For every business, especially the retail sector, there are lots of consumables that are being utilized on a regular basis which outnumber the assets of the business. Technically, inventory is calculated as assets that need to be maintained and managed. It is done by a variety of inventory management methods.
Inventory management is the administration of non-capitalized assets or stock items. The tools of inventory management control the flow of items from manufacture up to its dispatch or sale.
The key function here is to keep the record in detail of each and every item, produced, sold, or returned and its entry and exit from the warehouse.
It is the process involved in supply chain management where consumables or inventory or stock quantity is tracked and managed from the manufacturing to the sale of the item.
The goal is to know the exact the position of the inventory at any point of time and to gauge how much quantity is present in order to acknowledge the set production and sale levels accordingly.
There are a variety of inventory management methods to manage inventory according to the business need and nature of work. Many companies use the barcode technique to scan their inventory and increase efficiency and accuracy.
Functions of Inventory Management
Inventory management is very important for the long-term outlook of the business, as it helps in keeping detailed and accurate records.
For supply chain management to fall into place, it is necessary to keep the inventory organized. As such, there cannot be any place for errors in shipment, shortage of stocks, overstocking etc.
All such errors cost the organization money for the amounts spent on the labors and material to correct the mistakes later. Implementing inventory management methods reduces the risk of human errors and negative customer reviews that result in falling customers' loyalty.
Why Inventory Management Is Important for Any Business of Any Size?
- When to restock certain items
- What amount to purchase
- What price to pay
- When to sell
- What price to sell at
- Inventory planning and control
- Movement of stock
- Re-order level
Accounting of Inventory Management
The available stock is always physically counted before it is displayed on the balance sheet. Inventory accounting is grouped into four separate categories:
- Raw Materials - Raw materials are purchased by a company for its production purpose to transform them into finished goods.
- Work in progress inventory - Refers to the process of transformation of raw materials into finished goods.
- Finished goods - These are the complete goods that are ready to be made available for sale.
- Maintenance, repair, operation (MRO) goods - Items used for the support of production of finished goods as they need to be purchased from the distributor.
Variety of Inventory Management Methods
There exist a variety of inventory management methods to be used as effective ways to track and maintain inventory or stocks efficiently.
These methods are worth the extra time and money spent on inventory tracking software.
Asset management software allows the inventory management with proper technique and methods to optimize the profitability of the business with several of its advantages.
Following are some of the impact-fully used inventory management methods that can be selected from according to the business requirement.
1. Economic Order Quantity (EOQ)
It is used for the ideal order quantity which a company needs to purchase for its inventory. The EOQ has a set of considerations such as cost of production, demand rate etc. The goal of EOQ is to reduce all related costs.
2. Minimum Order Quantity (MOQ)
MOQ is for the suppliers which allow the minimum amount of stock to sell. The retailer has to buy at the MOQ of a product otherwise supplier will not sell.
For instance, the inventory goods that are more costly to produce have smaller MOQ as compared to goods produced cheaper.
3. ABC Analysis
ABC Analysis allows you to characterize the product according to their requirement. A few of the products require more attention than others. The product can be added to each category as per their requirement list.
- Category A - This includes products of high quality with a low frequency of sales.
- Category B - This includes products of moderate quality with a moderate frequency of sales.
- Category C - This includes products of low quality with a high frequency of sales.
Just-In-Time (JIT) Inventory Management
JIT inventory management method is to arrange raw material supplies from the vendors just in time for the production schedules. It is a great way to reduce inventory stocks and the associated costs.
The order for inventory is released as per production requirements instead of ordering it earlier and avoiding overstock or under stock levels.
To eliminate dead stock, the stock which is never sold or used is removed from the sales status.
5. Safety Stock Inventory
The extra inventory that is ordered beyond the expectation of the demand is known as safety stock. This inventory management method is used to prevent shortage of stock.
6. FIFO And LIFO
FIFO is basically a stock control method where the retailer will fulfill the order with an item that was there in the stock shelf for the longest. It can be defined as the product which was acquired first will be sold first.
LIFO works relatively opposite to that of FIFO as it confirms the most recent acquired products to be the first for selling. It determines the value of the sold stock by the most recent pricing.
7. Reorder Point Formula
This inventory management method is based on the purchase and sales cycle of the company on per product basis. Here, reorder point is normally higher than safety stocks.
8. Batch Tracking
It is a quality control method where users monitor the set of stocks with their matching traits to help tracking the expiration of the stock or to track defective items.
9. Consignment Inventory
This method is about the local consignment where the vendor agrees with the retailer to provide stock without getting paid for it in advance. Here, the vendor still owns the stock or goods and the retailer has to pay only when the items have been sold.
10. Perpetual Inventory Management
The perpetual inventory management method is about counting inventory as soon as it arrives. Being the most basic method, it can be recorded manually on paper or stored in a spreadsheet.
11. Drop Shipping
Drop shipping is a method where the stores do not keep the product to sell in stock. Rather, when the sale takes place, the product is picked from the 3rd party vendor and directly shipped to the customer's address.
The implementation of inventory management methods helps to reduce effort, time and money spent on various unproductive activities. It elaborates on the state of supply and demand and ensures customer satisfaction, with minimum costs involved. The tools of inventory management involve easy reporting and analytical views that are important for the business.