Simply stated, inventory management involves the control of both the timing and quantities of goods that need to be ordered and stocked by a business in order to meet its customer service targets. The key to great inventory management is doing so without incurring excessive costs as a result of inventory levels that are out of alignment with fluctuating customer demand.
The Goldilocks factor – not too much, not too little, but just right amount – is what all inventory managers strive for. This is because when inventory is properly managed and inventory levels are optimally maintained, a business’s profitability can be improved by up to 50% or more. But of course, the reverse holds true too.
When a business is left holding on to too much inventory, costs begin to climb and cash flow – the lifeblood of an organization – stagnates and becomes unavailable. On the other hand, failure to predict future stock demands accurately leads to poor purchasing, which can result in stock outs, where a business is not able to meet customer demand and loses revenue through lost sales and lost customers.
Either way, when a business finds itself carrying too much or not enough inventory it suffers the consequences. Inventory management is the science and art of ensuring that a business always has enough inventory on hand to satisfy customer demand, without burdening the bottom line due to overstock or under stock issues.
There is a lot more to inventory management than just buying and stocking new products before your current stock is sold off. In layman’s terms, inventory management is all about knowing what to buy, when to buy it, and how much of it to buy – all the while ensuring that every item is accurately tracked, traced and accounted for in the flow of goods through your distribution channel.
Knowing what to buy
Prioritizing inventory is an effective inventory management strategy that helps ensure your inventory levels are well maintained, and that wastage is kept to a minimum. In almost every case you’ll find that around 80% of your business revenue is generated by roughly 20% of your inventory.
Smart inventory management software will enable businesses to pinpoint the 20% of inventory that is driving most of their revenue. Focus, planning and resources – both human and working capital – can then be directed to optimizing the inventory that is driving your business growth.
A classic strategy when prioritizing involves the ABC method. This entails classing the inventory you have into groups, based solely on the dollar impact they have on your bottom line. So, items that have the highest dollar impact on your profits should be classed as A. Items that have a moderate dollar effect should be classed as B and those that have a marginal dollar impact go into group C.
Segregating and placing emphasis on inventory based on its actual dollar impact on your business, as opposed to the cost of the inventory alone, brings with it a host of benefits. A-class items – those with a high turnover rate – can be confidently re-ordered and stored at optimal levels, and slow moving inventory which bleeds off cash flow can be sold off before a costly overstock issue arises.
Knowing how much to buy
Getting your quantities right is essential. Knowing how much inventory to purchase is directly linked to the accuracy of your data. If your stock assessment is out of sync with the real time flow of inventory, your purchasing managers are going to be basing their orders on erroneous information. This is what leads to needless over-ordering, or being caught in the lurch without enough goods to satisfy customers as seasonal demand spikes.
The era of relying on costly and time-consuming annual stock takes is drawing to a close as sophisticated inventory management software solutions render the need for stock takes obsolete. Business owners now have instant ‘real-time’ data at their fingertips; data that integrates inventory throughout every phase of the purchasing, storage and distribution channel. This way, inventory managers will always have a clear idea of exactly how much inventory is on order, in storage and en route to retail outlets or customers.
Inventory management software also allows for sufficient – but not excessive – buffer of safety stock to be held. Safety stock is vital as a failsafe against sudden unforeseen surges in consumer demand. Having just the right amount of safety stock on hand ensures that your customer service targets will always be met. Happy customers equal a happy bottom line.
Knowing when to buy
Timing is everything: having a sound understanding of how much inventory is on hand and what the turnover rate is needs to be coupled with knowing lead-times from manufacturers and the sales cycles of product – both in-demand and slower moving inventory.
Inventory management software keeps track of inventory levels with precision, and alerts process managers ahead of time when critical stock levels – both surpluses and shortages - are approaching. This ensures that re-orders or stop orders can be executed in time avoiding costly stoppages in product or service delivery to customers
To ensure that the right inventory is bought, in the right quantities and at the perfect time, inventory managers would do well to harness the advantage of a powerful inventory management software solution.