying value of goods sold during a certain period that includes the costs of materials and labor used to create the goods|
|Deadstock||Discontinued line of unworn goods like clothing items that are no longer available on the market but still have their original tags|
|Decoupling inventory||A technique that describes saving extra raw materials or work-in-progress for all or some stages of the production process so that low stock or breakdown doesn’t slow or stop operations|
|Economic order quantity (EOQ)||One of the classical production scheduling models used to define the ideal order quantity that minimizes inventory costs such as holding and ordering costs|
|Holding costs||Costs associated with storing unsold inventory|
|Landed costs||The total cost of creating and transporting a product to the end customer|
|Lead time||The time between the initiation and completion of a production process|
|Order fulfillment||The process of fulfilling an order to the customer’s specifications that includes delivery of products as promised at the time of sale|
|Order management||The process of receiving, tracking, and fulfilling customer orders|
|Purchase order (PO)||A legally binding document created by a buyer for a seller that specifies the list of products to purchase|
|Pipeline inventory||All items in transit between different locations of a supply chain|
|Reorder point||A specific level of inventory at which stock needs to be replenished|
|Safety stock||An additional quantity of an item in inventory held to reduce the risk of that item being out of stock|
|Sales order||A document issued by a seller to a customer that specifies the details about products or services ordered by the customer|
|Stock keeping unit (SKU)||A scannable bar code printed on product labels that denotes a distinct type of item for sale with all its distinguishing attributes|
|Third-party logistics (3PL)||The use of third party businesses to distribute, warehouse, and fulfill orders|
|Variant||An SKU used to track inventory with inventory tracking services|
What Are the Types of Inventory?
Vendor managed inventory
Why Is Inventory Management Important?
Inventory Management Techniques
Economic order quantity (EOQ) formula
Days inventory outstanding (DIO) formula
If you’re just starting out your business, you’d value your starting inventory at zero. If your business is established, the value of your starting inventory would be the same as the value of your ending inventory in the previous year. There are three established ways to value inventory, such as FIFO, LIFO, and Average Cost. FIFO, which means first in, first out, assumes the company sells the oldest products first, whereas LIFO, last in, first out, assumes the opposite. The Average Cost is based on the average price of all goods currently in stock. Regardless of the chosen method, the important thing is consistency.
Reorder point (RP) formula
Safety stock (SS) formula
ABC inventory management
Just in time (JIT)
First in, first Out (FIFO)
Last in, first Out (LIFO)
Dropshipping and cross-docking
Implement six sigma
Set par levels
For example, if your restaurant business uses 20 pounds of tomato each week (with the safety stock being 3 pounds), and the delivery comes in twice a week, then your par level should be calculated as follows: (20+3)/2 = 11.5 pounds. This means that as soon as your level of tomatoes drops to 11.5 pounds, you need to reorder.
To prevent contingencies from happening, you need to follow good inventory management practices, such as those outlined below.
- Rely on a few people (as opposed to a single individual) to manage restocking by dividing replenishment responsibilities among several employees.
- Use accounting and inventory management software to document all inventory procedures with comings and goings and use analytical tools to forecast future demand.
- Keep all vendor information with contracts, contacts, and specific leverage terms (such as conditions to get a discount) in one place to be readily available for people responsible for supplier relationship and product inventory management.
However, following good practices might not be enough in times of crisis. You need to have a solid contingency plan (or several plans). To arrive at such a plan, you need to determine the nature of potential contingencies first, which might include the following crises:
- An unexpected spike in demand for a particular product;
- Cash flow problems;
- Lack of space in a warehouse;
- Shipment delays;
- Discontinuation of a product that was promised to a customer, and so on.
By identifying potential contingencies, you can create a backup plan to mitigate potential negative effects in case those contingencies end up happening. Contingencies are very good examples where a good relationship with suppliers can potentially save the day: suppliers might be more willing to accept the products that don’t sell very well, sell items on credit in case of cash flow problems, or help you determine the time when some of the needed items could be back in stock. However good your relationships might be, it’s always worth considering alternative suppliers who you could turn to if others don’t deliver on their promises.
Inventory Best Practices
The best practices, in inventory or elsewhere, are achieved through continuous improvement in operational efficiency and a collective mindset that embraces technology as a friend rather than a fiend. To guide you in developing your own best practices, below are a few suggestions for where to start or what to look for:
- Adopt product inventory management software that can effectively leverage large amounts of data and create a single source of truth and learning for all employees.
- Maximize inventory turnover, which can dramatically increase profitability by helping you determine the right reordering points, thereby reducing carrying costs, deadstock, and spoilage.
- Employ analytic and forecasting tools for accurate demand forecasting especially if you used to manually trawl through historical data to get an adequate picture of future growth.
- Invest in process automation and integrate inventory management software with other tools, including ecommerce.
- Follow established accounting disciplines, such as FIFO or LIFO, track and audit inventory consistently, decouple inventory for additional safety.
- Invest in good relationship management with suppliers but keep a list of alternative partners handy in case of emergency.
- Have a contingency plan ready.
Inventory Management Software for Retailers
What are the objectives of inventory management?
- Ensure there’s readily available inventory and safety stock for unforeseen circumstances
- Ensure there’s a systematic record of inventory to prevent any confusion like double ordering or ordering of wrong amounts
- Ensure that costs are minimized without affecting customer satisfaction
- Ensure that the overall production runs smoothly or at the best possible pace