Inventory Management: 7 Things You Need To Know

Brenden Lucas

Last updated: March 21, 2023
Brenden Lucas

Definition of Inventory Management

In logistics, inventory management is often referred to as the management of the incoming and outgoing goods at a company (by means of planning tools) to make sure materials are available for sale.

It is all about aligning people, processes, and technology to ensure you have the right products, at the right place at the right time.

This might sound easy but can be a rather complex process as there are many inventory management techniques and inventory management types which will be discussed within this blog.

Difference between Inventory Management & Inventory Control

Often the terms inventory management & inventory control are mixed up. Not everyone seems to be aware of the difference between these two terms.

Inventory management is the process of tracking inventory throughout the supply chain, from sourcing to order fulfilment, while inventory control is the process of managing stock once it arrives at the warehouse, store or other storage location.

Stock counts, quality control, item locations and storage in a safe manner are therefore all part of inventory control. Often companies make use of a warehouse management system to control their inventory.

Inventory management on the other hand is focused on determining the required inventory levels at the different locations to meet customer demand while keeping the costs as low as possible. The required quantities are based on the forecasted demand, taking into account minimum order quantities (MOQ), supplier lead-times, etc. Many companies make use of a forecasting and inventory management system to efficiently manage their inventory.

Inventory management system

Inventory management systems manage the inventory of a company throughout the entire supply chain. The system helps companies to efficiently and effectively manage their inventory by tracking the inventory levels, purchase order and expected deliveries. The system will calculate the required safety stock levels and reorder points. Taking into account lead times, minimum order quantities, etc. Furthermore a proper inventory management system is able to calculate the demand forecast for each individual item/location combination based on historical sales, can calculate the EOQ and fills up orders to full truck loads/containers automatically. On strategic level ABC-XYZ analyses can be performed and service levels can be set for each item to guarantee you have the right amount of inventory at the right location. An inventory management software integrates with a company’s ERP system and can run on premise or in the cloud.

Why do companies implement an inventory management system?

An inventory management system helps to prevent overstock and understock situations as the system bases its outcome in statistics instead of gut feeling. Moreover a system is able to review and recalculated the complete portfolio of items daily, which is undoable for planners. A system reduces the amount of time required to manage inventory, moreover it make sure the right amount of inventory is available at the right place and right time to meet your customer’s demand. Significantly reducing the amount of capital stuck in inventory which is actually not needed, or the possibility of running out of stock because you hadn’t detected the upward trend of an item/seasonality. With our software Slim4 we are able to achieve:

  • 10% – 30% reduction in inventory
  • 2% – 7% increase in sales based on an increased availability
  • Up to 50% reduction in stock outs

6. Inventory management types

There are different inventory management types, the most common types have been summed up underneath:

  • Raw materials

Raw materials are parts which are processed during the manufacturing process to become components, semi- finished or finished products

  • Work-in progress

Are all the items which are waiting for the final or further production steps to take place. An item which is only a part of a final item but not a raw material is seen as work-in-progress

  • Finished goods

Is a part which can be ordered by a customer, this is the product which is kept in the warehouse before its being sold

  • Transit inventory

Also known as pipeline inventory, transit inventory is inventory which is transferred between two locations and therefore not readily available

7. Inventory management terms

There are many terms related to inventory management, a sumup of some of the terms can be found underneath:

  • Cost of goods sold (COGS)

Is the combination of costs which are directly related to the production of the goods which are sold. This is important as a company’s gross profit is calculated by subtracting the COGS from the companies revenue.

  • Deadstock

Available items which where intended to be sold to customers but haven’t, therefore they were written off. In most cases the items are expired or outdated, which for example occurs when a new model is introduced to the market.

  • Holding cost

The costs of holding inventory in the warehouse, which includes labor, space, depreciation and insurance costs.

  • Order cost

Order costs are the costs involved in creating and processing a purchase order to a supplier. These costs include the labor costs of the buyer but could also include the labor costs required to perform inspections once items arrive at the warehouse

  • Lead time

The time between placing the purchase order and receiving the physical goods from the supplier in the warehouse.

  • Purchase order

This is a document created by the buyer which is distributed to the supplier and indicates a demand for specific products or goods.

  • Stock keeping unit (SKU)

In the area of inventory management a SKU is a unique number given to a product to enable easy identification and internal tracking of the inventory. Each company has its own way of determining the SKU number. A SKU number could for example consist of the color code, product type, size and manufacturing code.

  • Order cost Minimum order quantity (MOQ)

Is the minimum quantity a supplier agrees to supply when receiving demand for a certain product. It could for example be that a supplier only wants to supply in full pallets or card boxes.

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