What Is Inventory Management: Inventory management is a process deployed by businesses to improve how they store and order raw materials, sales goods, and stock components during the production and sale of items.
Inventory management is an often light, but effective, requirement of asset management. Whilst the terms ‘Inventory’ and ‘Asset’ are, in many situations, interchangeable, the former refers to stock that a business intends to sell individually or to sell as part of a product. Inventory is split into four types:
- Raw materials & supplies
- Work-in-process goods
- Finished goods
- MRO inventory
All businesses, particularly small and medium businesses, will have different workflows for managing their inventory through the use of various tools. Inventory management tools are essentially deployed so that businesses can better understand and handle their capital costs, service costs, and storage space costs.
The inventory management workflow will mainly affect areas of an operation such as warehousing, sales, manufacturing, and logistics.
Build and Implement a Successful Inventory Management Process Using Asset Management Software
What Type of Assets Are You Looking to Manage?
The Importance of Good Inventory Management
When inventory is optimised, working capital can be reduced as inventory buffers can be lessened. Having the right amount of inventory allows organisations to meet demand without shortages.
Collaboration can increase as clear inventory levels help the business assess its financial health. Inventory and accounting are closely related, when both are integrated, business leaders can review important metrics with accuracy and confidence.
Typically, inventory management is part of an enterprise resource planning (ERP) system and contributes to optimised inventory levels. Organisations use ERP systems to automate and manage business activities such as accounting, procurement, project management, and supply chain operations. Asset Management Software organises and tracks inventory levels along with purchase orders and sales.
This enables optimal inventory levels and allows a company to record the location of inventory. Companies can track inventory between separate locations or while in transport. Warehouse processes such as picking, packing, and shipping can also benefit from this type of inventory tracking tool.
Some solutions allow for the simple scanning of items into the system by integrated RFID tags and scanners.
4 Popular Inventory Management Techniques
1. Just-in-Time (JIT)
Just-in-time is an inventory management technique adopted to avoid the issues that come with overstocking, such as high storage costs. JIT means businesses will only order stock once they know that the demand is being met. An advocate of just-in-time inventory management is Apple CEO Tim Cook, who shifted the company away from an unwieldy, over-complex, and responsive approach to inventory control.
2. First In, First Out (FIFO)
First in, first out is a costing method used to sell the oldest inventory first. FIFO is one of the most common techniques used for successful inventory management as it reduces the chances of inventory deteriorating and keeps items as fresh as possible.
3. Last In, First Out (LIFO)
Last in, last out is also a costing method that is the complete opposite of first in, first on inventory management. LIFO is primarily implemented when goods aren’t perishable, meaning they can have a longer shelf life.
4. Always Better Control (ABC) Analysis
ABC analysis is a method designed to better optimise your inventory management. It uses a ranking system (A, B, and C) that allows procurement managers to decide which inventory is worth stocking, how much of each item needs to be stocked, and the frequency at which items should be ordered.
Other inventory management methods include:
- Economic order quantity (EOQ)
- Average costing
- Cycle counting
Inventory Management vs. Asset Management
The term inventory is used to describe a material that a business intends to sell, rent, or consume. Businesses may hold an inventory of finished goods and products ready to be distributed. Companies that manufacture goods may hold inventory of raw and packaging materials as well as work in progress (WIP).
Maintenance repair and operations (MRO) inventory includes all materials needed for MRO purposes, such as spare parts. While these items are not being incorporated into finished products, they can be considered inventory.
On the other hand, an asset often refers to something a business owns and uses, such as computers and office equipment. Intellectual property, like a patent, is also considered part of the business’s asset portfolio.
There are different types of assets:
- Fixed assets are intended for long-term use
- Current assets are expected to be exchanged for cash within a year
- Operating assets are assets needed for business operations
One important financial statement companies produce is a balance sheet, which includes a list of assets as well as liabilities and equity. Balance sheets are often drafted on a monthly, quarterly, or yearly basis. In financial terms, assets are described with the formula:
Assets = Liabilities + Shareholders’ Equity
While inventories and assets differ, there is also some overlap, as a result, an asset can be an inventory and an inventory can be an asset. In accounting, inventory is often considered part of the organisation’s assets as long as it is expected that the inventory will be converted into cash within a year.
Asset inventory refers to how businesses manage the stock of their assets through organisation and tracking. For instance, a business may need to count and document all of its laptops or maintenance equipment.
Successful Inventory Management With Asset Management Software
Asset management tools are used to track assets throughout the entirety of their life cycle, from procurement to disposal. Software solutions can help a business document the location and details of its assets.
Some businesses may only need to track inventory and physical assets in a simple spreadsheet. Often, the larger and more complex a business is the more essential having an asset management system becomes.
Investing in Asset Management Software, however, helps to prevent inventory loss whilst providing more in-depth asset analysis.
Inventory management improves productivity and encompasses actions like buying, storing, and tracking. Demand can be monitored and data can be readily available to create forecasted demand.
In 2013, the Ambient Monitoring group saved up to $30,000 per year in time searching for lost parts.
Track Inventory Levels
Stock-level management improves the visibility of stocking for procurement purposes as well as for sales. Items can be categorised and, depending on the software, it may be able to generate sales and purchase orders.
Clear inventory levels help reduce over-purchasing and let business leaders know if they are stocking too much of a finished item. Conversely, accurate inventory levels let the company know when it is time to replenish inventory. Inaccurate inventory can result in shorting of customers and wasted time looking for missing inventory.
See Inventory Cycle Times
Inventory cycle times can be measured differently based on the type of goods or services a company provides. Cycle times may refer to how long it takes for a company to manufacture and sell an item.
However, for retailers and distributors, inventory cycle times often centre around finished goods. Cycle times will represent the amount of time needed for inventory turnover.
Optimising inventory cycle times can help keep customers satisfied. These cycle times can be tracked with Asset Management Software and making customers wait for items to come back in stock can lead to missing out on sales. While having too much inventory can reduce the available cash flow and increase storage costs. Excess inventory may lead to obsolescence or expiration depending on the type of product.
Identify Inventory Turnover
Inventory turnover is the rate that inventory is sold or used in a designated period. The ratio measures how efficiently a company manages its inventory. A ratio of 5 over a year means that a company sells through its entire inventory 5 times in one year.
The benchmark inventory ratio is the target ratio for an organisation. It may vary greatly between industries. A balanced inventory turnover ratio for a company’s industry correlates to reduced storage and holding costs. When an inventory turnover ratio is too high it can signify incomplete orders and trying to expedite replenishment orders to avoid stock out. While lower ratios may indicate low sales, holding too much inventory, or inefficient inventory management.
The formula for inventory turnover ratio is:
Inventory Turnover Ratio = Cost of Goods Sold (COGS)Average Value of Inventory
The cost of goods sold is the amount in dollars related to making a product while the average value of inventory takes fluctuating costs into account and is the mean value of inventory in the specified period.
Monitoring inventory turnover can tell a company how well it is generating sales from items in its inventory. This key performance indicator can provide insight into what finished goods are in high demand and which products’ marketability should be improved.