INVENTORY MANAGEMENT: LESSON THREE

Inventory management helps companies identify which stock and how much to order and at what
time. It tracks inventory from purchase to the sale of the goods. The practice identifies and
responds to sales trends to ensure there’s always enough stock to fulfill customer orders and
proper warning of a looming shortage.

Once sold, inventory becomes revenue. Before it sells, inventory (although reported as an asset
on the balance sheet) ties up cash. Therefore, too much stock costs money and reduces cash flow.

One measurement of good inventory management is inventory turnover. Inventory turnover

reflects how often stock is sold in a period of time. A business does not want more stock than
sales. Poor inventory turnover can lead to deadstock, or unsold stock which eventually will make
the stock obsolete.

Why Is Inventory Management Important?

Inventory management is vital to a company’s health because it helps to ensure there is rarely too
much or too little stock on hand, limiting the risk of stock outs and overstocking.

Benefits of Inventory Management

The two main benefits of inventory management are that it ensures you’re able to fulfill
incoming or open orders and raise profits. Inventory management also:

 Saves Money:
Understanding stock trends means you see how much of stock you can keep, and whether
you have enough to meet demand. This also allows you to keep less stock at each
location (store, warehouse), as you’re able to obtain from any of your branch store to
fulfill orders — all of this decreases costs tied up in inventory and decreases the amount
of stock that goes unsold before it’s obsolete.
 Improves Cash Flow:
With proper inventory management, you spend money on inventory that sells fast, so
cash is always moving through the business.
 Satisfies Customers:
One element of developing loyal customers is ensuring they receive the items they want
timely without waiting.

Inventory Management Challenges

The primary challenges of inventory management are:

  having too much inventory and not being able to sell it.
 Not having enough inventory to fulfill orders.
 Not understanding what items, you have in inventory and where they’re located. Other

Other obstacles include:

 Getting Accurate Stock Details:

If you don’t have accurate stock details, there’s no way to know when to refill stock or
which stock moves well.
 Poor Processes:
Outdated or manual processes can make your work error-prone and slow down
operations.
 Changing Customer Demand:
Customer tastes and needs change constantly. If your system can’t track trends, how will
you know when their preferences change and why?
 Using Warehouse Space Well:
Staff wastes time if like products are hard to locate. Mastering inventory management can
help eliminate this challenge.

How Inventory Management Works

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.

Inventory Management Techniques and Terms

Some inventory management techniques use formulas and analysis to plan stock. Others rely on
procedures. All methods aim to improve accuracy. The techniques a company uses depend on its
needs and stock.

 ABC Analysis:
This method works by identifying the most and least popular types of stock.
 Batch Tracking:
This method groups similar items to track expiration dates and trace defective items.
 Bulk Shipments:
This method considers unpacked materials that suppliers load directly into ships or
trucks. It involves buying, storing and shipping inventory in bulk.
 Consignment:
When practicing consignment inventory management, your business won’t pay its
supplier until a given product is sold. That supplier also retains ownership of the
inventory until your company sells it.
 Cross-Docking:
Using this method, you’ll unload items directly from a supplier truck to the delivery
truck. Warehousing is essentially eliminated.
 Demand Forecasting:
This form of predictive analytics helps predict customer demand.
 Drop shipping:
In the practice of drop shipping, the supplier ships items directly from its warehouse to
the customer.
 Economic Order Quantity (EOQ):
This formula shows exactly how much inventory a company should order to reduce
holding and other costs.
 FIFO and LIFO:
First in, first out (FIFO) means you move the oldest stock first. Last in, first out (LIFO)
considers that prices always rise, so the most recently-purchased inventory is the most
expensive and thus sold first.
 Just-In-Time Inventory (JIT):
Companies use this method in an effort to maintain the lowest stock levels possible
before a refill.
 Lean Manufacturing:
This methodology focuses on removing waste or any item that does not provide value to
the customer from the manufacturing system.
 Materials Requirements Planning (MRP):
This system handles planning, scheduling and inventory control for manufacturing.
 Minimum Order Quantity:
A company that relies on minimum order quantity will order minimum amounts of
inventory from wholesalers in each order to keep costs low.
 Reorder Point Formula:
Businesses use this formula to find the minimum amount of stock they should have
before reordering, then manage their inventory accordingly.
 Perpetual Inventory Management:
This technique entails recording stock sales and usage in real-time.
 Safety Stock:
An inventory management ethos that prioritizes safety stock will ensure there’s always
extra stock set aside in case the company can’t replenish those items.
 Six Sigma:
This is a data-based method for removing waste from businesses as it relates to inventory.
 Lean Six Sigma:
This method combines lean management and Six Sigma practices to remove waste and
raise efficiency.
Inventory vs. Cycle Counting
“Taking inventory “or stock taking is the process of physically counting all stock, once a year in
most cases. Cycle counting is the practice of counting a selected set of stock more often. Cycle
counting serves as an important means of checks and balances to ensure the amount of inventory
represented in the inventory management system is what you have on the shelf.

A cycle counting best practice is to count specific SKUs(STOCK KEEPING UNIT) regularly
and integrate it into the daily tasks of warehouse staff. Companies may determine different
standards for different types of inventory, such as performing a cycle count of top-moving SKUs
or higher-value items.

Inventory Management Formulas

Understanding inventory management formulas is crucial to optimizing stock levels. Multiple

inventory and accounting professionals have vetted formulas to make inventory calculations
easier.

Inventory Management KPIs(KEY PERFORMANCE INDICATORS)

Effective inventory management plays an important role throughout the supply chain. There are
many key performance indicators for measuring inventory management success throughout the
different organizations in the business. Understand which calculations return the most insight
into your business processes is important. To learn more, see inventory management KPIs.

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How Is Inventory Management Different From Other

Processes?
People sometimes confuse inventory management with related practices. Inventory management
controls all stock within a company. Supply chain management manages the process from
supplier to delivering the product to the customer. Warehouse management is a part of inventory
control and focuses on stock in a specific location.

Inventory Management vs. Inventory Control

inventory control is a part of the overall inventory management process. Inventory control
manages the movement of items within the warehouse.

Learn more about how these practices work together in our article on inventory control vs.
inventory management.

Inventory Management vs. Inventory Optimization

Inventory optimization is the process of using inventory in the most efficient way, and as a result
minimizing the dollars spent on stock and storing those items.

You can also think about inventory optimization as seeing inventory across all locations and
selling channels, being able to use any of it to fulfill customer orders—in doing so, you can hold
less stock overall.

Inventory Management vs. Order Management

Inventory management is responsible for ordering and tracking stock as it arrives at the
warehouse. Order management is the process of receiving and tracking customer orders.
Software often combines both tasks.

Inventory management plays an important role in order management. As orders are received,
inventory can be allocated to specific orders, and then the status can be changed in the inventory
record to essentially put it “on hold” for that order. Furthermore, when the order management
system and inventory system are integrated, the inventory system can recommend which location
should fulfill the order, based on where all the items in the order are available—this eliminates
multiple shipments for a single order.

Inventory Management vs. Supply Chain Management

Supply chain management is a process of managing supply relationships outside a company and
the flow of stock into and through a company. Inventory management may focus on trends and
orders for the company or a part of the company.

Inventory management is essential for a properly running supply chain. Inventory management
follows the flow of goods to, through and out of the warehouse. The supply chain includes
demand planning, procurement, production, quality, fulfillment, warehousing and customer
service—all of which require inventory visibility.
Inventory Management vs. Warehouse Management

Warehouse management complements inventory management. Warehouse management

organizes stock in a warehouse. Inventory management manages stock and trends for many
warehouses or an entire company.

The key to streamlining your warehouse operations is a thoughtfully laid out and meticulously
organized facility. When each product has a specific place in the warehouse, it prevents staff
from moving about inefficiently and maximizes labor efficiency. But these processes are only as
good as the inventory records that drive them.

Learn more about how warehouse management and inventory management work together.

Inventory Management vs. Logistics

Logistics is the practice of controlling processes in a warehouse and in the replenishment and
delivery systems. Inventory management maintains stock levels and manages stock location.

Inventory management is a crucial part of how companies manipulate their logistics. The
relationship between inventory management and logistics is interdependent. Logistics need
inventory management to perform their activities. Good logistics systems improve warehouse
and operational activities.

Find out more about this topic by reading “The Benefits of Integrating Your Inventory Software
With Your Accounting and Back-Office Processes.”

Inventory Management vs. ERP

An enterprise resource planning (ERP) system is software that manages business activities such
as accounting, purchasing, compliance and supply chain operations. By contrast, inventory
management is a part of a modern ERP system, providing insight into stock levels, inventory en
route and the status of current inventory—this makes it visible across the organization in real
time.

Inventory management helps to properly plan a company’s replenishment orders. ERP systems
give companies accurate inventory data, so they have the most current information for their
inventory management plan. ERP systems optimize the data so inventory management is
successful.

Retail Inventory Management

Retail inventory is the stocking of products that you sell to consumers. Use the system to set
profitable prices and ensure you have the right amount of stock to meet demand.

Learn more about retail inventory management.

Manufacturing Inventory Management
Manufacturing inventory management is the practice of keeping enough stock on hand so
production lines can fulfill orders. The process helps managers see stock levels at a glance and
tracks raw materials, parts, work-in-progress and finished goods.

Find out more about manufacturing inventory management.

What Is Multi-Location Inventory Management?

Multi-location inventory management is the process of managing stock across multiple locations,
warehouses, and retail stores or across multiple selling channels. With multi-location
management, you can watch stock levels in all locations and optimize your inventory to fulfill
orders.

What Is an Inventory Management System?

An inventory management system combines varying software packages to track stock levels and
stock movements. The solution can integrate with multichannel sales systems or shipping
systems.

An inventory management system optimizes inventory levels and ensures product availability
across multiple channels. It provides a single, real-time view of items, inventory and orders
across all locations and selling channels. This enables businesses to carry less inventory on hand
and frees up cash to be used in other parts of the business. An inventory management system
helps keep inventory costs low while delivering on customer expectations.

Learn about all inventory management system features and how to pick a solution that’s right for
your company.

How to Choose an Inventory Management System?

Choosing an inventory management system is a matter of identifying the features your business
needs. Do you need to track stock movements and location within a warehouse, or plan inventory
and track trends, or both?

Read “Choosing the Right Inventory Management System” for answers to your research
questions. When evaluating a system, remember to look for three key features: real-time
demand planning functionality, data analysis tools and near- and real-time data reporting.
Learn about each by reading “Three Must-Haves for Your Inventory Management Software
Shopping List.”
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Inventory Management FAQs

There are many questions in a broad and complicated topic like inventory management. Here are
answers to a few:

What Are the Objectives of Inventory Management?

One objective of inventory management is to keep enough stock to satisfy customers. Another is
to invest as little as possible in stock while still earning the most profit.

Why Inventory Management Is Important in the Supply Chain

Inventory management is vital in the supply chain because a company must balance customer
demand with storage space and cash limitations. Inventory management provides visibility into
the supply chain (procurement, production, fulfillment, etc.) so managers can coordinate lead
times for deliveries with production timetables.

How Can Inventory Management Be Improved?

Keeping accurate accounting records and taking regular physical stock counts can improve your
inventory management efforts. A system that provides your organization with real-time visibility
into inventory can help stakeholders make critical business decisions. You should also be aware
of a stock’s condition, especially if you’re dealing with perishables.

How Inventory Management Affects the Working Capital

Real goods in warehouses tie up working capital until they sell. Making the supply chain more
efficient keeps you from holding too much stock. Improving inventory management processes
helps you prevent storing, picking and shipping errors that reduce sales.

What Are Inventory Management Policies?

Inventory management policies are plans for how to use inventory to make customers happy and
reduce costs. Policies outline such things as the stock management method the company uses.

What Are the Types of Inventory Management Systems?

There are several types of inventory management systems that businesses use depending on how
they operate. Three examples are manual inventory, periodic inventory and perpetual inventory.
Manual methods are the least sophisticated and least accurate, and perpetual systems are the
most sophisticated and most accurate.

 Manual Inventory System: This involves physically counting items and recording them
on paper or in a spreadsheet. Small businesses may use manual systems.
 Periodic Inventory System: Periodic inventory systems include manual and periodic
counts. Periodic counts record item details as items move in and out of stock. Barcodes
simplify stocktaking. A database contains the records of stock levels and locations.
 Perpetual Inventory System: Perpetual inventory systems provide real-time stock data,
as they rely on active radio frequency identification (RFID) tags that are always on and
sending updates on item movements. Passive RFID tags, meanwhile, use a scanner to
send stock information to the database.

What Is Service Level in Inventory Management?

A service level for inventory management is how much a company believes it can successfully
store a particular stock.In other words, it’s the probability a company will avoid stockouts and
support sales.

How Does ERP Help in Inventory Management?

Enterprise resource planning (ERP) is helpful for inventory management because it tracks and
provides insights into supply chain operation, accounting and purchasing, consolidating the
information and making it visible in one place.

What Is Poor Inventory Management?

Poor inventory management is an imbalance between keeping too much and too little stock. The
definition of a perfect balance can change as demand changes: Sales change when trends or
seasons change. Poor stock management increases costs and thereby reduces profits.

Bring the Benefits of Inventory Management to Your

Business With NetSuite
Decision-makers know they need an inventory management system that can grow with them.
With automated replenishment and lot tracing and tracking in multiple locations, NetSuite
provides cloud-based inventory management solutions that are the perfect fit for businesses of
any size. NetSuite offers a suite of native inventory management and control features, including
multiple location planning, warehouse and fulfillment management, automated stock
replenishment, lot and serial tracking and cycle counting. Learn more about how you can use
NetSuite to manage inventory automatically, reduce handling costs and increase cash flow.

Learn about the unique solutions NetSuite offers businesses to accelerate growth with a
unified suite for financials, operations, and commerce.