Inventory management definition and meaning - What is inventory management?
When we ask “what is inventory management?” the answer is pretty straight forward. Inventory management (or stock management) is literally the process of managing a business’ inventory and stock. It is a part of supply chain management. To further define inventory management process we can note that it includes aspects like storage of inventories, overseeing the orders for stock inventory, and controlling the number of items in stock.
As you see, the inventory management definition is not complicated. The real question is how do you, as a retailer, unitize inventory management, meaning what techniques do you focus on to achieve the best results? Here are a few useful how-to’s to use in your inventory management.
Getting that right amount of inventory when stocking is extremely important. Order too little and you’re at risk of losing customers. Order too much and you might be stuck with extra stock that you’ll be forced to sell at a big discount or have them expire; all the while paying extra carrying costs.
One way to go about deciding on reordering amount is to do it based on the information from previous months. In this case, you need to have the right inventory data at hand. A smart choice here would be to go automatic with your inventory management, meaning get a solution that will automatically track your inventory fluctuations.
Even if you chose to go a slightly different route and use inventory forecasting software or even just Excel formulas you’re still going to need that information from the previous months.
Purchasing the right amount of inventory stock is only the beginning. It’s always important to keep the carrying costs in mind, which are attached to all the products you buy. The larger the invetory you have, the more you’ll be spending on storage, while increasing your risk of having products going out-of-date. Good news is there is an equation that helps you with this - the Economic Order Quantity (EOQ) formula.
Economic Order Quantity is a formula that helps calculate how many units your business should be adding to its inventory in order to reduce the total costs of inventory management – including factors like order costs, holding costs, and shortage costs.
There are a number of EOQ calculators you can find online to help you figure it out.
The next important point you need to calculate is the right time to place your order for the inventory restocking. EOQ answers the question of “What is an inventory level you want to maintain?”, but it doesn’t tell you how to actually do it. Ideally, you want your restock shipment to arrive when your previous batch is about to sell out. If it comes too early, you might face all kinds of storage and handling issues. And if it comes late, you’re in danger of running out of stock. So, you want to make sure you always have enough products, which is where determining your reorder point gets important.
In order to do it right, you would need to know the time it takes for:
• Picking and handling of your items
• Shipping (lead time)
Also, having a safety stock is always a good idea!
Many small businesses rely on excel spreadsheets for their inventory management, but once your business starts growing, those become extremely limiting. To save yourself the trouble of dealing with all sorts of stock-related issues, look for a cloud-based inventory management system that tracks inventory movement across all your sales channels in real time. It will significantly reduce your risk of overselling.
One of the main advantages of switching to inventory management software is automation of the whole process - you won’t have to worry about overselling by accident or missing reorder points. It will also help reduce the likelihood of human error. Plus, it will save you a significant amount of time that you could allocate to growing your business.