Everything You Need to Know About Inventory Management (2023)

There's an old business axiom that says, "Nothing happens until somebody sellssomething." With inventory management, that could be changed to "Nothing happens untilsomebody counts something."

Inventory can be anything from boxes of ice cream cones in the storeroom at a sweet shopto a million-square-foot warehouse full of goods for a big box chain. But in either case,accurate inventory management is a key to that company's success.

Simply put, inventory is the goods that a business owns that it plans to sell. If yourcompany is an apparel retailer, products become inventory when you take possession ofshirts, dresses, suits and accessories from your suppliers. Those products leave the stockwhen they're sold to customers. Inventory can be stored on premises or at warehouses,distribution centers and other facilities.

Everything You Need to Know About Inventory Management (1)

In the United States, manufacturers,retailers and merchant wholesalerscarried more than $1.9 trillion ininventory in June 2018, according to theU.S. Census Bureau. And believe it or not,experts say that about 90 percent of acompany's inventory is stationary; it'sstored somewhere, whether on theshelves of a retail store or racks in awarehouse. Only about 10 percent of acompany's inventory is actually in transit.

That's why inventory management is so crucial to a company's success.

Inventory is considered an asset, and as such is recorded on a company's balance sheet.Developing an accurate valuation for the balance sheet requires either a physical inventorycount to determine the quantities on hand or an ongoing inventory system that creates anaccurate record of each inventory-related transaction.

Tracking inventory well is not only good business; it's also a requirement for compliancewith SEC regulations and the Sarbanes-Oxley Act (SOX) for public companies. Companiesmust demonstrate well-documented, well-understood and well-controlled supply chainprocesses as part of their compliance efforts. Warehouse Anywhere provides the tools toproperly account for inventory and inventory transactions from shipping to point of use.

Complying with SOX has helped push companies into better inventory managementpractices. After all, losing track of inventory is the same as losing money. If you don't knowhow much stock you have or where it's located, you don't really have it. Even goods intransit are considered inventory, although they are not typically counted as inventory forfinancial purposes.

With the investment that companies make in creating, storing and transporting products,inventory management is a critical factor in a company's financial success.

So what is inventory management?

Basically, inventory management is the system used to organize and track all of thecompany's goods during the time the company owns them. Once they're sold,inventory is converted to revenue.

(Video) Inventory management

In some industries, inventory management is also known as stock management. This iscommon in the retail sector for example, where apparel or home goods inventory isconsidered "stock on hand."

No matter the size of a business, from a small neighborhood gift shop to a multinationalcorporation, effective inventory management can make the difference between failure andsuccess. Even a basic inventory management system can ensure that appropriate levels ofproducts are kept on hand to serve customers without tying up capital in an unproductivefashion.

Unfortunately, few rules of thumb can be applied across industry sectors. For companieswith long production lead times for big-ticket items, carrying inventory makes sense, socustomers aren't disappointed. Other industries operate on a just-in-time basis to reduceinventory-carrying costs.

With a baseline understanding, the next step is to consider the different types of inventorymanagement systems to understand which one might work best for your business.

Everything You Need to Know About Inventory Management (2)

What is an inventory management system?

Every business uses at least some level of inventory management system. The bestinventory management systems will not only keep count of products but also provideactionable business intelligence such as identifying low and high performing products andsending re-order notifications when stocks are low.

An inventory management system helps tackle the challenge of assuring the right level ofinventory is in the right place at the right time. The explosion of e-commerce, omnichannelfulfillment and expanding relationships with national and global trading partners havecreated new challenges to accurately managing inventory.

The spectrum of inventory management techniques ranges from the fully analog manualpaper ledger that's been used for hundreds of years all the way to the latest smart systemthat tracks products autonomously. There are still a surprising number of larger companiesthat manage inventory through an ad hoc collection of spreadsheets and legacyapplications that simply don't communicate with each other.

The inventory management process can be based on a variety of formats and technologies.We'll explore some of the common options and discuss the pros and cons of each type.

Common Inventory Management Systems

Inventory vs. Cycle Counting

Choosing which of these strategies to follow will set parameters for your entire approach,from infrastructure to technology. Full inventory counts are completed on a regular basis,often annually as part of a financial audit. You'll see a retail store is conducting an auditwhen items on shelves are tagged with slips of paper, and some display items like furnitureare tagged "Do Not Inventory." An inventory team from a vendor is counting items whenthe store is closed. The same process occurs in a warehouse. This process is time and laborintensive and only provides a snapshot of the inventory.

By contrast, cycle counting is used to count only a portion of inventory on a regular basis.In a retail store, one area is counted on a particular day of the week or month, and the nextday the team counts stock in a different area. In a large warehouse, the most active or mostvaluable items could be counted more frequently. Smaller, more frequent counts canprovide better insights into the state of the inventory. However, inaccuracies can occur aswell, especially if the same product is stored in multiple locations.

(Video) Inventory Basics - Whiteboard Wednesday

Of course, human error can creep into both of these processes, with inaccurate data causinga problem across the company. Both processes can be completed manually or aided byusing inventory management technology.

Manual

Depending on the size and scope of your inventory problem the manual approach may bethe most efficient. It may make sense to hire a vendor or complete it with internalresources. Many small businesses close a day or two per year for inventory.

Each manual step is rife with possibilities for human error, from counting on thewarehouse floor to data entry to manipulating the data. Each mistake-filled action canexacerbate the problem, and only a manual re-do could restore any sense of accuracy.

One of the big negatives to manual counting is the difficulties in turning paper-basedinformation into useful data. Making marks on a checklist is one thing -- typing thoseresults into a spreadsheet can be a daunting task.

Barcode

This system uses the familiar label of black stripes that are already affixed to the product,packaging or pallet. Wearable barcode readers can speed up this process, allowing workersto shave scanning time a few seconds per item. One of the main advantages of the bar codesystem is the data is input in a useful digital format at the same time, so the count is morereal-time. With the accuracy they get with barcodes, managers have more confidence tomake purchasing and sales decisions based on the inventory levels.

RFID

Radio frequency identification tags are found in two configurations: active and passive.Active systems use tag readers located throughout a warehouse. Active systems providereal-time updates of inventory count and location. An active tag simply means it is batteryoperated and is used when more signal strength is required to communicate with a reader.

Passive systems are read-only when someone activates the readers, such as hand-helddevices rather than fixed readers. In either case, when the tag is read, the inventory isautomatically recorded in the system. Passive technology can be read at up to 40 feet, whileactive readers are effective up to 300 feet.

Fixed readers can run continuously, like the Warehouse Anywhere RFID scannerchandeliers in our storage locations. In this case, passive tags are read continuously.

Warehouse Robots

The next level of warehouse inventory systems will be optical systems mounted onautonomous ground-based or aerial platforms. These systems use machine learning to readexisting labels without barcodes or RFID and maintain an up-to-the-minute inventory.

Everything You Need to Know About Inventory Management (3)

Warehouse Management vs. Inventory Management: Which is Best?

While inventory management and warehouse management might seem likeinterchangeable terms, they are not.

(Video) What Is Inventory Management? - Whiteboard Wednesday

A warehouse management system (WMS) supports the entire operation of a warehouse,which includes inventory management. Simply put, warehouse management is theumbrella term for all that occurs in a warehouse, of which inventory is one process.

A WMS will include inventory management, providing visibility into an organization'sinventory in any location. The WMS can also manage the entire supply chain operation andis often integrated with a Transportation Management System (TMS).

Features of a Warehouse Management System (WMS)

  • Warehouse design: Optimize inventory allocation and customize workflow andpicking logic.
  • Inventory tracking: Use automatic identification and data capture (AIDC) technologysuch as barcodes or RFID to track the location of goods.
  • Receiving and putaway: Guides inventory putaway and retrieval, often using pick-to-light or pick-to-voice technology.
  • Picking and packing: Guides warehouse workers to pick items and pack them in themost efficient way possible.
  • Shipping: Generates bills of lading, packing lists and invoices for shipments and cansend advance shipment notifications.
  • Labor management: Tracks employee performance by key performance indicators.
  • Yard and dock: Helps drivers find the correct loading dock and can assist with thecross-docking operation.
  • Reporting tools: Analyzes warehouse operations to track KPIs and see areas forimprovement.

Features of Inventory Management

  • Picking and packing: Directs picking and packing employees to the correctwarehouse locations.
  • Shipping: Manages bills of lading, invoices, packing sheets and other relateddocuments.
  • Managing locations: Directs placement of items in the warehouse for the best use ofspace and resources.
  • Receiving orders: Manages incoming orders to direct fulfillment operations.
  • Tracking inventory levels: Keeps a running total of inventory status on each item orSKU.
  • Cycle counting: Supports cycle counting inventory strategies to maintain up-to-datetotals.
  • Barcode tracking: Manages barcode scanning inputs and integrates with shipping,accounting and other systems.
  • Reporting tools: Generates data for actionable intelligence to drive tactical andstrategic decision-making.

To some extent, the difference between warehouse management and inventorymanagement is a matter of degree or scope. Warehouse management systems are typicallyused by large enterprises with at least one large warehouse or distribution center, if notmultiple locations. Inventory management systems are favored by enterprises that don'tneed all the functions that a full-featured WMS can provide, at least not for everywarehouse location.

For example, companies engaged in large-scale e-commerce use WMS to manage inventoryacross their locations. A WMS can support e-commerce websites, such as showing theavailable quantity of each item.

To fulfill an e-commerce order, the system knows the amount of product in eachwarehouse and which warehouse would be the best to satisfy that order due to geographiclocation, shipping cost or other consideration. When the item is shipped, the WMS updatesthe quantity count that's visible to all locations.

Typically a WMS will integrate with the organization's ERP and TMS for seamlessintegration of information flows. By comparison, inventory management software istypically a less complex system that is ideal for individual warehouses or other storagelocations that don't need all the functionality of a full WMS.

Inventory management software will support anywhere from one to hundreds of locationsto manage supply chain and fulfillment operation. The system tracks shipping andreceiving, product locations and provides record keeping for up-to-the-minute visibility.

The inventory management system fully supports technology such as barcodes and RFIDbut doesn't have the same comprehensive functions of the WMS. It's also a more cost-efficient solution for many warehouse operations.

In addition to supporting retail and e-commerce operations, inventory managementsoftware is ideal for field service or healthcare operations that pre-position items for useby technicians and customers. The choice of solutions is best guided by the size and needsof the individual warehouse or storage location.

How to Manage Inventory

Inventory management strategies and methods will vary based on the organization. Afterall, we wouldn't expect a mom-and-pop candle shop in a resort town to keep track of goodslike an automotive manufacturer. However, even that quaint candle shop uses a strategy,even if the owners may not realize it.

Here's a look at some of the methods used by organizations of various sizes.

(Video) What is Inventory Management? The Basics of Inventory Management

Common Inventory Management Techniques

Everything You Need to Know About Inventory Management (4)

ABC Method: This system ranksinventory based on turnover rates.For example, the 20 percent ofproducts that generate 80 percent ofthe revenue are designated CategoryA. Categories B and C are lowerperforming products. Class Aproducts should be located closest tothe fulfillment and shipping areas ofthe warehouse. Ongoing analysis willidentify when products should shiftcategories and be moved to anotherclass.

Two Bin Method: Items are storedin two locations or bins, dependingon their size. When the first bin isempty, items are moved from the second bin. The stock is replenished when the second binis empty.

Fixed Order Quantity: A minimum number of products is set, and when the inventoryreaches that number a fixed number of products are ordered to restock.

Fixed Period Ordering: Goods are ordered according to a set period of time. Thisapproach is common for small stores without sophisticated systems.

Vendor Managed Inventory: The supplier manages inventory levels and reorders basedon sales or on a regular time period. This is common in grocery, retail and forward-deployed inventory for field service and healthcare.

How to Strategically Manage Inventory in Hundreds of Cities

Regardless of which inventory management method you choose, you can localize yourinventory in hundreds of U.S. cities with Warehouse Anywhere's unique inventorymanagement capabilities. Our decentralized warehouse strategy moves your productscloser to where they're needed by joining supplier-managed inventory with supply chaintechnology.

With a decentralized warehouse strategy, retailers can restock popular items within hoursinstead of days. Field service operations can move parts closer to their customer base toimprove service level agreement performance. Technicians don't have to function aswarehouse workers, allowing them to concentrate on service. Healthcare and medicaldevice companies can preposition products for fast response and easy restocking.

Warehouse Anywhere employs advanced RFID technology and proprietary continuousscanning software to automate inventory tracking. The system fully integrates withinternal inventory and ERP systems. The Warehouse Anywhere Mobile app allows fieldpersonnel to search for an item and directs them to the closest location. The app alsosecurely manages access to the warehouse.

Want to learn more about how to decentralize your inventory to stock closer to yourcustomer than ever before? Let's get in touch!

More Resources

  • 3pl vs. 4pl Logistics: Best Definition, Explanation and Comparison
  • Things to Know Before Outsourcing Logistics: Pros and Cons
  • How to Choose the Best Supply Chain Conferences to Attend in 2018

FAQs

What are the 4 types of inventory management? ›

The 4 Types of Inventory Management

The types of inventory management are Raw Materials, Works-In-Process, Maintenance, Repair and Operations or MRO and Finished Goods.

What are the five principles of inventory management? ›

There five key principles of inventory management:
  • demand forecasting,
  • warehouse flow,
  • inventory turns/stock rotation,
  • cycle counting and.
  • process auditing.

What are the 3 major inventory management techniques? ›

In this article we'll dive into the three most common inventory management strategies that most manufacturers operate by: the pull strategy, the push strategy, and the just in time (JIT) strategy.

What are the 5 types of inventory? ›

Depending on the business, inventory can include raw materials, component parts, work in progress, finished goods, or any packaging.
  • Raw materials inventory. ...
  • Maintenance, Repair, and Operating (MRO) inventory. ...
  • Decoupling inventory. ...
  • Work In Progress (WIP) inventory. ...
  • Finished goods inventory.
3 Dec 2021

What is the inventory formula? ›

The first step to calculating beginning inventory is to figure out the cost of goods sold (COGS). Next, add the value of the most recent ending inventory and then subtract the money spent on new inventory purchases. The formula is (COGS + ending inventory) – purchases.

What are the 2 methods of inventory control? ›

There are two key types of inventory control systems.
  • Perpetual inventory system. A perpetual inventory control system tracks inventory in real-time. ...
  • Periodic inventory system. A periodic inventory system is kept up to date by a physical count of goods on hand at specific intervals.

What are the 3 types of inventory? ›

Raw materials, semi-finished goods, and finished goods are the three main categories of inventory that are accounted for in a company's financial accounts.

What are the 8 types of inventory? ›

8 Types of Inventory Defined
  • Work-In-Process. Work-in-Process (WIP) is a term used to describe partially finished goods that are waiting to be completed. ...
  • Cycle Stock. ...
  • Pipeline Stock. ...
  • Anticipation Inventory. ...
  • Hedge Inventory. ...
  • Buffer/Safety Stock. ...
  • Finished Goods. ...
  • MRO Inventory.
23 Jan 2019

What are the 6 types of inventory? ›

The 6 Main classifications of inventory
  • transit inventory.
  • buffer inventory.
  • anticipation inventory.
  • decoupling inventory.
  • cycle inventory.
  • MRO goods inventory.
29 Sept 2020

What are the 4 basic reasons for keeping an inventory? ›

Four very good reasons to hold inventory
  • Expecting the unexpected. By far the greatest adversary any inventory manager is expected to overcome is fluctuating consumer demand. ...
  • A time to buy and a time to buy more inventory. ...
  • Capitalizing on low cost offers. ...
  • Putting on bottom-line body armor.
19 Oct 2015

How do you track inventory? ›

The best way to keep track of inventory is with an easy-to-use, robust inventory management software system. With inventory management software, you can get real-time alerts, add meaningful pictures to your inventory list, and utilize barcodes and QR codes to automate otherwise tedious, error-prone processes.

What is the easiest way to manage inventory? ›

Here are some of the techniques that many small businesses use to manage inventory:
  1. Fine-tune your forecasting. ...
  2. Use the FIFO approach (first in, first out). ...
  3. Identify low-turn stock. ...
  4. Audit your stock. ...
  5. Use cloud-based inventory management software. ...
  6. Track your stock levels at all times. ...
  7. Reduce equipment repair times.
27 May 2021

What are 10 raw materials? ›

Examples of raw materials include steel, oil, corn, grain, gasoline, lumber, forest resources, plastic, natural gas, coal, and minerals.

What is MRO inventory? ›

Maintenance, repair and operations (MRO) refers to a range of activities that keep a company running on a day-to-day basis. Companies rely on their supply chains to provide the materials, tools and components they need for MRO activities. The items that each company stores for this purpose are known as MRO inventory.

What is ERP inventory? ›

ERP inventory management is an integrated approach to business operations. ERP inventory management systems help businesses manage each of their business operations from a single platform. Typically that includes the management of inventory, finance, operations, planning, and logistics.

What are the 4 inventory costs? ›

Ordering, holding, carrying, shortage and spoilage costs make up some of the main categories of inventory-related costs.

How do I do an inventory in Excel? ›

How to Create An Excel Inventory Management System
  1. Create a spreadsheet. ...
  2. Add any necessary product categories as columns. ...
  3. Add each product that you carry to the spreadsheet. ...
  4. Adjust the quantities as you make sales. ...
  5. Time-consuming process. ...
  6. Lack of automation and real-time reporting. ...
  7. Greater chance for errors.
23 Mar 2021

What is the FIFO method? ›

What is the FIFO method? FIFO stands for first in, first out, an easy-to-understand inventory valuation method that assumes that goods purchased or produced first are sold first. In theory, this means the oldest inventory gets shipped out to customers before newer inventory.

What are the inventory tools? ›

Inventory management tools and techniques
  • Barcode data collection. The perpetual inventory system is highly dependent on timely and accurate reporting. ...
  • Cycle counting to improve accuracy. ...
  • ABC analysis for prioritisation. ...
  • Integrated planning and execution. ...
  • Lot tracking and traceability.
19 Apr 2021

What is ABC technique of inventory control? ›

ABC analysis is a method in which inventory is divided into three categories, i.e. A, B, and C in descending value. The items in the A category have the highest value, B category items are of lower value than A, and C category items have the lowest value. Inventory control and management are critical for a business.

What are the two main tasks of inventory? ›

A few of the main functions of inventory in supply chain management: Initial purchase (raw material or products for resale) Storage, usually in warehouses until needed for production or to resell to customers.

What are the 3 main components of inventory? ›

The three types of inventory most commonly used are: Raw Materials (raw material for making finished goods) Work-In-Progress (items in the process of making finished goods for sales) Finished Goods (available for selling to customers)

What are the stages of inventory? ›

There are four stages of inventory: raw material, work in progress, finished goods, and goods for resale.

What is it called when you check inventory? ›

Stock-taking or "inventory checking" or "wall-to-wall" is the physical verification of the quantities and condition of items held in an inventory or warehouse. This may be done to provide an audit of existing stock. It is also the source of stock discrepancy information.

What is Kanban for inventory? ›

Essentially, kanban inventory management is a way to have only the minimum amount of stock on hand that is necessary at that time. This avoids purchasing more than you need and having to allocate space to warehouse that extra inventory. More than that, kanban is a way to avoid bottlenecks in your workflow.

Which inventory method is best? ›

The FIFO method is the most popular inventory method because it's the one that most closely matches the actual movement of inventory for most businesses. This method assumes that the first products you acquired will be the first that are sold.

What are the two main problems of inventory control? ›

9 Inventory Control Challenges
  • Supply chain complexity.
  • Changing demand.
  • Challenging stock.
  • Inaccurate data.
  • Manual stock taking and documentation.
  • Managing warehouse space.
  • Poor order management.
  • Lack of experienced staff.
7 Dec 2021

What are the two main concerns of inventory management? ›

Ans: Inventory management has two main concerns. One is the level of customer service, that is, to have the right goods, in sufficient quantities, in the right place, at the right time. The other is the costs of ordering and carrying inventories.

What are KPIs for inventory? ›

Key performance indicators (KPIs) in inventory management are metrics that help you monitor and make decisions about your stock. In inventory management, KPIs matter because they offer information about turnover, sales, demand, costs, process success, relationships and more.

How can I improve my inventory skills? ›

Tips for managing your inventory
  1. Prioritize your inventory. ...
  2. Track all product information. ...
  3. Audit your inventory. ...
  4. Analyze supplier performance. ...
  5. Practice the 80/20 inventory rule. ...
  6. Be consistent in how you receive stock. ...
  7. Track sales. ...
  8. Order restocks yourself.

What are the 4 types of materials? ›

Materials can be classified into four main groups: metals, polymers, ceramics, and composites.

What are the two main raw materials? ›

There are two main types of raw materials: direct and indirect. Direct materials are unprocessed resources that can be specifically traced to an end product. Lumber is a good example of a direct raw material.

What is WIP and MRO? ›

The four types of inventory most commonly used are Raw Materials, Work-In-Process (WIP), Finished Goods, and Maintenance, Repair, and Overhaul (MRO). You can practice better inventory control and smarter inventory management when you know the type of inventory you have.

What is OEM and MRO? ›

Maintenance, Repair, & Operations (MRO) Original Equipment Manufacturers (OEM)

How many inventory methods are there? ›

There are three methods for inventory valuation: FIFO (First In, First Out), LIFO (Last In, First Out), and WAC (Weighted Average Cost). In FIFO, you assume that the first items purchased are the first to leave the warehouse.

Is SAP used for inventory? ›

SAP Inventory Manager is a complete wireless inventory management solution. It provides the tools to improve and manage inventory levels, efficiently fill customer orders, and track the movement of materials using mobile devices with scanning functionality.

Is Excel an ERP? ›

Many manufacturing companies rely on Excel for all sorts of tasks, from scheduling to inventory management to data analysis, because it is readily available, easy to use, and is seen as a cost-effective solution for organizing and planning business operations.

Is supply chain an ERP? ›

Supply chain management has been an integral part of ERP solutions adopted by several enterprises. Manufacturers need to interact with various suppliers and partners to obtain the raw materials and resources at the right time and at the right amount to bring finished goods to market.

What are the three 3 classifications of inventory? ›

Raw materials, semi-finished goods, and finished goods are the three main categories of inventory that are accounted for in a company's financial accounts. There are other types as well which are maintained as a precautionary measure or for some other specific purpose.

What is ABC analysis? ›

In materials management, ABC analysis is an inventory categorisation technique. ABC analysis divides an inventory into three categories—"A items" with very tight control and accurate records, "B items" with less tightly controlled and good records, and "C items" with the simplest controls possible and minimal records.

How do you maintain a good inventory? ›

Inventory management techniques and best practices for small business
  1. Fine-tune your forecasting. ...
  2. Use the FIFO approach (first in, first out). ...
  3. Identify low-turn stock. ...
  4. Audit your stock. ...
  5. Use cloud-based inventory management software. ...
  6. Track your stock levels at all times. ...
  7. Reduce equipment repair times.
27 May 2021

What is ABC inventory control? ›

ABC analysis is a method in which inventory is divided into three categories, i.e. A, B, and C in descending value. The items in the A category have the highest value, B category items are of lower value than A, and C category items have the lowest value.

Is inventory an asset or liability? ›

In accounting, inventory is considered a current asset because a company typically plans to sell the finished products within a year.

What are the two kinds of inventory? ›

Two types of inventory are periodic and perpetual inventory. Both are accounting methods that businesses use to track the number of products they have available.

What is the basic goal of inventory management? ›

The goal of inventory management is to understand stock levels and stock's location in warehouses. Inventory management software tracks the flow of products from supplier through the production process to the customer. In the warehouse, inventory management tracks stock receipt, picking, packing and shipping.

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