If you want your ecommerce business—or any product-selling business—to be efficient and profitable, you need to make sure your inventory is neither too high nor too low. This requires keeping accurate stock details, following customer demand trends, and proactively forecasting market conditions. Read on to learn how you can gain greater control of your inventory management process to save money and time.
What is inventory management?
Inventory management is the process of managing and monitoring a business's goods in stock. To properly manage the supply chain, ensure enough stock is on hand, and prevent overstock of unnecessary items, product inventory management is essential.
This includes monitoring the materials you use to manufacture your products as well as the finished goods that you ship out to your customers. Your inventory management can include ordering, restocking, storing, adjusting order frequency and quantity, and forecasting demand for the future.
Successful inventory management means making sure that you have the right amount of stock at any given time, when and where you need it. A thorough approach to inventory management can help your business cut unnecessary costs and increase customer satisfaction.
Why is inventory management important?
Inventory management is essential to a business's financial health. A well-oiled inventory management process ensures that you always have product in stock when customers make a purchase, but not too much stock that it doesn’t get sold—ultimately leading to markdowns and overstock. More, proper management allows you to reduce the risk of running out of stock or holding inaccurate records that can lead to a sudden scramble when more goods are needed.
As your company grows, accurate inventory management will also be necessary to comply with regulations. If your company goes public, for example, it must keep stock inventory management records to comply with the requirements of the Sarbanes-Oxley Act (SOX) and the Securities and Exchange Commission (SEC).
How does inventory management work?
If proper inventory management is meant to help your company save money, ensure customer satisfaction, and forecast future demand, then rigid processes need to be in place so you’re never caught surprised.
Managing your inventory works by keeping clear records of stock levels on hand. It also entails records of your products' location—whether it’s in your office, warehouses, or fulfillment centers. By coupling inventory management software with a fourth-party logistics (4PL) provider like Airhouse, you can track the flow of your products from the initial supplier to the fulfillment center to the end customer. This includes monitoring stock receipts, packing, and shipping.
Four types of inventory management
While there are different processes that you can use to track your inventory, including a perpetual and constantly updating inventory system or a periodic system updated at regular intervals, there are four main types of inventory management.
What are the 4 types of inventory management?
- Raw materials: These are the ingredients or components that are processed to make the final product you sell to customers. Anything needed to manufacture your products can be considered part of your raw materials and need to be managed to ensure that your final products can be manufactured.
- Work-in-progress (WIP): The WIP inventory includes partially finished and uncompleted products at some in-progress production locations.
- Finished goods: Products are considered finished when they're ready to be sold and shipped to end users.
- Maintenance, repairs, and operating (MRO) supplies: These items are not part of the product but are necessary for the business to function. For example, you might place office paper, computers, and cleaning supplies in this category. These items may be needed in order to carry out your business.
Benefits of inventory management
If your business can meet demand while avoiding expensive overstock, you're in a good position. Here are some of the key goals that you can meet through inventory management:
- Avoid spoilage: Products that expire can go bad while waiting to be sold. Proper inventory management can ensure that your customers receive fresh goods.
- Avoid dead stock: Direct-to-consumer brands may rely on seasonal updates or new branding. Proper inventory management helps you avoid getting stuck with out-of-date merchandise.
- Save on storage costs: With good management, you won’t need to pay to store and stock unnecessary items.
- Improve cash flow: Inventory affects both sales and expenses, both of which directly impact your cash on hand.
- Optimize fulfillment - Proper management can help you distribute goods between multiple fulfillment centers and provide a great customer experience.
Inventory management challenges
Of course, there are also challenges to implementing an inventory management program that reaches maximum efficiency. Some obstacles include:
- Phantom inventory
- Changing demand
- Supply chain issues
- Difficult counting processes
- Disorganized stock rooms
Phantom inventory
Mistaken counts or inadequate updates to your system can leave you with "phantom inventory," that is, goods are on record as being present but are not actually there. This can affect the decisions you make when ordering raw materials and manufacturing products.
Changing demand
Changes in society, the economy, and the world can shift demand up or down in ways that cannot be fully integrated into an inventory management process.
Supply chain issues
Similarly, externalities like supply chain problems, trade issues, or natural disasters can impact your stock—especially if you rely on narrow margins of inventory.
Difficult counting processes
Counting can be challenging, especially if you rely on your own labor to keep track of all of your items. Manual counts are also more prone to errors, so having an inventory management system is crucial.
Disorganized stock rooms
If you are responsible for all of your own inventory on site, stock rooms can easily become disorganized and items moved from one place to another without documentation.
What is the difference between inventory management vs. inventory control?
In essence, inventory management is your overall process for managing your goods and products, while inventory control is a smaller process. Inventory control is about managing and tracking the movement of items within a warehouse, facility, or fulfillment center.
What is multi-location inventory management?
With multi-location inventory management, you manage stock and products through multiple locations and sites, including retail venues, offices, and fulfillment centers. You can use this process to transfer goods from one fulfillment center to another or spot problems in one area.
What are the three major inventory management techniques?
Three common techniques used to manage inventory are first in, first out (FIFO); last in, first out (LIFO); and just-in-time (JIT) inventory. FIFO values inventory on the principle that the first goods manufactured are the first items sold. This technique is often used for perishable goods like food or beauty products.
LIFO calculates the cost of the goods sold at current prices rather than what was paid at the time of each item's manufacture. It is more frequently used for nonperishable goods. JIT aims to have goods on hand when they are needed, with fewer large stocks of goods waiting for future use. The specifics of your company can determine which technique is best for you.
