What is Inventory Management?
Inventory management is a major part of running a business. It involves the entire journey of managing inventories, ordering, storing, utilizing and selling a company’s inventory. This could include raw materials, finished products and components. It also encompasses storing, warehousing and processing these items.
Warehouse inventory management is important to avoid problems like product shortages and excesses and streamline operations. Businesses also use inventory management to collect data to analyze trends, maintain profitability and avoid breakdowns in supply chain management.
Inventory management systems, including manual or automated systems, allow businesses to track and control their stock before it is sold out. These different types of inventory management systems are vital tools that help companies organize their operations while cutting down on costs and meeting compliance requirements. In this article, we take a deep dive into the types of inventory, what inventory management systems are and the benefits they could bring to your organization.
What is Inventory?
Inventory includes any raw materials, finished goods, or components of goods that a company sells or requires in its production process. In some retail businesses, inventory is also referred to as “stock.” The term “stock on hand” is more commonly applied to finished products (like apparel or household items). At the same time, “inventory” refers to parts of production or raw materials. So, while “stock” and “inventory” differ, they are commonly used interchangeably.
In accounting, inventory is counted as an asset. Companies use information regarding stock levels to record the necessary valuations and balance their sheets. There are many types of inventory. These include:
1. Raw Materials
Raw materials are essential in manufacturing and producing goods. These could include fabric, metal, plastic, wood, etc., which are then processed to create other finished goods.
2. Work-in-Progress or Partially Finished Goods
As the name implies, these refer to goods only partly through production and manufacturing. WIP goods encompass production costs like raw materials, equipment and labor used for manufacturing, which are included in calculating the cost of goods.
3. Finished Items
Finished goods have gone through the entire production process and are now available for purchase by the final customers. When completed, WIP goods are added to the finished goods inventory.
4. MRO Inventory
MRO refers to maintenance, repair and operations goods. These are any materials or equipment used during the production process but not necessarily a part of the final product. Some examples of MRO inventory include cleaning supplies, protective equipment, etc.
5. Others
Other items that could count in inventory are packaging materials, transit, maintenance and safety stock. However, different companies may categorize and account for these materials differently.
What Are Inventory Management Systems?
Inventory management systems, or inventory systems, are the processes by which organizations track their supply chains. This involves monitoring goods throughout their journey, from manufacturing to purchase, sales and other functions. An inventory management system determines how companies approach inventory management.
Any business that has inventory needs a system to organize and track it. Otherwise, it becomes difficult to account for stock, making it easy to be under or overstocked. It can also lead to sufficient losses, especially when dealing with perishable items like food.
With the rise in competitiveness and globalization, inventory management can become challenging. This is especially true for large enterprises that have large volumes of stock. Luckily, inventory management software platforms have become easily accessible as well. In fact, studies have shown that retailers can reduce their labor costs by switching from manual to automated inventory management systems.
Benefits of Inventory Management Systems
Wondering how to improve inventory management? Implementing an inventory system for small businesses, larger enterprises, or chain organizations can enhance operations. Some of its benefits include:
1. Better Forecasting Ability
Inventory management software can handle and collect large volumes of data. It can also analyze data to provide insights into ongoing trends. Companies can use this information to improve their stock forecasting. The analytic capabilities of inventory management software can also be used to make data-driven decisions, save money and create more streamlined business strategies.
2. Centralize All Supply Chain Activities
Supply chain management software combines all supply chain activities into one single integrated platform. This means purchase activities, order management and inventory accounting can all happen in a centralized location. This helps streamline processes, eliminate redundancies and reduce the timelines required for each task.
Centralized purchasing and management platforms can also help you integrate with QMS (quality management system) efficiently. This allows organizations to maintain consistent quality standards across their operations.
3. Better Visibility and Transparency
When dealing with purchase orders and supplier management, transparency and visibility are crucial for keeping actions measurable and manageable. The real-time operational visibility granted by inventory and supply chain management software helps businesses keep track of information, assess supplier performance, measure the reliability and quality of goods and adhere to relevant schedules.
4. Streamline Supplier Onboarding and Management Processes
One of the first steps of efficient supplier management is the onboarding process. This involves having clear supplier evaluation criteria to ensure that suppliers meet the quality and regulatory standards within the given industry. Organizations can leverage automated supplier onboarding software to automate the process, reduce the manual work required for integrating new suppliers and establish a comprehensive criteria list to evaluate them. This ensures that quality, compliance, health and safety and regulatory standards are met.
5. Manage and Mitigate Risks
Since onboarding tasks can be automated and evaluation criteria established, organizations can ensure their supply chains adhere to the necessary compliance and regulatory guidelines. Inventory management software also gives organizations the tools they need to assess and mitigate potential risks.
6. Reduce Operational Costs
One of the most attractive benefits of inventory management software is the ability to reduce operational costs. It optimizes inventory levels, ensuring inventory is available when needed while reducing waste. Using an integrated platform also reduces the costs related to procurement and manual supply chain management.
