What is Inventory Management? Definition, Types and Importance

What is Inventory management?

The concept of inventory management mainly represents the procedure of storing, using, ordering and selling a business's inventory. It includes the management of components, raw materials, finished products and warehouse processing products. Besides this, inventory management practices try to streamline inventories from raw components to finished products efficiently. The inventory of a company is considered one of the most important assets in all industries such as food services, manufacturing, retail and others.

Types of inventory management?

Based on the type of products or businesses there are some inventory management procedures. Some of the procedures are materials requirement planning (MRP), just-in-time (JIT) manufacturing, day sales of inventory (DSI) and economic order quantity (EOQ).   

MRP (materials requirement planning)

This inventory management procedure is considered as sales-forecast dependent. In this term, it mainly focuses on monitoring accurate sales records of manufacturing products to enable appropriate inventory needs of the business. Along with this, it is also useful for ensuring the communication regarding material supply on time. Besides this, the inability for presenting accurate inventory plans and forecast sales has benefited from the application of the MRP procedure.

DSI (day sales of inventory) 

It is a financial ratio. DSI mainly indicates the average time in a day that an organization takes to turn its inventory into sales including goods and work progress. Additionally, it is also known as average age of inventory, inventory outstanding and also days in inventory (DII). These are interpreted in multiple ways. The prime feature of the DSI procedure is to indicate liquid inventory management. Moreover, the figure of liquid inventory represents what the stock of a company could stay for how many days. In this context, a lower DSI indicates a shortened inventory clear-off duration, whereas the average DSI varies across different industries.  

JIT (just-in-time)

This method of inventory management permits organizations for reducing waste and saving money by keeping records of inventory that is required for selling as well as producing products. JIT also helps in reducing insurance and storage costs along with liquidating costs or excess inventory discarding efficiently. On the other hand, to some extent, JIT is considered risky. In this term, it can be explained that if unexpectedly demand increases, then the manufacturer may not be able to fulfill that properly due to limited inventory. Therefore, it will damage the reputation of that organization as it will be unable to meet consumer demand spikes. Moreover, it will also be responsible for declining the competitive advantage of a company across the markets.

EOQ (economic order quantity)

This type of inventory management procedure is mainly applied to calculate unit numbers of a business that should be added to its inventory. It is also associated with batch order in terms of reducing total inventory costs by assuming constant consumer demands as well. Additionally, EOQ also includes the setup and holding costs of an organization's inventory. This inventory procedure is effective for ensuring adequate inventory amounts per batch order. Therefore, it helps a company to maintain a record for batch orders and helps to avoid excessive and frequent ordering issues simultaneously. Besides this, it assumes a trade-off between inventory setup costs and inventory holding costs. Moreover, by determining both inventory setup as well as holding costs, the total inventory costs of an organization can be reduced. 

Importance of inventory management?

There is a wide range of importance regarding inventory management process and some prime ones are mentioned below:

1. Control paves related to competitive ability

Usage of cloud based inventory management enhances market share and, in this way, it increases the competitive ability of a company. High-factor loading values, as well as significant mean values, have performed a vital role in determining business support concerning its competitive ability. 

2. Improving service level

Inventory management software leads to improving service levels as per the requirements of consumer preference swiftly. It aids businesses by allowing a company to right level of hands-on service within desired lead time. 

3. Reducing storage costs

Proper application of inventory planning helps a company to reduce excess storage costs by maintaining adequate inventories. The central values of inventory management process feature lower storage costs and enhanced revenue increase.

4. Higher revenue turnover

The application of a proper inventory planning approach helps a business to enhance higher revenue. Appropriate application of inventory management helps to increase organizational profitability. In this term, if a company focuses on its benefits, it is seen that inventory management maximizes the operational efficiency of sales and production.

Terms related to cloud based inventory management

• Bundles

It represents a group of products that are sold as a single product such as a camera, bag and lens as 1 SKU.

• Barcode scanner

It is a physical device that is mainly used for check-in as well as check-out stock items. Moreover, it is effective for third-party warehouses and in-house stock fulfillment segments.

• Deadstock

Deadstock represents items that have not been sold or used by consumers.

• Costs of goods sold (COGS)

Direct costs are mainly associated with production and goods storing costs as well.

• Decoupling inventory

It is also known as safety stock. Mainly it refers to safety net inventory management process for mitigating risks in terms of completing production halt of available components featuring segments.

• Holding costs

Holding costs or carrying costs are considered as the business cost which incurs for storing and holding stock in a warehouse until those are completely sold to consumers.

• Landed costs

It mainly represents the costs of storing, shipping, duties, taxes, import fees and other related expenses that are associated with buying as well as transporting inventory. 

• Economic order quantity (EOQ)

This term represents how much a company can reorder for taking into account demand and for maintaining inventory holding costing segments.

• Purchase order (PO)

It mainly refers to commercial documents between a buyer and a supplier that outlines quantities, agreed prices and types of service or products.

• Pipeline inventory

This term represents the "pipeline" of a company's supply chain including shipping or production; however, it is not reached its final destination.

• Reorder point

It indicates inventory quotas that determine recording schedules taking into future and current account demand along with lead times. 

• Safety stock

It is also known as buffer stock.

• Sales order

This term defines a transactional document that is sent to consumers after purchase and before completing the order fulfilled.