Even before the pandemic, managing inventory was considered to be a difficult task as it involved managing high stock levels backed by a complicated excel sheet. But the two years of pandemic has taught us that uncertainties come unannounced and we have to be prepared to tackle them.
Manual processes and inventory tracking are often prone to error as they are dependent on excel sheets and manual inputs in their systems. Correctly identifying stock levels, deciding the reorder quantities, etc. take a hit due to the manual processes. It is crucial that there is transparency and visibility in a company’s inventory process for a smooth supply chain.
An automated inventory management system is the way to go! But first, let’s understand what inventory management is.
Inventory management is a critical element of the supply chain. It essentially means the tracking of inventory from manufacturers to warehouses and eventually, from these facilities to the point of sale.
The main aim of inventory management is to have the right products reach the desired destination at the right time. And this requires inventory visibility i.e. knowing how much stock is available, when to reorder, how much to reorder and which warehouse to stock the inventory in.
Managing inventory also helps with a successful and disruption-free supply chain. Inventory management also includes aspects such as controlling and overseeing purchases from suppliers as well as customers, keeping a track of stock storage, controlling the amount of product for sale, and finally – order fulfillment. They are all part of the supply chain.
The scale of managing inventory is based on the size of your business and the types of products you sell and the channels you sell them through. Small businesses often use Excel and Google Sheets (or other manual tools) to keep track of inventory and make decisions about ordering.
However, keeping track of reorder dates, reorder quantities, where to store stock, etc. can fast become a complicated process. Automated inventory management software has capabilities that go beyond manual databases and formulas and hence, many growing businesses graduate to digital software to manage inventory.
An automated inventory management system goes beyond tracking reorder quantities and stock monitoring as it encompasses everything from production and business management to lead time tracking and forecasting demand. It even handles different inventory metrics, reports, and even accounting.
No matter the size of the business, most businesses maintain stock across multiple channels and at various locations. The diversity of inventory management – be it in retail or wholesale – is what makes managing inventory so complex and makes it crucial for your business.
Now that we have understood what inventory management is, let’s have a look at some of the necessary terminologies used in inventory management. We must know and understand the basic terms before diving into the strategies, techniques, processes, etc.
A barcode scanner is a physical device used to check in and check out stock items for in-house items at fulfillment centers and third-party warehouses.
A purchase order (PO) is a legally binding commercial document (B2B) between a buyer and a supplier that states the types, quantities, and agreed prices for products or services.
The term order management stands for the mechanisms of the backend or the back office which monitor order receiving, processing, payment and fulfillment, tracking, and communication with customers.
Order fulfillment is the complete lifecycle of an order i.e. from the point of sale to pick-up and packaging, to shipping the order and finally to customer delivery.
SKU is a unique alphanumeric tracking code that gets assigned to every product. An SKU also indicates attributes of the product like style, size, color, etc.
The term bundles essentially suggests groups of products that are sold as a single product. For example – selling a camera, lens, and bag as a single SKU.
COGS includes direct costs associated with production along with the costs of storing those goods.
EOQ suggests how much to reorder by taking into account the demand and your inventory holding costs.
Deadstock usually means stock that is outdated in some way or other. Typically, these are items that have never been sold to or used by a customer.
This is also known as safety stock or decoupling stock. Safety stock, as the word suggests, is inventory kept aside as a safety net to mitigate the risk of production coming to a complete standstill if one or more components are unavailable.
As the name suggests, pipeline inventory is any inventory that a business’ supply chain has in the “pipeline” i.e. either in production or shipping, but has not reached its final destination.
This is also known as carrying costs. These costs are the costs your business incurs to store and hold the stock in a warehouse until it is sold to the final customer.
These costs are associated with transporting and buying inventory. Landed costs include duties, taxes, cost of shipping, storing, and other expenses.
Lead time is the time a supplier takes to deliver goods after an order is placed. This also includes the timeframe for a business’ reordering needs.
Reorder point is a set limit for inventory that determines when should businesses reorder taking into account current and future demand as well as lead time.
This stock is also known as buffer stock. As the name suggests, this is stock that is kept in reserve to guard against shortages.
A sales order is a transactional document that is sent to customers after a purchase is made and before an order is fulfilled.
This refers to the use of an external service provider to handle either part of or all of your warehousing, fulfillment, shipping, or any other operation related to inventory. In simple terms, a business can outsource its inventory operations to an external provider.
A variant is a unique version of a product like a specific size, shape, or color.
The four most commonly used inventory are Raw Materials, Work-in-Progress (WIP), Finished Goods, and Maintenance, Repair, and Overhaul (MRO).
When you are aware of the type of inventory you have, you can control your inventory better and manage inventory in a smart way. This includes choosing the best inventory management software to keep track of all your inventory.
Let’s take a look at the most commonly used types of inventory.
These are materials that are needed to make a finished product. These materials could be bits and pieces of components that are in stock but are not yet used for work in progress or finished inventory.
Raw materials are of 2 types i.e. direct materials and indirect materials. Direct materials contribute to making the finished goods directly and indirect materials are part of overhead or factory costs.
Just as the name suggests, work-in-progress inventory is inventory that is being worked on. WIP includes labor costs and raw materials that are still in production when an accounting period ends. In simple words, all the direct and indirect raw materials your business is using to create finished goods are WIP inventory.
This is the simplest to understand as this inventory is literally what you list out to your customers for sale on your website. Basically, any product that is ready to be sold is finished goods.
MRO inventory is the inventory required to assemble and build the finished product. It is not built into the product itself. Depending on your business, this inventory could be in storage, with a supplier, or in transit out for delivery.
The most successful and resilient supply chains are backed by solid inventory management. This shows how important an asset inventory is for a company. This is where all the elements of the supply chain converge. To manage all of this, an efficient inventory management system is the way to go!
Let’s take a look at the need for inventory software.
Here are some of the core features businesses should look for while considering an inventory solution.
The most important and basic requirement of an inventory software would be to track inventory in real-time. This is the absolute basic requirement. The software must be able to show you how much inventory you have and where the inventory is. Any stock movements or allocations in your company need to reflect in real-time.
It makes no sense knowing how much inventory you have and where if the software does not notify you when you are running out. Good inventory software has a functionality around setting automatic alerts when important stock is running out – and the ability to fast generate a purchase order due to that alert.
When you have proper control over your inventory, a key business efficiency that gets unlocked is gaining control of your purchasing. So naturally, when you know exactly where your inventory is and what it’s worth, you are in a far better position to buy more and to buy efficiently. Suppliers can be better managed as the inventory software will keep track of transaction history, etc.
The finance team needs to know exactly how much the inventory lying in the warehouse is worth. A good inventory management software needs to update whatever accounting software your company uses, in real-time. The finance teams will need to know things like accurate inventory values that indicate price variations, a live view of inventory by warehouse, region, and country, multi-currency support, etc.
When inventory software limits the number of products you can add, you need to think twice before adopting this solution. Investing in inventory software should set you up for success and prep you for growth, so make sure it puts no limitations on the important aspects of managing your inventory.
Adopting inventory software should give you operational efficiency and reduce the manual extraction of data. If inventory software can pull out required reports with ease, it is the way to go! After all, you need to look at your inventory turnover rate, backorder rate, stock age, etc. to determine how your inventory is doing.
Businesses need to implement the best inventory management strategies to increase the efficiency level of the business and effectively meet customers’ demands. Let’s take a look at some of the best inventory management strategies.
Manual management of inventory leads to a lot of guesswork and a high margin for error. This is also time-consuming and you risk losing potential clients. Automating the systems can help your organization achieve higher efficiencies with greater accuracy. Inventory levels get tracked and updated in real-time so there is transparency.
When you have access to real-time inventory data and analytics, it gives you accurate product and sales forecasts in an instant. This data can be used to predict market demand which will give you an idea of scaling your inventory up or down at the right time. This results in increased profits.
This is a strategy that focuses on ensuring that only inventory that is needed to fulfill current and expected orders is kept in stock. This helps to cut down on your warehousing costs and optimize your existing storage space more cost-effectively.
Having a safety stock i.e. a small but surplus amount of goods on hand can help against any unexpected surge in demand that could strain existing product stock.
Accurate forecasting will help businesses go a long way as companies can make informed decisions and predictions on the placement of orders from customers.
When you have an app that can help you track your inventory on the go, you can access critical stock data anytime and anywhere. This will improve efficiency and details like shipment information can be forwarded accurately and on time.
Understanding inventory and successfully managing it has become extremely crucial for businesses. Once understood, you can achieve both efficiency and fast operations, that too at an affordable cost.
Automating your inventory and effectively managing it helps in reducing costs which further keeps accounts and finances in check. Not just this, you will automatically notice that you are able to provide better customer service through fast delivery and lower shipping charges hence, meeting customer expectations.