Inventory management is a key element of the supply chain, ensuring that products are available at the right place and time. With effective inventory management, businesses can fulfill customer orders on time, reduce the risk of stockouts, and maintain operational efficiency. Want to learn more? Read the full article!
Definition of Inventory Management
According to SAP, inventory management is the process of overseeing every stage in a product’s lifecycle—from raw materials in the factory to finished goods ready for sale. Its goal is to ensure product availability in line with market demand at the lowest possible cost, while minimizing the risk of overstocking or stockouts. In other words, inventory management helps businesses maintain a balance between market demand and operational efficiency.
Furthermore, Oracle NetSuite states that for most businesses, inventory is a key revenue-generating asset, but it also requires capital and resources to manage effectively.
In general, there are four types of inventory that are “monitored” in inventory management, namely:
- Raw materials and components. Raw materials and components used in the production process.
- Work-in-progress (WIP). Work-in-progress (WIP) items—products that are in the process of being manufactured or packaged.
- Finished goods—products that are completed and ready to be distributed to resellers or customers.
- Maintenance, repair, and operating supplies (MRO). Maintenance, repair, and operations (MRO) supplies—supporting items such as machinery, equipment, spare parts, and cleaning materials that are not part of the final product.
Objectives and Functions of Inventory Management
Inventory management plays a crucial role in maintaining a balance between supply and customer demand. Here are the five main objectives and functions of inventory management.
1. Ensuring Product Availability and Customer Satisfaction
One of the main functions of inventory management is to ensure that products needed by customers are always available at the right time. With accurate stock management, businesses can avoid stockouts that lead to lost sales and decreased customer loyalty.
2. Optimizing Costs and Reducing Waste
Excess inventory (overstock) can pose risks such as additional storage costs, product depreciation, and the risk of expiration. However, an effective inventory management system can mitigate these risks by keeping stock levels proportional. As a result, financial efficiency improves, and losses from unsold goods are minimized.
3. Improving Operational Efficiency and Productivity
Effective inventory management can also streamline workflows, reduce human errors, and smoothen production and distribution processes. This efficiency not only speeds up product delivery to customers but also allows operational teams to focus on more strategic activities.
4. Strengthening Cash Flow and Financial Performance
Effective inventory management ensures that capital is not tied up in excess stock. By maintaining healthy stock turnover, companies gain greater flexibility in allocating funds for innovation or
5. Enhancing Planning Accuracy and Decision-Making
By monitoring inventory data in real time, businesses can perform more accurate demand forecasting. This allows decisions related to purchasing, production, and distribution to be made based on actual data rather than mere estimates.
Challenges in Inventory Management
Even with careful management, inventory management is not without its challenges. A single small mistake can significantly impact customer satisfaction and overall business performance. That’s why it’s important to be aware of the five main challenges in inventory management:
- Stock Data Inaccuracy. Without accurate stock information, businesses struggle to determine when, how much, and which products need to be reordered.
- Market Demand Fluctuations. Changes in consumer trends and behaviors make stock planning challenging, especially if the system cannot track demand patterns in real time.
- Manual and Inefficient Processes Manual inventory management is prone to input errors and delays, which can slow down operations and disrupt the supply chain.
- Suboptimal Warehouse Space Utilization Inefficient warehouse organization leads to longer item retrieval times, reduced productivity, and higher storage costs.
- Loss and Damage of Goods Lost, damaged, or improperly recorded products can reduce inventory accuracy, lead to stock miscalculations, and result in potential financial losses.
Types of Methods in Inventory Management
Therefore, there is no single inventory management method that fits all businesses. Most companies combine several methods to align with their operational needs and strategies. Here are seven of the most commonly used inventory management methods.
1. ABC Analysis
This method prioritizes inventory management based on the value and importance of items. “A” category items are high-value and require strict supervision, “B” category items are of moderate value with moderate control, while “C” category items are low-value but numerous and can be monitored with simpler oversight.
2. Just-in-Time (JIT)
This approach orders items only as needed, effectively reducing storage costs and minimizing waste. However, JIT requires accurate demand planning and highly reliable suppliers to avoid supply delays that could disrupt production and distribution processes.
3. Safety Stock
This strategy involves keeping reserve stock to anticipate supply chain disruptions or sudden spikes in demand. Although it increases storage costs, safety stock can serve as a “safety net” during unexpected situations.
4. Economic Order Quantity (EOQ)
EOQ helps determine the most efficient order quantity based on storage costs, demand, and lead time. Its goal is to balance order frequency and stock levels to minimize total costs.
5. First-in, First-out (FIFO)
This system ensures that the first items received are the first to be sold. In this way, products remain fresh, and the risk of quality degradation or expiration is minimized.
6. Last-in, First-out (LIFO)
Conversely, in the LIFO method, the most recently acquired items are sold first. This strategy is often used when raw material prices are rising, as it can help reduce tax burdens through a higher cost of goods sold.
7. Material Requirements Planning (MRP)
MRP relies on sales forecasts to determine raw material requirements and order timing. With this system, manufacturers can ensure timely availability of materials in line with production schedules and customer orders.
Stages of Effective Inventory Management
The complexity of inventory management largely depends on the size and nature of the business. Small businesses with few products may have simpler processes and an easier-to-manage supply chain, whereas large companies with diverse product lines face more complex and interconnected systems.
However, at its core, every business follows the same basic stages to ensure effective inventory management, as outlined below.
1. Planning and Ordering
This stage begins with understanding market demand through sales data and seasonal forecasts. The goal is to ensure that raw materials or products are ordered in the right quantities and at the right time to keep the supply chain running smoothly.
2. Delivery
Once ordered, goods or raw materials are delivered to the business facility. For manufacturers, this means receiving raw materials, while for distributors and retailers, it means receiving ready-to-sell products.
3. Review and Storage
All stock is recorded in the warehouse management system using Stock Keeping Units (SKUs) or unique product codes for easy tracking. A well-organized warehouse layout helps speed up item retrieval and ensures older stock is used first to prevent damage or expiration.
4. Selling
When an order is received, the system verifies stock availability, picks the products, and prepares them for shipment. Efficient packaging and shipment tracking help maintain customer satisfaction.
5. Reporting and Auditing
Accurate inventory records are essential for monitoring stock flow from receipt to delivery. Regular audits—whether manual or automated—help identify discrepancies between recorded data and physical stock.
6. Reordering
Companies establish a reorder point to ensure stock is always available without overstocking. This system can be set based on demand levels, stock turnover rates, or periodic replenishment schedules.
After understanding its benefits and challenges, you’ll agree that inventory management is more than just tracking stock. With the right system, your business can avoid waste, optimize cash flow, and enhance customer satisfaction. That’s why you need Labamu’s Manufacturing feature, which helps businesses manage stock, production, and distribution all within a single integrated platform. Download the app now on Google Play or the App Store!
